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US Economic forecasts, bets on productivity

Comerica Financial has an Economic Outlook: 2004-2005, And Beyond (2006-08) from this fall that describes a different picture of the US economy over the next few years than I have seen forecast elsewhere. One of Comerica’s key assumptions is that:

“The forecast horizon (2004-2008) features a “guns and butter” public sector overlay on a private sector struggling to remain globally competitive. This promotes a strong pace of technology advancement and capital investment by business to substitute “state-of- the-art” equipment for labor to gain productivity and profits.”

This assumption directly implies a strong return to investment by enterprises in technology — one that I’ve not seen, though it does depend on their assessment of “Mainstream media obsession with negative reporting on the U.S. economy”.

The important element of Comerica’s forecast is a contrarian expectation that 2004 will be a year of strong growth when compared to 2005 and 2006. The report states that “Beyond 2005, U.S. economy hits major economic and financial air pockets”, owing to the inflationary policies of the Fed (aimed at fanning the fragile recovery now) and the shadow of the large entitlement liabilities.

Adding a different perspective, The Wall Street Journal has a piece (archivedhere) about how tech is allowing companies to do more with less. The piece opens in a discussion of companies taking a much closer look at how they can leverage what they have already.

At Hannaford Bros., a unit of Belgium’s Delhaize Group that operates 140 supermarkets in the Northeast, Chief Information Officer Bill Homa says he still has excess capacity on his telecom lines and equipment that he bought or leased between 2000 and 2002….As a result (of all this), Mr. Homa says Hannaford’s total tech spending has been relatively flat over the past few years because he’s been able to get more for less. “In the next five years, I’m not looking for any tech,” says Mr. Homa. “I haven’t run out of ideas with the technology I have now.”

Companies are clearly skeptical about the value of the latest technology. Janet Memmelaar, vice president of sales and administration at Metal Cutting Corp., Cedar Grove, N.J., has not installed the last two upgrades of the manufacturing software the metal-fabricating company uses. She says what the company is using is working fine and the new versions would require her to buy new hardware. “We’re not even paying the maintenance on the old software anymore,” saving the company $15,000 a year, she says.

A quote from Joe Tucci, CEO of EMC, captures another observation I’ve heard often lately — he “recently told investors that companies no longer pay upfront for big installations. ‘They want to pay as they go or pay as they grow,’ said Mr. Tucci. ‘This phenomenon is now hitting software hard.’”

In my daily work, I see more and more evidence that the enterprise market for IT is going to be a difficult place to make money, until perhaps the ‘next big thing’ comes along. Still, some analysts are bullish - Forrester Research makes some predictions (via Tom Sullivan’s InfoWorld blog) about enterprise IT spending , saying that 46% of US enterprises surveyed said they’d spend more on IT in 2005.