The federal government Wednesday reported a 6.1 per cent contraction in the U.S. economy during this year’s first quarter-a grim headline in the making. But economists and IT industry analysts saw some hopeful signs in the latest numbers, as did Wall Street, where stock prices staged a midday rally [on Wednesday].
The U.S. Department of Commerce, in its quarterly report on gross domestic product (GDP), said that consumer spending increased by 2.2 per cent in Q1 on a sequential basis, after falling 4.3 per cent in last year’s fourth quarter. Consumers account for about two-thirds of overall spending in the U.S., so the first-quarter jump was seen as a good omen for the economy as a whole.
“If consumer spending is starting to recover, that means you’ve got signs that the economy is starting to recover,” said Andrew Bartels, an analyst at Forrester Research Inc.
Bartels and other analysts said shrinking business inventories that also were cited in the Commerce Department report may spur increased production to meet the growing consumer demand. Moreover, the federal government’s economic stimulus spending under the $787 billion bill signed by President Barack Obama in February has yet to fully kick in.
The first-quarter decline in inventories “is a classic sign of reaching a bottom, because now the shelves are empty,” said Frank Scavo, president of Computer Economics Inc., a market research firm in Irvine, Calif.
But overall, the first quarter was rougher than expected for the economy, and the drop-off in GDP followed a similarly sharp 6.3 per cent decline during the fourth quarter of last year.
IT vendors were among the businesses that had a tough time in Q1 For instance, Microsoft Corp. reported a six per cent revenue decline year-to-year, while IBM said its revenue fell by 11 per cent. SAP AG Wednesday reported a 33 per cent drop in software sales; its total revenue declined by only three per cent, but that was thanks largely to increases in software support fees that took effect Jan. 1.
The data released by the Commerce Department explains why the revenues of tech vendors were down during the first quarter. The agency’s report shows that spending on software dropped by eight per cent in Q1 and that purchases of computers and peripherals were off by 25 per cent, Bartels said.
But with the consumer-spending data suggesting that the economic downturn is flattening out or perhaps even coming to an end, Bartels expects businesses to revisit their capital investment plans and decide that they might have overreacted in making spending cuts. And although federal spending was down four per cent in the first quarter, the stimulus plan “is going to turn government spending from negative to positive very quickly,” he said.
The Federal Reserve, in a statement issued this afternoon, said it also has seen signs of improvement in the economy, although its comments were guarded. The Fed said that “the pace of contraction appears to be somewhat slower” and that since March, “the economic outlook has improved modestly.” Household spending “has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth and tight credit,” the Fed said, adding that weak sales prospects have prompted businesses to cut their inventories, investments and staffing levels.
One wild card is the possible economic impact of the swine flu outbreak, especially if the World Health Organization determines that it amounts to a pandemic. Such a declaration might increase demand for technologies that support telecommuting, but it would hurt the travel industry and other businesses. Overall, Scavo said, a full-blown pandemic “could lengthen the recession, and that in turn could suppress demand for IT equipment and services.”
There is one economic sector that may be unaffected by the downturn: lobbying. Tech vendors spent $29.5 million in the first quarter lobbying Congress and the White House, according to the Center for Responsive Politics. That amount is on track with last year’s levels, when the IT industry spent about $118 million on lobbying efforts for the year as a whole.