Forrester/ITAA US Tech Economy Index

Methodology For The US Tech Sector Index
The Forrester/ITAA US Tech Sector Index is the market’s most comprehensive view of overall IT industry economic condition. The Index is based on 11 measures of the health of the tech economy, organized under three major headings — demand indices, supply indices, and firm strength indices. All 11 are weighted evenly in the overall index score. Each measure is available quarterly. Four of the measures are government measures, four are Forrester proprietary measures, one is a hybrid Forrester/government measure, and the remaining two come from other outside sources. All indices use a 2002 quarterly average as a baseline with the exception of Forrester's analysis of large US vendor profits.

Demand Indices
These indices are designed to measure overall demand for IT hardware, software and services in the US. There are four components that fall under this heading:

CIO confidence. This is a leading measure of IT health that attempts to quantify CIO confidence in both the state of their industries and their IT spending intentions. The source is Forrester’s CIO Confidence Poll, which is conducted quarterly. The poll gauges CIO optimism on five fronts: current business conditions, future business conditions, current IT spending, future IT spending, and IT spending relative to budget. We used the CIO Magazine Tech Future Growth Index for historical data prior to Q2 2005.
Forrester's outlook for business investment in IT. Forrester’s outlook for business investment in IT is a leading indicator that forecasts the subsequent quarter’s investments in IT. The score measures investment in computers and peripheral equipment, software, and other information processing equipment and software expenditures as tracked by the US Bureau of Economic Analysis. Data is available quarterly and is seasonally adjusted at annual rates. For trending purposes we replace Forrester’s forecast once actuals become available from the BEA.
US technology exports. This measure, as tracked by the US International Trade Commission, quantifies US exports in computer equipment, communications equipment, semiconductors and other electronic components, magnetic and optical media, and software publishing. It directly measures the demand for US technology goods and services from abroad regardless of company size.
US revenues for 39 large IT vendors. Each quarter Forrester tracks the North American revenue of 39 large IT vendors — regardless of nationality — as a measure of US demand for technology products and services. The revenues are tracked in dollars and include computers and peripherals, communications equipment, software, and IT services. They are seasonally adjusted, using the same seasonal adjustment factors that the US Bureau of Economic Analysis uses for its data on business investment in IT. This is a lagging indicator of IT health. While this measure does not capture the contribution of smaller vendors, it has proven to be an accurate indicator of the overall industry, which has historically been driven by a select group of large vendors.

Supply Indices
These indices are designed to measure the overall health of IT service and product supply in the US. There are three components that fall under this heading:

Venture capital investment in IT. This measure effectively tracks three distinct inputs to the health of the industry. First and most basic is venture capitalists’ faith in the IT industry and its future. Second is the influx of new capital and businesses to the market. It is our belief that new startups, new competition, and new capital are vital signs of industry health and long-term viability. Lastly, it serves as one measure of research and development of new technologies — a major focus of VC capital. This measure is collected quarterly as a collaboration between the National Venture Capital Association, PricewaterhouseCoopers, and Thomson Venture Economics.
Total IT industry employment. IT industry employment is a basic indicator of IT health as a whole and serves as a proxy for the overall size of the IT market supply. This measure is tracked by the US Bureau of Labor Statistics and includes employment in computer and electronic products, ISPs, search portals, and data processing, computer systems design and related services, and software publishers. Data is seasonally adjusted with the exception of software publishers.
US technology imports. This measure, as tracked by the US International Trade Commission, quantifies US imports in computer equipment, communications equipment, semiconductors and other electronic components, magnetic and optical media, and software publishing. It directly measures the supply of technology goods and services in the US from abroad. It is our belief that an increase in imports represents increased opportunity for US firms, and, unless there were to be a major shift, does not represent declining US influence or quality.

Firm Strength Indices
These indices are designed to measure the overall strength of US IT solution providers and examine the interplay between supply and demand. There are four components that fall under this heading:

Profits of 22 large US-based vendors. Each quarter Forrester tracks the profits of 22 large US IT vendors as a basic measure of IT industry health. This measure includes both domestic and foreign revenues, and accounts for input prices, output prices, and other cost of production. They are seasonally adjusted, using the same seasonal adjustment factors that the US Bureau of Economic Analysis uses for its data on business investment in IT.
Global revenues of 22 large US-based vendors. Each quarter Forrester tracks the global revenue of 22 large US IT vendors as a measure of global demand, but also as a measure of US firm strength relative to the rest of the world. The revenues are tracked in dollars and include computers and peripherals, communications equipment, software, and IT services. They are seasonally adjusted, using the same seasonal adjustment factors that the US Bureau of Economic Analysis uses for its data on business investment in IT. This is a lagging indicator of IT health. While this measure does not capture the contribution of smaller firms, it has proven to be an accurate indicator of the overall industry, which has historically been driven by a select group of large vendors.
Prices. Government data on IT prices serve as an excellent measure of the interplay between supply and demand, as well as a gauge of the commoditization of the IT industry. Prices are measured by the Bureau of Economic Analysis Price Index For Information Processing Equipment and Software, which captures the prices of computers and peripheral equipment, software, and other information processing equipment and software. The BEA indexes to 2000 and prices are seasonally adjusted.
Stock prices. The Dow Jones tracks the US technology sector through an index of 254 leading IT companies, and this serves as a final aggregate indicator. This is a market indicator that aggregates the analysis of millions investors, and as such it will track any and all changes in industry health that are not explicitly tracked in the Forrester/ITAA US Tech Sector Index. It will also remain insulated from the fluctuations of any one company, given the breadth of the measure, though it is weighted to reflect the relative importance of key suppliers and companies. The stock (symbol: IYW) is tracked daily on the American Stock Exchange, and is measured as the average quarterly close price.