Tech sector set to recover

Tech sector set to recover

Strong and steady improvement, economists say, would suggest that the United States is truly emerging from the Great Recession. Yet if tech spending fades, it would mean that recovery is further off.

So far, there are many encouraging signs. The technology giants Intel, IBM and Google delivered better-than-expected quarterly financial results and their executives expressed confidence that the worst was over and a rebound under way. Top executives at Dell, Cisco Systems and other tech companies have also been optimistic recently. “ The worst of the recession is clearly behind us and because of what we have seen, we now have the confidence to be optimistic about our future,” Google’s Chief Executive Eric E Schmidt,  told analysts after the company’s strong earnings report. Much depends on how the nascent revival in the technology sector plays out. Computer hardware and software are building blocks of the modern economy, as basic as iron ore and coal were to the industrial era. Together, technology products represent about half of all business spending on equipment.

Microchips and clever code animate consumer technology goods, like personal computers and Apple iPhones. Larger computers in data centres power e-mail, electronic commerce and the Internet.

“This will be a technology-led recovery,” said Edward Yardeni, an economist and investment strategist. “And the improvement we’re seeing from the technology companies suggests the recovery has legs.”

Chief Executive of Intel, Paul S Otellinithe world’s largest semiconductor maker, pointed to his company’s solid third-quarter performance on Tuesday and said it showed that “computing is essential to people’s lives, proving the importance of technology innovation in leading an economic recovery.”

Computer chips like those made by Intel are a key ingredient of technology goods, and spending on the equipment used to make semiconductors is projected to rise by 47 per cent in the second half of this year, according to Gartner, a research firm.

Recently IBM, a leader in software and technology services sold to companies, reported profits and revenue that surpassed Wall Street’s expectations. The company’s net income rose 14 per cent from a year earlier to $3.2 billion, or $2.40 a share. IBM lifted its guidance for full-year profits by 15 cents a share from its previous projection, and added that it expected year-on-year revenue to grow in the current quarter. Revenue in the third quarter fell by 5 per cent, adjusted for currency movements, to $23.6 billion.

“We’re seeing more stability in the economy,” IBM’s Chief Financial Officer Mark Loughridge said in an interview. “That’s a big improvement over the relentless declines we had been seeing.” The strongest markets for technology suppliers have been in developing nations, like China, India and Brazil. In the United States, much of the technology spending so far has been by consumers, especially buying personal computers and smartphones.

But analysts caution that it is too early to tell whether the spending pickup will carry through to a key market: corporations. “We’re eeing glimmers of improvement, but it would be premature to say we’re on a strong recovery path,” said Richard Berner, an economist at Morgan Stanley.

Managers who make technology purchase decisions have yet to really open their wallets, although recent surveys of their intentions have become far more positive. Corporate buying tends to trail an economic recovery because companies routinely take several months to budget and plan technology projects. Tech industry executives say corporations are preparing to replace their aging personal computers — purchases that were put off during the depths of the recession. There are already some signs that companies are buying new PCs again, executives say, and that could well accelerate after the introduction of the Windows 7 operating system, a Microsoft product.

Companies typically buy new PCs six months or so after Microsoft introduces a new operating system, after they have the chance to test the software and plan their rollout. “I think there is a very powerful refresh cycle that is coming,”  Chief Executive of Dell Michael S Dell, said in a speech this week. “We are seeing the planning and early stages of this from the clients we serve, which would be about 85 per cent of the organisations in the United States that have more than 500 people.”  Chief Executive of Cisco, John Chambers,was even more bullish predicting a substantial increase in productivity at American companies driven by investments in Internet software and hardware. “I think we are entering a period very similar to 1997 to 2004, where you’ll see a decade run of productivity increases,” he said .

Hiring is up
Rising confidence and investment eventually translate into stepped-up hiring. That phase has just begun. Google, for example, began hiring again in August in response to a pickup in the company’s search and Internet advertising businesses, according to its chief executive, Mr. Schmidt. He said the company was also scouting for acquisitions again.

“I can’t prove it,” Schmidt said, “but I would hope we’re a leading indicator.” Infosys, an Indian technology services and outsourcing company, plans to hire 1,000 workers in the United States over the next year. The move is part of its strategy to hire more locals as it expands in the American market. An improving economy would accelerate the programme. “We are gaining momentum and will speed up the hiring,” said Nandita Gurjar, a Senior Vice President at Infosys.

The steady march of digital technology, in industry after industry, is pushing the demand for IT.  The recession curbed spending for a while, and forced organizations to improve the efficiency of their data centers and technology operations. But that goes only so far. In health care, for example, rising demand is being driven by the push for computerized health records, the adoption of digital radiography, digital pathology techniques and telemedicine.

“There is this huge growth in digital data coming in health care, and it is only going to add to the need for computing resources of all kinds,” said Daniel CIO  of the University of Pittsburgh Medical Yet the pervasive spread of computing across industries and society, analysts say.

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