Optimism that tech firms will help kick-start economic recovery is overdone

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The IT business rebounds - Betting on bytes | Unknown | The Economist

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EVERY year, many leading lights of the internet world congregate at the Web 2.0 Summit in San Francisco. The 2009 event, which took place this week, included an evening reception thrown by a venture capital company at a swanky hotel and was dubbed “Web After Dark”. And evidence is growing to suggest that the darkness that has hung over the information technology (IT) industry for many months is lifting.

EVERY year, many leading lights of the internet world congregate at the <a href="http://www.web2summit.com/web2009">Web 2.0 Summit</a> in San Francisco. The 2009 event, which took place this week, included an evening reception thrown by a venture capital company at a swanky hotel and was dubbed “Web After Dark”. And evidence is growing to suggest that the darkness that has hung over the information technology (IT) industry for many months is lifting.

Three of the sector's heavyweights—IBM, Intel and Google—recently reported surprisingly robust profits. Even Yahoo! did less badly than expected. On Monday October 19th Apple stunned even the most bullish investors by posting its best quarterly results ever: third-quarter revenues came in at $9.9 billion—24% higher than the same period a year earlier. Then came the news that venture capital investments in America are growing again. And Windows 7, Microsoft's new operating system, launched on Thursday, is expected to drive demand for personal computers and related wares.

Three of the sector's heavyweights—IBM, Intel and Google—recently reported surprisingly robust profits. Even Yahoo! did less badly than expected. On Monday October 19th Apple stunned even the most bullish investors by posting its <a href="http://www.apple.com/pr/library/2009/10/19results.html">best quarterly results ever</a>: third-quarter revenues came in at $9.9 billion—24% higher than the same period a year earlier. Then came the news that venture capital investments in America are growing again. And Windows 7, Microsoft's new operating system, launched on Thursday, is expected to drive demand for personal computers and related wares.

The outlook for IT firms in other countries is also brighter. The OECD detected signs of a recovery as early as August, particularly in Asia. Countries such as South Korea and Taiwan, which boast many companies specialising in chips and hardware, had been hit particularly hard by the downturn, with production in some sectors dropping by as much as 40%. But now that inventories have been depleted, manufacturers there are cranking up production again.

All this is more than welcome. But the wave of good news has already restarted the hype machine, for which the IT industry is well known. Once again, the sector is being trumpeted as the saviour of the economy. Some even predict that IT will pull the economy out of recession, with investment in technology giving a swift boost to productivity and job creation.

Just how much of a boost IT can provide is a subject of some contention. Both Forrester and Gartner, the industry's leading research firms, see the downturn bottoming out in the current quarter and predict that demand will rebound next year. But while both firms agree on the timing of a recovery, they differ on the severity of the recession in IT and, more importantly, the speed at which the industry will pull out of its slump. Forrester is both more bearish and more bullish. In late September it predicted that worldwide IT purchases will have fallen by 11.4% at the end of this year, to $1.5 trillion, but will grow by 4.9% in 2010. In a report released on Monday, Gartner put these numbers at 5.2%, 3.3% and $3.3 trillion respectively.

There are good reasons to be conservative. For a start, several statistical effects that make the latest numbers look better than they actually are. After a steep downturn, growth numbers can seem equally dramatic. The volatile dollar muddles the picture as well. As long as the currency was relatively strong it weighed heavily on the results of American IT firms by devaluing foreign revenues. Now the dollar's increasing weakness makes their numbers look far healthier.

In addition, excellent results at Apple, Google and even Intel reflect increased demand from consumers. Apple has benefited from the boom in smart phones, Google from users clicking on more advertisements and Intel from the popularity of netbooks, or small laptops, many of which contain its chips. But companies still account for by far the biggest chunk of technology spending. IBM, which offers the entire range of corporate IT services, from powerful computers to consulting services, is therefore a much better proxy for the overall health of the IT industry. Although its profits were better than expected, its revenues fell by nearly 7% compared with the third quarter of last year.

Yet more to the point, encouraging numbers or not, the technology sector is unlikely to lead the economy out of the recession. More likely, it is the economy, supported by cheap money and stimulus programmes, that is pushing IT. Ultimately, the IT industry will stage a real rebound—it will just take some time. Perhaps it is a result of the severity of the recession, but many are reacting to the first signs of an IT recovery as if it were the latest great thing. As with many new technologies, they overestimate the short-term impact, but underestimate what will happen in the longer run.

The IT business rebounds

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Betting on bytes

Optimism that tech firms will help kick-start economic recovery is overdone

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