siliconstrategies.com
Industry indicator points to prolonged slump
EBN
(05/08/01 11:53 a.m. EST)
Business conditions in the electronics industry have deteriorated to their worst levels in well over a decade, triggering fears that the sector's problems may extend into the first quarter of next year.
After stabilizing in March, EBN's Electronics Buyers' Index (EBI) slumped in April to 29.8, its lowest level since 1988, when EBN began tracking purchasing conditions in the electronics industry. The EBI had previously fallen to 33.4 in both February and March. The latest decline is further proof that executives across the industry don't expect an improvement in the next few months, according to economists.
“The depth of the industry problem is illustrated by the eighth consecutive decline in the prices paid for components and a plunge in the index for quantity of inventory purchased to 22, less than half of the 50 level typical of a balanced market,” said Jim Haughey, EBN's staff economist.
All sectors of the index fell to their lowest level in years, led by orders, component purchases, and a sharp drop in production as well as export orders. While OEMs should be glad component prices have finally fallen off their perch-to 34.5 from as high as 65.2 in June 2000-the current inventory mess and weak end-market demand means they are unable to parlay pricing gains into higher revenue and profits.
And this problem isn't about to go away anytime soon, at least going by the latest industry surveys released last week. According to the National Association of Purchasing Management's report on business,the U.S. manufacturing sector contracted for the ninth consecutive month.
“It doesn't look really good for electronics,” said Norbert Ore, chairman of the NAPM Business Survey Committee. “I really don't see anything encouraging.”
How low can it go?
So, how bad do purchasing executives think conditions are in the electronics industry? Awful. Four sections of the EBI are currently below 30, while the remaining four are at or below 35. The vendor deliveries index dropped to 34.7 in April, from 40.5 in March and 63.3 last July. The electronics production index is at 28.8, while the new orders index registered 25.4, continuing a slide that started in October 2000.The export orders index fell to 29.7, from 35.3 in the prior month, while the employment index, which had been resilient until early this year, fell to 35. With 50 as the midpoint between industry contraction and expansion, the situation looks really bleak for the next two quarters, according to Ore.
“Electronics will lag the rest of manufacturing this year,” Ore said. “It may even be next year before we see an improvement.”
Many industry observers are hoping the turnaround won't take that long, particularly with the recent interest rate cuts by the Federal Reserve Board, sparking renewed enthusiasm for technology stocks on Wall Street.
Investors are already swarming over bargain stocks, which gave the EBI Leading Index a strong lift in April. The EBILEAD, which usually precedes the EBI by several weeks, jumped to 51.3 from 45.8 in the prior month, “mostly due to a 30% rise in the Nasdaq Composite Index from the low value early in April,” Haughey said.
Turnaround ahead?
Will this be enough to engineer a turnaround in the entire market? Haughey said the situation may be improving and the negative conditions may begin to slowly reverse, as manufacturers work through inventory and consumers resume their normal purchasing patterns.
Other economists are more doubtful. They point to the sharp decline in earnings at companies across the U.S. economy as a sign that the current jump in equity prices may be short-lived.
At Deutsche Banc Alex. Brown, chief investment strategist Edward Yardeni questioned the “back on Ecstasy” mentality that's boosting stock prices in the face of reports that earnings will be sharply lower in the current quarter after a round of double-digit declines in the first quarter. Already, analysts have been cutting their profit estimates for most electronics companies and have now trimmed operating income estimates for the Standard & Poor's 500, down to $53 per share from as high as $60. Even that reduced estimate may be a stretch for most companies, Yardeni said.
“Earnings expectations for 2001 are almost exactly tracking the drop during the recession of 1991, when real GDP fell 1.5%,” he said. “If they continue to do so, S&P 500 earnings are on track to fall not to $50, but $45 for this year.” |
