IT Spending Fuels Economic Growth

Increased IT spending by businesses and consumers helped the economy grow at a 7.2% annual rate in the third quarter, its strongest pace in 19 years.
Fueled by increased spending by consumers and businesses--including heavy investments in IT--the U.S. economy erupted last quarter, growing at a 7.2% annual rate, its strongest pace in 19 years.

No doubt the Bush tax cut played a key role in the astronomical growth of gross domestic product--the value of goods and services produced in the United States--so economists don't see the pace of growth continuing at such high levels as the impact of the tax reduction fades. Still, some economists see the economic rebound continuing, including the IT sector, although not necessarily at such a blockbuster pace.

Companies that have been holding back in recent years on making investments in equipment and software are on a buying binge as profits rise and economic prospects brighten. "For most companies, technology is the first thing they buy," says Brian Keyser, chief U.S. economist at Citigroup Asset Management. "They're playing catch-up, adopting technology they wish they could have purchased two years ago. IT yields the most bang for the buck for corporations. You can get almost an instant return on your investment."

IT did play a big part in last quarter's blistering GDP growth. About one-sixth of last quarter's GDP came from all types of corporate equipment and software investments. Also, information-processing equipment and software represented more than half of equipment and software fixed investments last quarter.

Spending on IT wares rose 4.3% in the third quarter, down a bit from the 4.42% increase posted in the second quarter, but significantly higher than rates logged during the past 1 1/2 years. If this past quarter's pace can be kept, IT buying will increase at an 18.3% annual rate.

Hardware outperformed software. In the third quarter, business investment in computers and peripherals soared nearly 10%, or at a 46.3% annual clip. Software rose 2.3% during the third quarter, or at an annual rate of 9.7%.