U.S. Economy – No Recession but Manufacturing Sector Struggles

The U.S. economy may be in better shape than many forecasters expected. Domestic 2Q’08 GDP growth ( Chart 1 ) was a surprising 1.9% versus 0.6% in the fourth quarter of 2007 and 1% in 1Q’08. The United States may be “teetering on recession,” but its GDP growth has improved for two successive quarters - since bottoming in the fourth quarter of last year.

	Chart 1

The U.S. July “Purchasing Managers’ Index ( Chart 2 ) indicated flat July manufacturing activity. Norbert Ore, chair of the Institute for Supply Management Manufacturing Business Survey Committee stated: "In this month's report, manufacturers indicate no change in overall business activity when comparing July to June. This continues a trend biased toward relatively minor contraction established more than 12 months ago. Manufacturing has maintained a reasonable level of activity during a period in which other sectors of the economy have been in recession. While the PMI indicates little to no change has occurred during this period, it would be hard to convince manufacturers who are faced with higher costs and uncertain demand that there is little change taking place."

	Chart 2

2Q’ Global Electronic Industry Financials by Sector – Growth Continues Except for SEMI CAPEX

Based upon preliminary composite 2Q’08 financials of companies representing more than 50% of the world’s electronic equipment production, the global electronics industry remained (barely) in double-digit growth last quarter. Sixty-one OEMs with annualized sales of $850 billion grew 10% in 2Q’08 versus 2Q’07 ( Chart 3 ) with only a slight decline in combined profits and a modest increase in inventories. Inventory levels versus revenues remained steady throughout the supply chain ( Chart 4 ) as EMS companies, component distributors, and chip manufacturers all maintained similar stock levels compared to sales.

	Chart 3

	Chart 4

By sector instruments & control equipment sales were up 12% ( Chart 5 ), medical equipment rose 16% ( Chart 6 ), military equipment sales increased 8% ( Chart 7 ), communication equipment revenues (stated in US$ but amplified by stronger European currencies) grew12% ( Chart 8 ), Internet equipment was up 12% ( Chart 9 ), computer sales climbed 11% ( Chart 10 ), and data storage equipment revenues grew 16% ( Chart 11 ). Only semiconductor fab, assembly, test & measurement equipment ( Chart 12 ) was in negative territory – down 12% in 2Q’08 versus 2Q’07.

	Chart 5

	Chart 6

	Chart 7

	Chart 8

	Chart 9

	Chart 10

	Chart 11

	Chart 12

June Chip Sales Signal Start of Busy Season

June semiconductor shipments were surprisingly strong. In anticipation of the late summer/autumn “busy season”, global chip revenues were up 8% on a 3-month growth basis ( Chart 13 ) as Southeast Asia ( Chart 14 ) recorded record monthly semiconductor purchases. In North America ( Chart 15 ) June chip revenues (monthly values distorted by 4-4-5 week accounting) reached a 12-month high but remained below seasonal peaks of recent years. On a 3-month basis chip shipments to North America (a measure of electronic assembly activity) bottomed in February and have climbed modestly thereafter.

Composite sales of a large group of semiconductor manufacturers ( Chart 16 ) rose 6% in the second quarter – consistent with the SIA reported global growth (Chart 13).

	Chart 13

	Chart 14

	Chart 15

	Chart 16

EMS Growth Tells the Story

Electronic Manufacturing Service providers recorded an 8% increase in second quarter sales compared to the same quarter in 2007 ( Chart 17 ). Recent historical EMS growth (quarter versus same quarter a year earlier) has been:

	Chart 17

1Q'06	+6.3%
2Q'06	+11.0%
3Q'06	+22.2%
4Q'06	+22.0td>
1Q'07	+15.6%
2Q'07	+14.4%
3Q'07	+11.4%
4Q'07	+9.8%
1Q'08	+10.3%
2Q'08	+7.7%

We are still well into positive territory, but more modest global growth is apparent. No surprise!