Does IT Spending Drop Mean 2004 Recovery is Bust?

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After three months of steady IT spending in the U.S. market, sagging small and large businesses pulled down IT spending levels sharply in August, according to a new study from Gartner, Inc.

The news of the drop in spending comes just one month after Gartner, an industry analyst giant, reported that a strong increase in IT spending was pointing toward hope for a turnaround in 2004. While May, June and July showed signs of consistent growth, August saw a large drop in spending.

Medium-sized businesses remained consistent for the month. But analysts warn that an IT spending recovery will depend on the strengthening of large and small businesses.

”While current demand among small enterprises has weakened, their strong projected spending in 2004 strengthens the upward momentum provided by midsize enterprises,” said David Hankin, senior vice president and general manager of Gartner. ”Only large enterprises appear to be consistently sluggish, which does cause some concern over the depth of any future recovery.”

The analyst firm ranks IT spending on its Gartner Technology Demand Index, in which a rating of 100 would mean the company spent exactly what it had budgeted for that month. A Gartner poll of 20,000 member companies shows that U.S. enterprises spent below their budgeted levels, recording a score of 81 on the Gartner Technology Demand Index.

The Technology Demand Index had remained above 90 during the months of May through July.

Small companies have shown the greatest unwillingness to spend, according to Gartner, dropping to 72 on the index in the third quarter. That’s down from 79 in the second quarter. Gartner analysts say large companies also showed weakness quarter over quarter, but these businesses are not as tight on budgets as small companies. The current spending index for large enterprises slipped to 85, from 89 in the second quarter.

For now, all eyes are on the fourth quarter.

Analysts say if an IT spending recovery is in the works for next year, it will have to be heralded in by strong spending in the last quarter of 2003.

”The current period is indicating potential market weakness among small and large enterprises, which are reluctant to spend at budgeted levels,” says Hankin. ”However, mid-size organizations may be the economic vanguard that will stimulate spending throughout all sectors. We continue to expect that, overall, the fourth quarter will show expected gains as companies clear excess budgets to gear up for a stronger business environment in 2004. Failing this, the 2004 recovery is in jeopardy.”