Economic Warning Signs Flashing at the Channel

The markets and the Fed aren't the only ones saying the recovery is slowing enough to cause concern. Warning signs are flashing all through the small business and IT markets.

The National Federation of Independent Business (NFIB) released results of its latest Index of Small Business Optimism on Tuesday. See the full PDF here.

The survey was conducted in July  and the results don't show much optimism. The index lost 0.9 points in the July run compared to June for a reading of 88.1. According to the report's summary, "The persistence of Index readings below 90 is unprecedented in survey history." NFIB has been running the survey quarterly since 1973 and monthly since 1986.

"The performance of the economy is mediocre at best, given the extent of the decline over the past two years. Pent up demand should be immense but it is not triggering a rapid pickup in economic activity. Ninety percent of the decline this month resulted from deterioration in the outlook for business conditions in the next six months. Owners have no confidence that economic policies will 'fix' the economy," report authors William Dunkelberg and Holly Wade wrote.

Other findings from the survey are that hiring plans are historically weak, capital spending plans are near the record low set in December 2009 and profit trends are worsening.

Researchers at Ovum reported Tuesday that the number of contracts in the IT service sector increased in the second quarter -- but hold the applause there. Despite the 14 percent sequential increase in deals from 401 in Q1 to 457 in Q2, the total contract value (TCV) of those deals also fell by 14 percent to $30.8 billion.

In a statement, Ovum analyst Ed Thomas indicated that IT service providers dealing with the public sector were faring slightly better than their private-sector counterparts.

"Public sector demand remained steady, particularly in the U.S., which accounted for more than 90 percent of the market's quarterly TVC. This was good news for vendors with a major focus on the U.S. government sector, notably General Dynamics, Lockheed Martin and SAIC," Thomas said. "Concerns remain about the scale of outsourcing in the private sector, where TCV for Q2 slipped to only $10 billion as clients shied away from signing large deals."

In a report released earlier this month on worldwide IT spending, IDC reported that first half spending exceeded the analyst firm's expectations and raised spending forecasts for the full year to $1.51 trillion, a 6 percent increase over 2009. By segment, the forecasts are for hardware growth of 11 percent, software growth of 4 percent and services growth of 2 percent. However, the firm tempered its enthusiasm with concerns about the global economy.

"We stand in the middle of two powerful and opposing forces," wrote IDC analyst Stephen Minton. "On the one hand, the very real pent-up demand for new IT investment, which has driven the solid recovery in the first half of 2010 and which will hopefully continue into 2011. On the other hand, the potential loss of confidence in a global economy which remains extremely vulnerable to any further escalation of the European debt crisis or a deterioration in the U.S. stock market."

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Posted by Scott Bekker on August 11, 2010