SAN JOSE, Calif. -- With the status of the U.S. economy surrounded by question marks, what will be the impact of a recession, or at least a severe slowdown, on IT spending and budgets? That was the question being addressed at an afternoon session here at the IDC Directions '08 conference.

Stephen Minton, vice president of worldwide IT markets, discussed the possible scenarios facing IT this year and compared it to the last major economic slowdown in 2001-2002.

Back then, the U.S. was hit with a double-whammy. First came the Dot Bomb implosion that led to a surplus of office space and slightly used server equipment and a shortage of moving trucks in the San Francisco Bay Area. Then came the terrorist attacks of Sept. 11, 2001, which made an already tough situation much worse.

In the current scenario, however, there are two significant differences. The terrorism scenario was never brought up and not factored into the equation, and in this instance, the slowdown isn't being driven by a bunch of overvalued tech startups but overextended consumers who bought houses they couldn't afford.

"This downturn is very different than 2001, which really was a business-led recession," Minton said. "That's one reason why [the tech sector's situation] was as bad as it was. What we're looking at now is one primary industry, financial services."

Unfortunately, that's also a big sector; it makes up 18 percent of the U.S. economy and buys a lot of computing equipment, software and services, and there could be spillover. For instance, he cited weakness in retail, particularly high-end retail. The Sharper Image, a chain that sells all kinds of expensive gadgetry, recently entered Chapter 11 bankruptcy protection and will close half its stores.

The other reason this is different from 2001 is it is a consumer-led recession mostly affecting bad housing markets in some states, which has no direct impact on a Fortune 1000 firm buying new servers, for example. "So a lot of the business IT market is relatively immune to the direct impact of a slowdown of consumer spending," said Minton, although given Intel's recent quarterly warning concerning weakness in flash memory, that's not an absolute situation.

IDC has lowered its forecasts for IT spending in the U.S. and western Europe based on what they have seen in the decline of economic indicators, but they aren't seeing spending go negative over the prior year like in 2002, when PC spending was 20 percent less than the prior year.

IDC forecasts around four percent growth in IT spending budgets in 2008, half of the eight percent growth in 2007. IT managers are more bearish about their ability to fund projects and are either slowing or delaying certain projects, Minton said. However, the rest of the world is doing fine. The four BRIC nations – Brazil, Russia, India, China – are expected to increase IT spending between 10 and 20 percent this year.

CIOs that IDC has spoken with say they are working with multiple budgets to cover a variety of scenarios, and many are re-evaluating their spending on a per-quarter basis. "This means things could go up if the economy proves more resilient, but things could also go down," Minton said.

The hardware most likely to be affected by a reduction in spending, not surprisingly, is PCs, followed by mobile devices -- smart phones in particular. Storage is least likely to be cut, followed by networking hardware.

Software reductions are also anticipated, but at a much slower rate than hardware. Office and operating systems are most likely to get the chop (bad news for Microsoft), while security and compliance software is least likely to be cut.

Virtualization isn't being cut back at all. It remains a strong priority and represents a theme Minton noticed: CIOs are trying to protect datacenter projects. Endpoints can be allowed to lag but the servers are the last place where cuts are being seen.