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Tech Sector Waits for Next Wave

The U.S. tech sector has clearly recovered from its recession but is poised to suffer some ups and downs until the next wave of innovation arrives in 2008.

Those were the conclusions of a new sector index created by Forrester Research and the Information Technology Association of America, which claim they've invented the most comprehensive view of the health of the tech sector.

"We expect the index to follow a saw-tooth pattern in 2006 and see a mild downturn in 2007," Forrester predicts. "Don't weep for the U.S. tech sector, but don't break out the champagne either."

The quarterly index, unveiled Monday, was created from 11 measures of tech-economy health, organized by demand, supply and firm strength. Using 2002 as a baseline with a measure of 100, the index reached 121.6 in the third quarter of 2005, approaching a three-year high of 122.3 set in the fourth quarter of 2004 and 3.9 points higher than this year's second quarter.

But Forrester also found indicators of a future weakening in the U.S. tech sector, with its outlook for fourth-quarter business investment falling. Forrester also said early fourth-quarter readouts show a drop in CIO confidence, while U.S. enterprises are projecting smaller budget increases for 2006.

The latest indication of a potential slowdown came from Forrester's November 2005 North American and European Enterprise IT budgets and Spending Survey, which found that U.S. enterprises project IT budgets to increase only 3.1% in 2006 vs. 3.4% heading into 2005.

Forrester expects some measures, such as employment and IT spending, to continue to grow, but at slower rates. Other measures such as IT vendor profits, stock prices and CIO confidence are expected to fluctuate.

Such weakening comes on the heels of a strong third quarter. Forrester found that CIO confidence on the health of budgets and future spending prospects shot up in the third quarter, contributing to an overall increase in the index. Revenue increases at U.S. tech firms and a rise in the iShares Dow Jones U.S. Technology Sector Index Fund (IYW) also contributed to the third-quarter improvement. And IT employment climbed to its highest level since the first quarter of 2003, with the addition of 15,500 new tech jobs.

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