Does IT Spending Predict the Movement of the S&P 500?

| About: SPDR S&P (SPY)

By Paul Carton

Andy Golub co-wrote this article

Ever since 2001, corporate spending on information technology has been considered a key leading indicator in our ChangeWave surveys.

The latest ChangeWave IT spending survey appears to be no exception. Its findings suggest we are fast approaching the tail end of the current U.S. recession.

But just how accurate a measure is corporate IT spending for predicting the future direction of the U.S. economy anyway?

Here’s what we did to find out.

First, the following chart appears to show U.S. corporate tech spending in the process of stabilizing – with a dramatically improved outlook in place for the 3rd Quarter (see arrow pointing to May ‘09 results).

  • Of the 1,950 IT buyers we surveyed, 15% say their company's IT spending will increase for the 3rd Quarter – up 5-points and the first uptick in a ChangeWave IT survey in more than two years.
  • While 24% still say their company’s IT spending will decrease or there will be no spending at all, that’s a major 17-pt improvement since the previous survey.

Note that the last time we had a net improvement of this magnitude was way back in November 2001 – a time period that would later prove to be the tail end of the previous U.S. recession.

But that doesn’t prove we’ve got a classic leading indicator above. Much greater proof is needed. Here’s what else we looked at.

First, we merged the two lines in the above chart into a single line, which we’ll call our ChangeWave Net IT Spending Score line. The following chart shows the Net IT Spending Score line for each of the past 12 quarters:

For illustration, when we merged the May 2009 survey results (in which 15% of respondents say they are Increasing and 24% say they are Decreasing IT spending) we got a Net IT Spending Score of -9 (see above arrow).

OK, here’s the most important part. In the chart below we’ve compared the green Net IT Spending Score line for the past 12 quarters with the performance of the S&P 500 Index (the blue line) over that same time period. Take a look.

Bottom Line. The results show corporate IT spending to have been a powerful leading indicator for the U.S. economy over the past 12 quarters – and for the S&P stock market index.

Not only does the green Net IT Spending Score line trend sharply downward in the months leading up to and throughout the first year of the recession, but then it clearly improves in February 2009 – three weeks before the stock market hits bottom. Moreover, it has continued to move above the S&P index line in our most recent survey.

Next quarter ChangeWave Research will once again measure corporate IT spending and utilize the results as a key leading indicator to help predict the future direction of the U.S. economy and the stock market.

Stay tuned.