June U.S. Purchasing Managers’ Index Rises Slightly to 50.2; Production & Inventories Growing; New Orders & Employment Contracting; Supplier Deliveries Slowing ( Chart 1 )

	Chart 1

Economic activity in the U.S. manufacturing sector expanded in June following four months of contraction.

Norbert Ore, chair of the Institute for Supply Management Manufacturing (ISM) Business Survey Committee noted, "The manufacturing sector showed a slight improvement in June as the PMI registered above 50 after four months of decline. While the Purchasing Managers' Index (PMI) indicates minimal change is taking place month over month that is hardly the situation. When viewed from the manufacturer's perspective, they are experiencing higher prices for their inputs while demand for their products is slowing."

What the ISM respondents said:

• "The shock waves from high crude price continue to put pressure on derivative pricing." (Chemical Products)
• "Business appears to have bottomed out." (Transportation Equipment)
• ”Seeing renewed interest in outstanding quotes." (Machinery)
• "Volume is normal, and we are able to recover some of the raw material (steel cost) increases." (Fabricated Metal Products)
• "Commodity bubble is killing profitability." (Food, Beverage & Tobacco Products)
• "Orders have slowed, and prices for metals are going up." (Computer & Electronic Products)

U.S. Electronic Equipment – May Orders, Shipments, and Inventories

Soft Landing in Process?

The most recent Factory Orders report from the U.S. Department of Commerce suggests that a soft landing is in process for the electronic equipment end markets. With a 3-month average book/bill of 1.02 ( Chart 2 ), domestic electronic equipment orders and shipments have been steadily growing since early-2003 ( Chart 3 ). Rates of growth ( Chart 4 ) are still positive (3/12 > 1.0), but growth rates began to soften in early 2008.

	Chart 2

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	Chart 4

Something’s Strange

One thing that bothers me about the recent DOC “seasonally adjusted data” ( Chart 5 ) is that the “adjusted” numbers do not seem to be tracking the “unadjusted” data. Over a year the sum of the variances between the adjusted and unadjusted data should tend toward 0 but in ( Chart 5 ) the recent trend in adjusted data seems too optimistic. Is actual demand possibly not as good as the DOC “adjusted data” might imply?

	Chart 5

“Adjusted Data” Results

Returning to the “adjusted data” ( Chart 6 and Chart 7 ) orders are generally growing modestly for all equipment segments. Instruments, controls & medical equipment continue to gain share versus computers and communication equipment ( Chart 8 ).

	Chart 6

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	Chart 8

Inventories Generally “Under Control”

Overall finished goods inventory levels ( Chart 9 ) are expanding in line with end market order growth. After bottoming in mid-2005 the ratio of finished goods inventories to orders ( Chart 10 ) has climbed a bit, but it is well below its post-2000 “bubble” peak. Strangely, since mid-2007 “work-in-process” has been climbing while materials & supplies and finished goods have leveled out ( Chart 11 ).

	Chart 9

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Specific End Market Comments

U.S. vehicle shipments ( Chart 12 ) have plunged to their lowest level since mid-2001 with no end to the current decline in sight. In contrast both commercial and military aircraft sales are up through May ( Chart 13 ). How long will it take for massive fuel price increases and lower airline profits to prompt commercial aircraft order delays and cancellations?

	Chart 12

	Chart 13

Military electronics continues to climb ( Chart 14 ) as does electromedical, measurement & control equipment ( Chart 15 ).

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	Chart 15

Global Semiconductor Shipments – Up 7.5% on 3-Month Basis in May

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North American Chips & PCB - Catch Up About to End

In North America it appears that much of the recent chip upturn was a “catch up” to end market growth ( Chart 19 ) and that semiconductor shipments will now move into line with slowing end market growth. Printed circuit board orders ( Chart 20 and Chart 21 ) have also been playing “catch up” with their year-on-year growth now likely to slow.

	Chart 19

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Food Chain Growth Summary

( Chart 22 ) summarizes the annualized (12/12) and 3-month (3/12) growth for the North American electronics food chain. The 3/12 is the leading indicator.. It appears that the end markets are outgrowing electronic components. This assumes that the recent DOC seasonal adjustments for electronic equipment are not too optimistic!

	Chart 22

World Photoresist Revenue Increased 14.5% to $1.2 Billion in 2007 ( Chart 23 )

	Chart 23

Worldwide photoresist sales in the semiconductor industry grew for the sixth consecutive year in 2007 to $1.2 billion (Gartner, Inc.).

“The ramp-up in device unit sales enabled photoresist volume consumption to expand 4.2% in 2007, while a shift to higher-priced resists bolstered revenue growth,” said Klaus Rinnen, managing vice president at Gartner. “In general, suppliers with strong positions in the rapidly expanding 193-nanometer (nm) deep ultraviolet (DUV) market did better in 2007 than those that focused on more-mature technologies.”

For 2008, Gartner forecasts that photoresist sales growth will slow with initial estimates for 6% growth over 2007. “The adoption ramp-up of 193-nm resist continues to add strength to sales, but this is counterbalanced by a slowing in overall semiconductor consumption growth and pricing pressures on all resist products,” said Mr. Rinnen.

World Server Revenue Grew 2.5% in 1Q’08 ( Chart 24 )

	Chart 24

Worldwide server revenue in the first quarter of 2008 increased 2.5% over the same quarter last year, according to updated statistics by Gartner, Inc.

“Based on updated guidance and additional analysis of the data, we have revised the revenue statistics for the first quarter of 2008,” said Jeffrey Hewitt, research vice president at Gartner. “We commented in the previous release that HP and IBM continue to vie for market leadership in the worldwide server market based on revenue. This is still the case, but the updated data shows that IBM maintained the No. 1 vendor position in worldwide server revenue in the first quarter of 2008.”