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The federal government last week reported a 6.1% 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.

The U.S. Department of Commerce, in its quarterly report on gross domestic product (GDP), said that consumer spending increased by 2.2% in Q1 on a sequential basis, after falling 4.3% 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% decline during the fourth quarter of last year.

Tech Firms Report Tough Quarter

IT vendors were among the businesses that had a tough time in Q1. For instance, Microsoft Corp. reported a 6% revenue decline year-to-year, while IBM said its revenue fell by 11%. SAP AG Wednesday reported a 33% drop in software sales; its total revenue declined by only 3%, 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 8% in Q1 and that purchases of computers and peripherals were off by 25%, 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 4% 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.

Swine Flu an Issue

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.

The first uptick in consumer confidence in 17 months is good news for Apple Inc., market research firm ChangeWave said Thursday.

According to Paul Carton, ChangeWave’s research director, the company’s April survey of 3,200 consumers showed a two-point increase, from 6% to 8%, in the number of people who said they planned to buy a laptop in the next 90 days — the first gain since November 2007.

If it pans out, the increase means Apple can breathe a little easier. “The economy is finally starting to move in Apple’s direction,” Carton said during a conference call Thursday. “Overall, laptop sales look like they’ll be hopping in the future, and that means Apple is well-positioned going forward.”

Carton based his optimism on the fact that, of those consumers who said they would buy a laptop in the next three months, 29% planned to buy an Apple laptop. While that number is down a point from February, it’s up two points from January.

That would be good news for Apple, which last month said it had sold just 2.2 million Macs — 1.4 million of them laptops — to report its first year-to-year decline in computer sales in nearly six years.
But netbooks, the smaller, lighter and cheaper laptops that are quickly gaining market share, are the proverbial fly in Apple’s ointment, said Carton. Almost one-fourth of the people who said they planned to buy a laptop added that the machine would be a netbook; the 23% who said last month they planned to buy one in the next 90 days was up from February’s 18% and January’s 14%, a noteworthy surge.
Apple doesn’t have a product in the under-US$500 range that traditionally defines the netbook category — its cheapest laptop is the $999 last-generation MacBook. And although rumors continue to swirl about Apple rolling out something to compete in the category this year, nothing has been announced.
“There are some contradictory trends here [for Apple],” acknowledged Carton, referring to the upside of a better outlook for laptops in general but the downside of encroaching netbooks. “Sometimes the world is filled with many shades of gray.”

Mike Abramsky, a Wall Street analyst with RBC Capital who joined the conference call, was blunter, though like Carton, he was optimistic about Apple. “The market is definitely shifting down in price, so Apple may need to introduce products to target that low end,” said Abramsky. “That could show as lower pricing of existing products, or it could be a tablet, but it’s not likely that Apple is going to shift away from its existing value proposition.” That last phrase is Wall-Street speak for Apple’s high prices, and resulting high margins, something rival Microsoft Corp. has used to its advantage in recent television advertising.
“How Apple wrestles with this growing netbook category will be important,” Abramsky said. “But the Mac franchise isn’t dead at all.”

Like other analysts, Abramsky added that although Macs will remain a major revenue stream, he’s pinning most of his hopes for Apple’s growth on the iPhone and App Store business. “At June’s WWDC [Worldwide Developers Conference], we think Apple will introduce a “pro” version of the iPhone, as well as a price cut on the existing iPhone,” he said. “The pro won’t be as revolutionary as the iPhone 3G last year, but it will continue the advantage that Apple has in the smartphone market.”

Contrary to other rumors, Apple won’t launch a smaller, cheaper version of the iPhone — some have dubbed it an “iPhone Nano,” referencing the small iPod — said Abramsky. “We’re not convinced that a nano iPhone will be introduced this year, but we know one’s in the pipeline for next year,” he said, adding that such a model would be perfect as pre-paid phone or as an inexpensive iPhone to sell in countries like China.

“What [ChangeWave's] data shows is that consumer sentiment is improving, and will allow Apple to sustain support for its value proposition,” concluded Abramsky.