The IT Industry has a Weaker Outlook but should Rebound

Senior Risk Underwriter Paul Wonka, reflects on the IT industry this year, discussing where the current trends could be headed.

As we reach the middle of the year, looking forward to 2024 for industry outlooks becomes more realistic and beneficial. Amidst shifting economic dynamics, the IT industry’s trajectory has strayed from its historical vigor, as fiscal 2023 witnesses a decline in IT spending and a moderated growth outlook, prompting concerns about profitability and resilience in the face of macroeconomic challenges.

The IT industry has been performing well, although not as strong as in years past. While technology spending remained relatively resilient in fiscal 2022, so far in 2023 IT spending has been weaker than originally anticipated. So much so that S&P Global Ratings revised its IT spending growth forecast to 2.2% in June, down from 2.4% in May, and 3.3% in January.

The biggest trend we are currently seeing is a decline in IT spending, which is leading to weaker results for many companies within the industry. As noted by S&P, the combinations of IT budget constraints, overstocked inventory, and below-trend demand (for both consumer and enterprise products) have led to margin compression and lower profitability.

Compared to prior years, the overall industry outlook is weak. While the IT industry performed strongly during the pandemic years (2019-2021), the industry has since fallen considerably amidst poor macroeconomic conditions and rising interest rates. Evidence can be seen in the many credit rating downgrades of companies within the industry in the past year. Additionally, it is less likely that we will see an improvement in IT spending in the back half of the year. Some of the major weaknesses within the IT industry include excess inventory, IT budget constraints, lower demand & IT spending, and high-interest rates that continue to constrain many companies within the industry.

It is difficult to gauge how the industry will fare for the rest of the year. What we do know is that the US economy has performed better than originally anticipated, thus likely avoiding a recession. However, this resilience combined with lasting inflation will likely mean continued interest rates at elevated levels. This is likely to pressure companies tied to variable interest rate debt and will ultimately pressure free cash flow.

Overall, while we expect the industry to remain weaker for the remainder of the year and possibly into 2024, we believe this will be temporary. As noted by S&P, the IT sector has historically been resilient and strong, and the sector along with increased IT spending is expected to rebound over the next few years. This expected rebound is likely to be driven by the continued growth and reliance on electronic content, digital transformation, AI, and cloud computing, among other things.