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Ever since it crashed into recession in 2002, the IT sector has watched indicators of its performance like a hawk. As it fought its way back into positive growth in 2004, analysts poured over the numbers, fearful that the recovery was tentative.

Information Age's Infoconomy Index, which tracks the overall revenue growth of the world's 200 largest technology companies, certainly showed a conclusive swing: from a low point of -14% in January 2002 to the current 9%.

But there are questions over whether such headline numbers actually indicate that the industry is back in rude health or whether there are underlying factors propping up the growth that actually suggest the industry has barely - if at all - made it out of recession.

Above all, one factor is having a hugely distorting effect on any measure of industry growth: the weakening of the dollar against the European currencies.

Three quarters of the technology companies tracked by technology indices are US-headquartered, but internationally spread. Even in cases where such companies have recorded flat or decreasing sales in Europe, the amount they are able to repatriate to the US is increased as the locally earned currency simply buys more dollars than in year-earlier comparative quarters. The result is an artificially inflated growth rate.

Take the example of business intelligence software vendor Cognos. Demand for its products is high in Europe, where 37% of the company's revenues are derived, but not as high as the headline numbers might indicate. Its reported growth rate for sales in Europe in the company's fourth quarter to the end of February was a fabulous 26%. But a full 7% of that was solely derived from currency transfer gains.

And that updraft is being felt by almost all major US IT companies, even though most of them are still only able to report single digit growth. The currency effect is also exacerbated by the still relatively strong purchasing power of the dollar in Asia, according to Forrester Research analyst Andrew Bartels. US firms can exploit this power by buying components cheap in Asia and derive maximum dollar value by selling in Europe, he says.

"That is one reason why US IT vendors such as Dell, HP, Cisco and Lucent have been able to post relatively good revenue growth, despite lower or even negative growth in the US," Bartels explains.

But there is another factor that is creating a false impression of an industry in robust health: the fervent acquisition activity among technology companies and the accounting rules that allow acquiring companies to report comparisons of 'apples and oranges'.

Since a change in accounting rules in 2002, a company that has made a recent acquisition will typically provide financial results that make a comparison between the revenue it currently generates (from both its own and the acquired company's activities) and its pre-acquisition revenue base, thereby showing a top line growth rate well above its 'organic' growth rate.

In January of 2004, for example, IT services giant Atos Origin acquired competitor SchlumbergerSema. It went on to record revenue growth for the year of 75%, even when the underlying growth of both companies was negligible. Similarly, business integrator Tibco acquired workflow and business process management software company Staffware in the second quarter of 2004. That meant the company reported top line revenue growth for the first quarter of 2005 of 40%. There is no suggestion anyone is trying to hide the fact that Tibco's organic growth is nothing like that number. But to outsiders that looks like a storming quarter.

Taken alone those numbers are not deceptive: the companies did grow in size - albeit through acquisition. But when aggregated into measures of industry growth, they skew the data to suggest that the technology market is selling much more than it actually is.

Look elsewhere for the true picture, suggests Peter Rowell, chairman of IT M&A advisor, Regent Associates. He believes that the most accurate measures of industry health are swayed by acquisition activity. "Top line growth is important for share holder value, but it is only one measure of health," he says. "The serious analysts see through it."

Moreover, Rowell believes that in spite of the distortion of market statistics that the plummeting dollar and acquisition reporting practices may have, the industry is still actually in good shape.

"The most accurate measure of the health of the industry is to look at the demand, not the supply," says Rowell. "And these show that demand is growing at a rate of 4% to 5%. Measures that look at companyrevenues are just looking at who is going to supply that demand."

Where do those demand numbers come from? Mostly IT director surveys on spending plans. And given that the removal of currency and M&A factors from the reported growth rate puts the industry's growth in the low single digits - at best - vendors will be hoping that those spending plans are directed towards products and services and not on salaries and recruitment.