The tech industry is poised for strength

The pandemic and its supply chain crisis boosted the demand for technology. Now, much of the industry is retrenching around boom-era overexpansion and missed bets. So, what comes next?

Remote work, shopping and entertainment boosted the demand for the tech industry’s products and services, along with the need for stronger digital infrastructure. That triggered some supply chain woes that led many large firms to invest in supply chain management, enterprise resource planning solutions and location tracking technology. As a result, the industry’s gross value added grew at almost twice the rate of U.S. GDP. 

Inflationary pressure

The macroeconomic environment over the next couple of years is unlikely to be so benign for tech, which has proved highly sensitive to interest rate fluctuations. Inflationary pressure prompted the Fed to raise its target range for the federal funds rate from 4½ to 4¾%, up from 0 to ¼% in 2020, with only limited promises of relief. The Fed’s latest statement said it anticipates further increases in pursuit of “monetary policy that is sufficiently restrictive to return inflation to 2 percent.”

Tighter credit conditions will hit the availability and cost of credit. Forecasts suggest corporate borrowing rates will average 5.3% and 4.6% in 2023 and 2024, up from an average of 1.75% in 2021. This will severely impact some tech firms that rely on debt for their funding.

Economic outlook

The same pain is being felt across the broader economy. The U.S. GDP is predicted to remain unchanged in 2023, after growing by 2.1% in 2022. The more uncertain outlook and reduction in business confidence evidenced by survey data is expected to dampen firms’ investment spending, which is forecast to contract by 1% (in real terms) in 2023. Households’ spending power has been hit by a 6% decline in real disposable income last year along with higher borrowing rates. Export prospects have also diminished: U.S.-weighted world GDP growth has continued to slow and is expected to be subdued in the near term.

Against these headwinds, the tech industry’s output (as measured by gross value added) is forecast to grow by 0.8% in 2023 — which is slow relative to the recent past, but still faster than overall U.S. GDP this year and across the next five years (an average of 3.1% versus 1.5%).