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U.S. Electronic Food Chain and Global Business Environment

Walt Custer March 10, 2008

U.S. Electronic Food Chain Growth

The recently released U.S. Department of Commerce’s January “Factory Orders report” provides insight into order, shipment and inventory trends for domestic electronic equipment and components.  U.S. electronic equipment had a January book/bill of 0.997 ( Chart 1 ) as both order and shipment 3-month (3/12) growth rates were in slight positive territory ( Chart 2 )  Notice the increased growth-volatility of orders (blue line) compared to shipments (magenta line).

                              

In actual value, orders have dropped below the shipment line ( Chart 3 ), suggesting that a slowdown may be occurring.  ( Chart 4 ) shows the change in electronic equipment product mix from 200 to present.  Note the increased share of medical, measuring & control equipment and military electronics in the U.S.  ( Chart 5 ) shows the monthly orders of each major equipment sector for the same time period while ( Chart 6, Chart 7, Chart 8, Chart 9, and Chart 10 ) compares orders to shipments for the key sectors.

                                                                                                          

( Chart 11, Chart 12, Chart 13, and Chart 14 )  provide an overview of electronic equipment “food” chain inventory situation.  Inventories relative to orders remain “in control.”

                                                       

( Chart 15 ) shows monthly shipments of U.S. made semiconductors.  This is much different than the SIA’s report of total semiconductor shipments to North America (from all regions).  ( Chart 16, Chart 17, and Chart 18 ) provide an overview of U.S. made passive component (excluding semiconductor) shipments, orders and inventory.

                                                       

( Chart 19 ) summarizes the annual (12/12) and 3-month (3/12) growth for “members” of the U.S. & North American “electronic food chain.”  The 3/12 is a leading indicator of the 12/12.

             

Global Business Environment

Thanks to my colleague Ed Henderson here is the introductory section of his March 2008 26 page “Henderson Electronic Market Forecast.”  For details on this monthly report e-mail Ed at hen.ven@comcast.net

Navigating a Global Economic Slowdown (See Figure 1 below)

Fourth-quarter economic statistics were misleadingly strong

As the U.S. economy runs out of gas, the Chinese economic engine continues to test the speed limit. During the final quarter of last year, the US managed only a 0.6% annualized rate of growth.  In contrast, Chinese Gross Domestic Product (GDP) soared by 11.2% over the fourth quarter of 2006. The booming Chinese economy is driving Asian exports, including those from Japan, which posted a surprisingly strong 3.7% annualized GDP increase during the last three months of 2007.

Constant $ Growth Rates (Figure 1)

                                                                                                                                                                                                                                                                                                                 
Category
06Q1
06Q2
06Q3
06Q4
07Q1
07Q2
07Q3
07Q4
United States
4.8
2.4
1.1
2.1
0.6
3.8
4.9
0.6
W. Europe
3.4
4.0
2.4
3.6
2.3
1.2
2.8
1.6
Japan
2.2
2.1
-0.2
5.5
2.6
-1.6
2.6
3.7
China (YR-to-YR)
10.3
11.3
10.4
10.4
11.1
11.9
11.5
11.2
World
3.9
3.9
3.5
3.6
3.3
3.4
3.8
3.8

Chinese economic strength is also responsible for soaring commodity prices, including oil, which recently exceeded the inflation-adjusted record price of $104/barrel that had stood since the spring of 1980. The strength of the global export economy enabled a host of developing nations to chalk up robust GDP growth rates during the fourth quarter, which helped to maintain world GDP growth at 3.8% during the fourth quarter. The 4-quarter moving average came in at 3.5%, also unchanged from the third quarter, as shown below.

The United States is still crucial to global economic health

Last year, global GDP approximated $54 trillion. Of that total, U.S. consumption expenditures accounted for $9.7 trillion, or 18% of the total. And given that U.S. consumers will continue to retrench during 2008, export-dependent economies will suffer slower growth rates. Moreover, the subprime bust and the resultant credit squeeze are not limited to the United States.

The root cause of the ongoing problem can be found in the deflation of the residential housing bubble, which has spread internationally. Home prices have been falling in Australia, France, Ireland, Spain and the UK, as well as in the US. The knock on consumer spending is also evident in countries with slumping real estate markets. Retail sales fell in Western Europe during the fourth quarter. And given the diminished prospects for exports to the US, the West European economies are set to decelerate. GDP growth is predicted to drop from a 2.6% rate in 2007 to only 1.5% in 2008. Fear of inflation and limited fiscal flexibility will impede a robust recovery. GDP growth rates in West Europe will only reach 2.2% in 2010, as shown in Figure 1.

Inflation is increasingly worrisome

The Federal Reserve Board (Fed) under Chairman Bernanke has made no secret of its policy angst. It has become publicly torn between the threat of a deeper financial crisis brought on by the subprime crisis and the risk of accelerated inflation. For now, the inflation menace has taken a back seat. Interest rates are expected to be lowered by another half percentage point at the March 18th meeting.

Unlike the Fed, the European Central Bank (ECB) is only mandated to keep inflation in check. Consequently, it has, thus far, resisted the temptation to lower interest rates, despite the peril of a looming recession. Moreover, its determination to hold the line on interest rates may have been stiffened by the report that euro-area inflation accelerated to 3.2% in January, the highest since 1999. The fear of uncontrolled price increases has prompted the central banks of Australia and Sweden to actually increase interest rates as spiraling costs of commodities seep into the general economy. And should global inflation suddenly become more pervasive, the central banks of the world will be forced to push up interest rates rapidly, thereby precipitating a global recession.

China is the key

Despite tightening credit substantially and raising interest rates six times during 2007, the inflation rate in China continues to accelerate. The January year-to-year reading was 7.1%, up from 6.5% in December. Food was responsible for the lion’s share of the increase, but the price of commodities, including oil and minerals, are pumping up “imported” inflation.

Should the Bank of China decide to slam on the monetary brakes, the sharp drop in economic growth rates would take down the export-oriented countries of Asia with it. And while a full court monetary press is not expected until after the Olympic Games, at the earliest, increasing monetary pressure is predicted to create decelerated growth through 2009. After an 11.4% run-up in 2007, Chinese GDP is predicted to grow by 9.6% this year and 8.4% in 2009, as shown in Figure 1.

Overall, the global economic trajectory can be characterized as a glide to a soft landing, hopefully. World economic activity is predicted to grow by 2.9% this year, after a 3.7% gain in 2007 and 4.0% in 2006. And because the ongoing financial chill is expected to extend into 2009, the world economic recovery is predicted to be gradual. Only a 3.3% gain is forecast for next year. However, a more powerful 3.8% burst is predicted for 2010.