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8/31/2005
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IT Sales Could Slow In Aftermath Of Katrina

Cascading impact of rising oil prices caused by Gulf Coast devastation could curb corporate revenue, causing a slowdown in IT spending.

A series of economic reports issued by the government this week show a robust IT market. But it's questionable whether those numbers can be sustained in the coming months because of the fallout from Hurricane Katrina.

With about a quarter of America's energy production tied to the region devastated by Katrina, including New Orleans, energy prices could soar, with oil reaching $100 a barrel. That worse-case scenario could bring the economy to near recession by year's end.

High energy prices would have a cascading effect on the economy. The high cost of gasoline and heating fuels could slow consumer spending. Fewer consumer dollars flowing to corporate coffers will force business to change purchasing plans, including what they spend on IT. Until this crisis, a number of research studies had forecast higher IT spending by business.

"If business profits are squeezed by higher energy costs, and businesses can't pass those higher costs on to consumers, the willingness to spend on investments, including IT, will disappear," says Nigel Gault, group managing director of the North American macroeconomics service at the economics consultancy Global Insight Inc.

Another factor, albeit a small one, is the impact of the halt of nearly all business economic activity in New Orleans and other locales obliterated or extensively damaged by the storm surges and flooding caused by Katrina. Businesses that don't operate don't buy IT wares. But those businesses represent a minute fraction of the entire national economy. New Orleans' population, for instance, is no more than 1.5% of the U.S. population. Damage estimates topping $25 billion equate to only 0.2% of the nation's economy, valued at $12 trillion.

Until now, the IT economy has been healthy. Spending by business on information-processing equipment and software represents about 37% of all nonresidential fixed investments. Last quarter, businesses spent 17.3% more on computers and peripheral equipment than they did a year earlier, the Commerce Department reported Wednesday. Software investments rose 11.2% in a year. To put those numbers in perspective, overall nonresidential fixed investments--which also include categories such as industrial and transportation equipment--rose 11%.

Computer sales represent about 9% of the nation's gross domestic product. Last quarter, GDP grew by 3.3%. Without computer sales, it would have grown only 3%. That percentage can fluctuate dramatically month to month. In the second quarter of 2004, final computer sales represented only 2% of GDP.

On Tuesday, the government reported that shipments in July of computer and related products rose one-half of a percent, though new orders fell by 8.2%. Still, year-over-year orders soared by 31.7% while shipments rocketed by 31.9%.

The aftermath of Katrina might prevent such rosy numbers in the months to come.

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