The U.S. Bureau of Economic Analysis (BEA) released its Q2 2018 report on US gross domestic product this morning, and it contained some surprises for the US tech market. Real GDP growth for the quarter was about what we expected: 4.1% on a seasonally adjusted annualized basis versus our assumption of 3.9% in our July 2 report, “US Tech Market Outlook For 2018 And 2019.” But the BEA also revised historical data going back over 20 years. Those changes will cause some meaningful shifts upward in Forrester’s sizing and forecasts for the US tech sector.
Here are the changes:
The 4% real GDP growth in Q2 2018 is likely to be repeated in the second half of 2018. Many economists had expected the strong growth in Q2, but they had assumed that a significant part of that growth would come from inventory buildups in anticipation of tariffs and trade barriers. Instead, private inventory levels actually declined in Q2, subtracting from GDP growth. Consumer spending was strong, up 4%, led by spending on consumer durables. Business investment in structures rose at a 13% rate (similar to Q1), but business investment in equipment grew more modestly, by 3%. US exports were surprisingly strong at a 13% growth rate, while US imports were surprisingly weak with just 1% growth. US government spending growth was moderate but positive at 2% growth, led by a 5.5% rise in US defense spending. Overall, the characteristics point to 4% or so real GDP growth in Q3, slowing to 3% or so in Q4.
Data revisions increased the size of the US economy, and of the US tech sector. The BEA introduced a significant number of changes in how it measures and calculates US GDP, especially in the areas of software, computer equipment, and communications equipment. These revisions increased nominal GDP by about $100 billion from 2013 to 2018, approximately 0.8% (see below figure, left column). Revisions to tech investment made up a significant part of this upward revision in GDP, running between $20 billion and $40 billion a quarter and representing a 5% to 6% increase in total US tech investment. Business investment in computer equipment and communications equipment were revised up the most, by $20 billion to $25 billion per quarter each (see below figure, right column). At the same time, business investment in software was revised down by $10 billion to $15 billion per quarter. That revision was due to a reclassification of a portion of “own-account software” (that is, software created by companies for their own internal use) as intellectual property and not software. That change will actually not impact our tech budget numbers because Forrester has excluded “own-account software” from our software estimates on the grounds that it was valued based on the cost of time put in by the staff who created that software, thus duplicating our tech staff numbers.
Forrester’s US tech market growth is likely to be revised higher for 2018 and 2019. We have not yet worked through all the implications of the Q2 2018 GDP report for our US tech market forecast. However, our preliminary estimates are that the more positive economic outlook and revised data for hardware will raise the 2018 growth in business and government spending on tech goods, services, and staff to 6.9% from the 6.7% forecast on July 2 and the 2019 growth to 6% from our July 2 projection of 5.5%.