Former Federal Reserve Chairman Alan Greenspan is hitting the airwaves promoting his new book, but his comments in recent interviews about the possibility of a recession might be scarier to IT folks than anything in the new tome.
Greenspan told the Wall Street Journal recently that he thought the probability of a recession is “slightly more than a third,” up from merely a third, as he put it earlier this year.
For IT professionals and CEOs of major software and hardware vendors, the prospect of a recession any time soon is downright daunting, given that memories of the 2001-2002 dot-com bust are still fresh.
If housing price declines and the troubles with home mortgage lenders precipitate a longer economic downturn in the next year, the effect could roughly halve the 12-year cycle many economists track for upturns and downturns, some observers noted last week.
However, a report from Macquarie Research in Australia says any downturn would be very different to that of 2001.
“The 2001 downturn was first and foremost an investment-driven recession,” write the report’s authors, Daniel McCormack, Tim Rock and Henry Hon. “Any pending slowdown now will be more the traditional housing/consumption-driven slowdown. This is an important difference for the tech sector as investment is a greater source of demand for tech products than consumer demand.”
The report says US businesses spent over US$400 billion (NZ$552 billion) each year on software, hardware and communications equipment. This compared with US$64 billion spent by consumers on computers and peripherals, including software. Adding in consumer electronics, including household appliances, took this figure to around $US170 billion a year.
“In short, a traditional housing/consumption-led downturn is less problematic for the tech sector than a business-led downturn,” the report says.
The recession of 2001 followed the dotcom crash and accelerated spending by business on IT hardware and software in the lead-up to Y2K. In that period businesses bought forward its IT spend, causing a spending void during the early 2000s.
Another positive for today’s tech sector is the burgeoning demand for IT and communications equipment from the developing world.
The report says large drops in the price of mobile phone handsets have led to increased demand in the developing world. It suggests a similar pattern could occur with PCs and their software.
At least one US analyst agrees.
“I’m certainly concerned with the housing downturn,” says IT market analyst Jason Sajko, who studies government spending on IT for consulting firm Input. “But I don’t see that creating something like what we felt in 2001 and 2002 so soon after then.”
Sajko and Input do frequent analysis of federal, state and local spending on IT products and services. A month ago, Input said it was still projecting strong growth in state and local government spending in the US on IT products and services into 2012, increasing from US$43.9 billion in 2007 to US$67.2 billion in 2012. That analysis was able to track the impact of the general economy, including the news in the last six months over housing market problems.
Several CEOs in recent days have said they learned from the dot-com bust to adapt products to successful market segments in order to weather downturns.
— Additional reporting by the Australian Financial Review