IT Spending Decline Raises ConcernsIT Spending Decline Raises Concerns

IT spending in the United States took an unexpected dip in August, raising concern among analysts who had seen demand moving upward.

The overall IT Demand Index compiled by Gartner retreated to 81 after holding steady at above 90 from May through July. The index is drawn from a poll of 20,000 IT decision makers, with a rating of 100 meaning businesses are spending exactly what they had budgeted for the month.

"We're still optimistic that we'll see continued growth in IT spending in 2004, but obviously, things like this make us look more carefully at the next batch of data coming in," Gartner analyst Martin Reynolds said. "The message is that the IT recovery isn't here yet."

A drop in spending among small and large businesses is what took down the index, while IT demand among midsize businesses remained strong. The demand index for large businesses slipped to 85 in August from 89 in July, Gartner said. Small businesses slipped to 72 from 79.

The enthusiasm for IT among large companies was dampened by a slow economic recovery globally, Reynolds said. Small businesses, on the other hand, were probably made a bit nervous by the nonexistent job growth in the United States--the one sour note in an otherwise harmonic recovery. Small businesses are often owned by individuals and tend to be more skittish about negative economic news.

Midsize businesses, however, were firing on all cylinders. Spending has remained strong for the last five months, moving from 95 to 97. Medium businesses are more focused on the U.S. economy, which other than job losses has shown growth in every other major indicator.

The performance of the overall economy over the rest of the year will be the driving force behind IT spending next year. "Companies need to have confidence that their businesses are going to grow in 2004 in order for them to invest in technology," Reynolds said.

Potential factors that could dampen optimism among business executives would be weak consumer spending during the holiday season, no job growth, and a setback in the global economic recovery. An increasing U.S. deficit caused by the nation's occupation of Iraq is not expected to have much impact.

Military spending, which helped boost the nation's gross domestic product last quarter, has actually lifted IT demand. "We're pass that as an issue," Reynolds said. "Iraq is no longer a source of global instability."

Within the midsize IT market, spending was strongest among financial and health-services companies. The healthiest IT sectors were services and networking/telecom. Many businesses were spending more than budgeted amounts on those technologies.