Economist predicts IT spending snapback in '03

Corporate IT spending is about to undergo a "sharp snapback" to 5 percent to 10 percent annual growth once corporate profits begin rising again, according to Michael Mandel, BusinessWeek's chief economist who spoke at the Comdex IT Executive Symposium.

That would be welcome news for IT vendors who have been hit hard during the past 18 months by a spending slowdown, as well as for CIOs who have struggled to meet service levels and rising business demands as their budgets continue to be slashed.

But the snapback will come at a cost, Mandel warned: The surge in IT spending "won't look like the '90s," when there were big gains in both tech spending and job creation. "Instead, technology will be used to replace jobs in a low-growth, heavy-competition environment," he said.

If it does play out that way, Mandel's predictions would map closely with those made by analysts at Stamford, Conn.-based Gartner Inc. at their annual symposium conference in Orlando last month. There, Gartner analysts predicted that further automation improvements will lead to improved productivity and result in the elimination of "thousands" of jobs.

Mandel, who predicted the dot-com bust in his 2000 book, The Coming Internet Depression, cited several factors that could contribute to resurgent IT spending and a subsequent loss of jobs. During the past two years, said Mandel, IT spending "has actually fallen less than other types of capital spending." And proportional to their revenues, technology vendors are still the biggest spenders on IT.

But, said Mandel, the drop in their spending on technology -- IT spending by vendor companies dropped by "half" in 2002 compared with 2001 -- has "magnified" the problem across the U.S. economy.

Throughout the economic downturn, U.S. labor costs -- which include wages and benefits -- have continued to rise faster than productivity gains, said Mandel. Labor costs have increased US$1.4 trillion since 1996, while corporate profits have slumped back to where they were that year, said Mandel.

At this point, companies have worked off their excess IT spending from the late 1990s, which will help fuel an uptick in IT spending beginning as early as this quarter and the first quarter of 2003, said Mandel. But with that, he expects to see more American jobs shipped overseas.

"People with an education have had a 20-year run of prosperity. I think we'll run into a stage where the technology has a substantial negative effect on jobs -- including at the top" of corporate organizations, said Mandel.

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