Reading the headlines, tech is showing some signs of relaxing a bit.
- The first is a slowdown in corporate capital formation. Businesses hold record amounts of cash, but have nowhere to put it: a stagnant economy doesn't encourage investment for growth, while real interest rates on Treasurys are negative. Why raise more capital?
- Next are signs that captive IT spend is slowing amid general economic uncertainty in the US and Europe.
- Public sector austerity will reduce government spending on tech, softening demand further.
- Investment capital is also getting a bit tighter. Volatile equity markets don't make for the best of times to IPO. Also, market uncertainty has triggered a run for cash, depleting high-risk investments. That is cooling off venture backed businesses.
- Finally, H-P pulling the plug on WebOS devices (if not the OS) may portend an inevitable shakeout in smartphone & tablet platforms, while market battles waged with patents threaten to make innovation an early victim.
But it is likely to be a short breather. The overall trend in tech remains inflationary.Demand is still strong. Businesses are still spending on technology as a way to lock-in productivity gains to protect margins in a period of flat revenues. Business spending on software is forecast to increase nearly 10% this year. Smartphones and tablets are selling in copious volumes. Mobile as well as social media platforms are spawning new applications and new categories of applications.
Investment remains strong, too. M&A in the tech sector is back to pre-crisis levels. VC firms late to the game will add more froth to valuations. Some tech firms - encouraged by moribund investment banks - may still believe the time is right to IPO. Tech behemoths such as Oracle, Microsoft and Google are sitting on large cash piles.
In a broader economy plagued by deflation, tech is still robust. A bit of capital tightening and demand slacking probably isn't a cooling off as much as it's just a cool breeze. Still, it's a welcome respite, particularly if it blows through tech labor markets. High labor costs don't just drive up development costs, they also make project rescues and bailouts that much more expensive. Any reduction in labor market pressure would make tech investments more resilient to failures, particularly important in a line of work notorious for spectacular ones.
Best of all, it would give tech leaders the opportunity, however brief, to adjust and reposition for another round of tech inflation.