Finance's Troubles Infect Tech

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The situation would be much worse if mortgage woes spread further, causing a significant drop in consumer spending and hurting the retailing, telecom, media, and manufacturing sectors. At that point, IT growth in the U.S. would slow to 1% to 2%, Minton estimates.

So far, the fallout in the tech sector has been a drip, drip, drip, rather than a flood. On Oct. 16, IBM announced its largest customer group, big banks and brokerage firms, was pulling back on buying the large software programs and mainframe machines used for massive, complicated calculations. That sent hardware sales for the third quarter down 10%. On Oct. 24, Symantec (SYMC), a leading seller of security software with a high proportion of its customers on Wall Street, sliced second-half earnings estimates because of economic uncertainty. And EMC (EMC), the biggest data-storage company, said that while it had beaten quarterly expectations, its customers in the financial sector were spending cautiously on more expensive disk drives.

Mixed Signals

The problems have been limited primarily to Wall Street. On its earnings call, Cisco said the weakness in the U.S. market was a result of softer-than-expected demand from its top 25 customers. It reported a drop in orders in the U.S. from clients in the automotive and retail markets, as well as in the financial markets. But of the top 25 customers, eight are financial clients, and two are in the automotive industry. "[In financial services], especially the large financial institutions, we did see pretty dramatic year-over-year decreases in orders," said Chambers, in response to one analyst's question.

Complicating matters is the tech industry's mixed overall picture. Other tech bellwethers, Microsoft and Intel, posted stellar results and rosy forecasts this quarter. And while Cisco's outlook was more somber, the company didn't cut long-term revenue growth estimates. Because of the strength of overseas demand, which makes up about 55% of sales, the company said it was confident it could meet its target of 12% to 17%.

Mounting Pressure

The longer it takes Wall Street to sort out the extent of its exposure to the mortgage woes, the more the pressure builds on 2008 tech budgets. And it's not clear when that will happen. Merrill Lynch (MER), Morgan Stanley (MS), and Citigroup (C) have all taken multibillion-dollar writedowns in the past two weeks. But Citi, even as it said it would take a writedown of $8 billion to $11 billion in the fourth quarter, gave little assurance that it knew when its troubles would end (BusinessWeek.com, 11/6/07). "There's no way, I think, anyone can give you assurance of how things are going to move," said Gary Crittenden, Citigroup's chief financial officer.

The write-offs are expected to continue. The industry's financial woes have led to 140,000 layoffs in financial services so far this year, a record that could dampen the need for more computers and services in some offices. Representatives at some of the largest investment firms declined to comment on their budget plans. "Certainly next year, the tech budgets will be more constrained, and that will take an edge off the current revival of the tech industry," says Mark Zandi, chief economist at Moody's Economy.com (MCO).

Green is an associate editor for BusinessWeek .