Economic Signs Mostly Positive For IT Spending

Solution providers can look forward to solid economic growth this year, although there are a few clouds lurking on the horizon. The economy is expected to grow 3.4 percent this year, according to a survey of 51 economic forecasters by the Federal Reserve Bank of Philadelphia. If realized, this would be only slightly below last year’s 3.6 percent pace.

William Dunkelberg, chief economist at the National Federation of Independent Business, a 600,000-member small-business advocacy group in Washington, said small businesses are “very optimistic” about the economy and that sales and earnings growth this year have been “terrific.” If confidence continues into 2006, small businesses will follow through with plans for higher capital spending, including technology, he said.

There are a few economic uncertainties in areas such as interest rates and the housing market. The Fed has steadily raised interest rates throughout the year to keep inflation under control, and this has raised the cost of leasing and purchasing technology as well as the cost of floating rate loans taken out by solution providers.

CRN believes the Fed will bring the current cycle of interest rate increases to an end sometime in the first quarter of this year. The exact timing is uncertain, however, particularly with Benjamin Bernanke replacing longtime Federal Reserve Chairman Alan Greenspan on Feb. 1.

Growth in the housing market is also cooling as speculative fever eases and the impact of rising mortgage rates (up from less than 5.5 percent in 2004 to about 6.5 percent currently) take hold.

However, as housing sales slow, price appreciation is also slowing. This will limit the future growth of home equity, which has played a major role in economic growth as consumers tapped into huge home equity gains and pumped hundreds of billions of dollars into the economy. Slower consumer spending growth, in turn, could put a damper on economic growth this year.

The weather is another wild card. The economy showed remarkable resilience in the face of the two hurricanes, but how well it would “weather” a repeat of last year’s hurricane cycle is an open question. It appears there was a sharp (though short-lasting) impact on the technology sector from Hurricanes Katrina and Rita.

In September, average per-firm technology spending by midsize companies dropped 17 percent compared with August, from $41,500 to $34,500, according to CRN research data. Spending began to recover in October, with the average increasing to $38,600.

“We lost four or five decent customers in late August and September, companies that either went out of business or downsized,” said Oli Thordarson, CEO of Alvaka Networks, Huntington Beach, Calif. “I attribute that to a loss of business confidence and increasing financial pressures arising from the hurricanes.”Despite these uncertainties, the climate for business technology investment should remain solid. Market researcher Forrester Research is forecasting a 7 percent increase in IT spending in 2006, the same as in 2005.

“The latter stage of an economic recovery, where head count is rising and productivity is starting to fall, is the best for technology spending, and that’s where we will be in 2006,” said Arnie Berman, chief technology strategist at SG Cowen & Co., an investment bank and brokerage firm based in New York. “Business leaders start thinking more about technology and less about questions like capacity expansion or how long the recovery will last.”

Many solution providers also expect 2006 to be as good or better than 2005 when it comes to sales growth.

“Managed services for smaller businesses will be a big growth area this year,” said Ed Solomon, co-president of Net@Work in New York. “The value and ROI are easy to describe and demonstrate. We also see compliance issues driving solid sales growth in the financial services market, biotechs and pharmaceuticals.”

“For us, the small to midsize enterprise market is the sweet spot,” Thordarson said. “The ROI is stronger here than in the SMB area, where technology needs are the same but the ability to pay becomes an issue. But if solution providers can figure out how to package a rich, robust, competitively priced set of managed services to businesses with five to 25 users, a lot of money can be made in this market segment.Pete Busam, vice president and COO of Decisive Business Systems, Pennsauken, N.J., also sees growing opportunities in both smaller and larger company markets.

“The- small and midsize-company market will continue to lead sales growth, and we see entry points in voice over IP, disaster recovery, managed services, OS upgrades and migrations, blade servers and remote access,” Busam said. “Secure instant messaging will be a hot spot in the enterprise segment, and you could see 20-plus points of margin if the solution is packaged right.”