Down To Business: What Could Doom The IT Recovery?

The economy (stupid). Absent more responsible and disciplined fiscal policies, the U.S. tech rebound will be a short-lived phenomenon.
The IT industry appears to be rumbling back, even if the economy remains jammed in a ditch on the side of the road. Several IT advisory firms have issued optimistic forecasts, most bullish among them Forrester Research, which sees U.S. tech spending growing 6.6% this year -- more than twice as fast as the overall economy -- after declining 8.2% in 2009.

The latest positive evidence comes from an industry group, CompTIA, whose IT confidence index rose 6.3 points in December -- to 56.6 on a 100-point scale -- marking the first time since the index was started last June that industry executives, on balance, are more positive than negative. The index is based on a survey of execs at 300 U.S.-based IT vendors, aggregating their opinions of their company, the industry, and the U.S. economy. CompTIA forecasts an additional 6.5-point increase in the confidence index over the next six months.

While stating that some macroeconomic indicators (U.S. GDP, corporate profits, manufacturing) have improved over the past six months, "lending factual support to the positive perceptions of IT executives," CompTIA research VP Tim Herbert cautions that "some big unknowns still loom" -- most notably unemployment, stuck at 10%, a soaring national debt, now at more than $12 trillion, and a tight credit market. Aside from your husband's assassination, Mrs. Lincoln, how did you enjoy the show? Herbert rightly notes: "Until these factors start to turn around, exuberance about an economic recovery will rightfully be tempered."

So what is being done about the Big Three economic priorities -- create jobs, reduce the deficit and debt, and free up credit -- so that the tech recovery isn't just a short-lived phenomenon? Not much of substance, it turns out.

On the jobs front, the fiscal stimulus has been a failure so far. When the Obama Administration's metric for success is jobs "saved" rather than created, it's apparent that all the spending on "shovel-ready" public works and other projects isn't having the desired effect on employment. But here let's give the benefit of the doubt: Jobs are often the last thing to bounce back in a recovery, as employers are still leery.

As for reducing the massive annual budget deficit and national debt (or at least slowing their cancerous growth), there's been zero progress. The key to deficit and debt reduction is economic expansion and job creation (see above) -- getting more companies and people, earning higher profits and salaries, on the tax rolls. But we also must get federal spending under control, and the three-year "freeze" proposed by President Obama Wednesday night in his State of the Union address does nothing of the kind. By excluding national security, the biggest entitlement programs (Social Security, Medicare, and Medicaid), the $787 billion (and still growing) stimulus package, and the $900 billion set aside to restructure national healthcare, Obama's freeze actually applies to just $450 billion of the $3.6 trillion federal budget. In fact, the so-called freeze applies to an amount that's less than the increase in the federal budget between fiscal 2009 and '10. So much for fiscal restraint.

How about loosening up credit? The chief steward of the nation's monetary policy and interest rates, Federal Reserve Chairman Ben Bernanke, was reconfirmed for a second four-year term on Thursday after a Senate battle. Your opinion of Bernanke's track record notwithstanding, the confirmation is widely seen as having a calming effect on the credit markets, which don't respond well to uncertainty. Working against the credit markets, however, is President Obama's plan to tax the country's largest banks to recover TARP loans faster. While such populist politics play well with the stick-it-to-The-Man crowd, they're counterintuitive to putting banks in a better position to lend money to businesses and other capital spenders.

The time for rhetoric and grandstanding is over. If Obama really wants to create jobs and not just "save" them, he needs to help businesses invest and expand -- either through tax incentives or by just getting out of the way -- rather than spend taxpayer dollars on bloating government bureaucracies and subsidizing socially acceptable industries. If he really wants to freeze federal spending, he must freeze it -- period -- and not just throw a few ice shavings into the budget cocktail for good measure. If Obama really wants banks to lend more money, to individuals and businesses who will use it productively and who can actually pay it back, he should heed the advice of Warren Buffett (and not Buffett's buddy Bill Gates) and resist squeezing their liquidity further with new taxes, while at the same time regulating the banks' risk management practices.

The information technology industry isn't just a creator and enabler of economic growth; it leverages that growth like no other industry, as IT is embedded in every single business sector. So implicit in the bullish IT forecasts of CompTIA, Forrester, and others is this reality: Get the economy in order, or the IT recovery doesn't stand much of a chance.

Rob Preston,
VP and Editor in Chief, InformationWeek
[email protected]

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