IDC: U.S. IT spending to grow slowly

SAN FRANCISCO -- IT spending in the U.S. will grow only slightly in 2003, with the continued economic slowdown and the lack of a new "killer" application preventing more rapid growth, according to a report from IDC released Monday.

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IT spending in the U.S. will grow 1.5 percent from 2002 to $372 billion in 2003, after which it will grow at a compound annual rate of 4.9 percent to $467 billion by 2007, according to the report, which forecasts IT spending in 17 vertical industries in the public and private sectors.

"In the past 5 years, killer applications like the Internet and e-business have driven IT spending and investment. We don't see any killer application in the future," said Anne Lu, a senior analyst at IDC.

Total IT spending fell 5.3 percent from $387.8 billion in 2001 to $366.8 billion in 2002, according to IDC.

IT spending will grow at a higher clip after the U.S. economy recovers in 2004, she said. For the time being though, IT spending and investment will remain tight as containing costs remains a top priority. "Companies have become prudent when investing in IT and they look very crudely at return on investment (ROI)," she said.

While most industries' IT spending will grow slowly because of the soft economy and companies' unpredictable financial performance, investment in IT in the government, manufacturing and financial sectors will continue to increase, she said. The manufacturing and financial industries account for almost half of all U.S. IT spending, according to IDC.

The U.S. federal and state governments will spend a combined $35.8 billion on IT in 2003, representing a 6.7 percent increase from 2002, and rising to $46 billion by 2007, according to the report. The government is becoming dedicated to investing in technology and is increasing its spending in software, IT services and network equipment, said Lu.

A number of new e-government initiatives underway and the demand for new technology in server lines, encryption and overall security is pushing the government to buy network equipment and to spend more on software and IT services, she said. The establishment of the new U.S. Department of Homeland Security will also "translate into opportunities for IT vendors and system integrators," said Lu.

The manufacturing industry will spend $76.5 billion on IT in 2003, growing 3.1 percent from $74.2 billion spent on IT in 2002. That amount will reach $96 billion by 2007, the report said. Companies in some industries like automobile, airspace and pharmaceutical will keep investing in IT heavily to improve product lifecycle management, said Lu. Of the manufacturing IT budgets in 2003, 45 percent will go to IT services, 30 percent to software and the rest to hardware, she said.

IT spending in the banking industry will increase 4.3 percent from 2002 to 2003, and then grow 6 percent annually through 2007, according to the report. The growth will be driven by attempts to accelerate the delivery of products and services and by spending on customer relationship management software, said Lu. "The banking industry needs to use cutting-edge technologies to increase efficiency, so they need to keep upgrading (their systems and business processes)."

Comparatively, IT budgets in the insurance industry will remain tight as companies struggle to demonstrate operational efficiency and upgrade legacy systems, said Lu. The insurance industry has a "long way to go to upgrade legacy systems," she said.

The overall growth in IT spending will partly depend on how vendors target each industry, as the economics of each varies. "Each industry represents different value-proposition, and vendors need to understand the industries they are facing," said Lu.

For example, the transportation market, which was hard hit in 2002, will grow in the future and the IT spending will increase once the industry bounces back, said Lu. "The vendors have to give a clear picture of the ROI on IT investment. Vendors have to show how IT can solve business problems and generate revenue."

The slowdown in economic growth has affected consumers negatively, which is affecting IT spending in the private sector, noted Lu. The U.S. gross domestic product will grow 2.3 percent between 2002 and 2003, and reach the traditional growth level of between 4 percent and 5 percent between 2004 and 2005, she said. "The consumer sentiment will continue to decline, and that will have an impact on IT spending," especially in the private sector, she said.

Comparatively, the economic slowdown is having a moderate impact on the public sector.

IT spending in the education market, for example, will grow at a flat rate of about 1 percent from 2002 to 2003, said Lu. The education sector "needs funding to increase IT spending. It's not like the business sector, where profits will increase when the economy bounces back and they can invest more in IT. The (education sector) needs to see a use for technology and invest," she said.