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Tuesday, January 25, 2011

2011 Shaping up to be a Good Year

10 Days In, 2011 is Shaping Up to be a Very Good Year
Bruce Richardson, Chief Strategy Officer, Infor

Posted on January 10, 2011

If a television newscaster was to be so bold as to predict the winner of an election with less than 4% of the votes tallied, there is a good chance that viewers would overwhelm the station’s switchboard with calls asking whether that neatly coiffed person had been over-medicated.

At the risk of inviting a similar deluge, I’m going to declare that 2011 will finally put an end to any questions about the timing of a US economic recovery. It’s here.

It’s true. See for yourself. Grab a pen and a piece of paper. Create two columns. On the left, write “Good News.” On the other side scribble “Bad News.” Under each heading, add as many proof points as you can.

You can relax now when you open your 401K statements

Let me help you out. We’ll start with the stock market. Look at how some of the major indices ended 2010: the Dow Jones Industrial Average was up 11% for the year. It closed at a 28-month high. The S&P 500 gained 12.8% to finish at its highest close since September 2008. The NASDAQ Composite jumped 16.91%. It closed at its highest level in nearly three years. The Russell 2000 gained more than 25%, and closed at its highest point since October 2007. A stronger stock market is good for both business and consumer confidence.

While confidence is never lacking in investment banking, 2010 brought a fresh supply of testosterone. According to Thomson Reuters, the global dollar volume in announced deals reached $2.4 trillion, up 23.1%. The US accounted for about a third of the volume—$822 billion. This was up 14.2% over 2009. Buyers paid 50+% premiums for targets in financial services, industrial manufacturing, and telecommunications. Is there anyone that expects the M&A market to slow this year? I didn’t think so.

Bullish predictions from the analysts

Now, let’s look at what the analysts are saying. IDC’s list of 2011 predictions opens with a wager that global IT spend will hit $1.6 trillion this year, up 5.7%. The analysts see the software market “rebounding” after modest growth last year and a decline in 2009.

For its part, Forrester Research presents an optimistic view of the US IT market. The firm expects the domestic market to reach $889 billion, up 7.4% over last year. Forrester is even more bullish on 2012, as early signs point to 9% growth. Drilling a little deeper, the software market should grow 8.4% to $220 billion this year. That’s great news for application vendors like us, as apps make up the largest slice of the software pie.

Forrester also models IT spend as a multiple of “nominal GDP” or GDP that has not been adjusted for inflation. Historically, IT spend tends to be at least double nominal GDP. Economists’ estimates for US GDP range from 2.1% to 7.0% this year, with many camped out between 3% and 4.0%. Assuming 2011 doesn’t prove to be an aberration, this should be another good omen.

Companies are profitable and sitting on a lot of cash

Speaking of spending, American companies are sitting on a lot of cash. At the end of the third quarter, the 419 non-financial firms that make up the S&P 500 had $902.4 billion in cash on hand, 49% higher than one year ago. Their combined third quarter profits were $1.64 trillion, up 26%. This is the highest profits have been in four years.

Profits should continue to rise. Barclays is forecasting 8% profit this year. While that’s lower than the 2010 level, it’s because the bank is anticipating increased spending on property and equipment.

Buyers have been loosening the purse strings. In Q3, US companies spent $1.08 trillion on equipment and software. That was up 15% over the year earlier period.

Good news across the service and manufacturing sectors

Last week saw positive news from the Institute of Supply Management (ISM). The index for the services sector reached its highest level since May 2006. This marked the 12 straight month of growth. This is good news as this sector accounts for 80% of the US workforce.

Meanwhile, ISM’s index for manufacturing showed that the sector grew for the 17 month. According to the organization’s chairman, the continued expansion is due to “strength in autos, metals, food, machinery, computers, and electronics.”

If you did a double-take when you read “autos,” that wasn’t a typo. One of the more surprising success stories for 2010 was the comeback of the US automobile market. December sales rose 11% versus one year ago. Overall, US drivers purchased nearly 11.6 million vehicles last year. Preliminary forecasts see this number increasing to 13.5 million in 2011.

Now for the other side of the ledger

Last week, ADP issued a report showing that private firms added 297,000 jobs in December. This was three times what economists had been predicting. Later that week, the US Department of Labor issued its own study. The agency said that the private sector had added 113,000 jobs last month.

While that was enough to nudge the unemployment rate from 9.6% to 9.4%, it still means that 14.5 million Americans remain out of work. While some areas are much lower than the national rate, a separate Labor Department study noted that unemployment had increased in 258 of the 372 largest US cities.

While many industries have rebounded, the housing market remains soft. Construction spending grew 0.4% in November, but markets remain too soft—especially in Arizona, California, Florida, and Nevada.

On a related note, there were 1.55 million bankruptcy filings in the US last year. While this represents a 10% increase over 2009, it’s a much smaller increase than the previous two years.

You may have noticed that the price of gasoline and crude oil has been rising. There is frequent talk about “$5 gas.” Higher fuel prices coupled with rising food prices may negatively impact the strong recovery.

What does your Good News/Bad News score sheet look like?

As you might surmise, the Good News trounced the pessimism in my T-chart. And I didn’t even have to talk about the potential “halo effect” from successful IPOs from Facebook, Groupon, and/or Twitter. Should one or all of them go out in 2011, they could cast a positive shadow across the tech market.

What does your T-chart look like? Did Good overcome Bad? Or, did pessimism/caution prevail?

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