Prod­ucts de­mand of 3 US elec­tronic equip­ment mak­ers weak­en­ing

The Pak Banker - - Company& -

NEW YORK: In the week be­fore the Fed­eral Re­serve an­nounced its $600 bil­lion pro­gram to help spur the U.S. re­cov­ery, three mak­ers of elec­tronic equip­ment for com­pa­nies such as Cisco Sys­tems Inc. an­nounced that de­mand for their prod­ucts was weak­en­ing.

"Our cus­tomer fore­casts are more un­cer­tain," Jure Sola, chief ex­ec­u­tive of­fi­cer of San Jose, Cal­i­for­nia-based San­mina-SCI Corp., said on a Nov. 1 con­fer­ence call. Some clients "have a lot of in­ven­tory in the pipe­line" and "are wor­ried about the econ­omy." Pol­icy mak­ers led by Chair­man Ben S. Ber­nanke cited the de­cel­er­a­tion in busi­ness spend­ing on equip­ment and soft­ware when they an­nounced Nov. 3 that the Fed would pur­chase Trea­suries in a sec­ond round of quan­ti­ta­tive eas­ing to pre­vent in­fla­tion from fall­ing fur­ther and help bring down un­em­ploy­ment, which has re­mained above 9 per­cent since May 2009. While in­vest­ment in this sec­tor of the econ­omy helped the U.S. emerge from the worst down­turn since the 1930s, the Fed's gauge of in­dus­trial pro­duc­tion by high-tech com­pa­nies ex­panded 10 per­cent in Oc­to­ber, half the pace of the 20 per­cent in­crease in April.

"Tele­com, and net­work­ing in par­tic­u­lar, has been very strong, and what you're see­ing now is that there's a pause," said Sherri Scrib­ner, a re­search an­a­lyst at Deutsche Bank Se­cu­ri­ties Inc. in New York. While con­tract man­u­fac­tur­ers typ­i­cally "have very good vis­i­bil­ity into the quar­ter ahead," now, "al­most across the board" they are be­ing "a bit more cau­tious."

The new Bloomberg U.S. Elec­tron­ics Man­u­fac­tur­ing Ser­vices In­dex, which com­prises 14 com­pa­nies in­clud­ing San­mina-SCI and St. Peters­burg, Florida-based Ja­bil Cir­cuit Inc., jumped 91 per­cent from June 2009, when the re­ces­sion ended, through April 2010 and has since de­clined 9 per­cent. The Stan­dard & Poor's 500 In­dex climbed 29 per­cent be­fore ris­ing an­other 0.1 per­cent in the same pe­ri­ods. "Cap­i­tal spend­ing is very im­por­tant to sus­tain­ing a mod­er­ate re­cov­ery over­all," said Ethan Har­ris, head of de­vel­oped-mar­kets eco­nomic re­search in New York at BofA Mer­rill Lynch Global Re­search. "QE2 pro­vides a small lift to cap­i­tal spend­ing, but it's a very small stim­u­lus." Scrib­ner lists San­mina-SCI, Ja­bil, Bench­mark Elec­tron­ics Inc. in An­gle­ton, Texas, and Plexus Corp. in Neenah, Wis­con­sin, as holds.

"I think what's im­por­tant about this quar­ter is that ev­ery­one com­mented on a slow­down," she said. "Ex­pec­ta­tions may have been that things would con­tinue to be strong, but we're see­ing a bit of pull­back." Man­u­fac­tur­ing spear­headed the U.S. re­cov­ery, which be­gan in July 2009 af­ter an 18month re­ces­sion. Cen­tral to that tran­si­tion, and the sub­se­quent ex­pan­sion, was in­vest­ment in busi­ness equip­ment and soft­ware. This com­po­nent of gross do­mes­tic prod­uct grew at a 17 per­cent an­nual pace in the third quar­ter, com­pared with 25 per­cent in April through June, ac­cord­ing to Com­merce Depart­ment fig­ures re­leased Nov. 23.

Spend­ing " is ris­ing, though less rapidly than ear­lier in the year," Fed pol­icy mak­ers said in a Nov. 3 state­ment at the con­clu­sion of their two-day meet­ing in Washington. Or­ders for U.S. goods meant to last at least three years un­ex­pect­edly de­creased 3.3 per­cent in Oc­to­ber, ac­cord­ing to a Nov. 24 re­port from the Com­merce Depart­ment, rais­ing the risk that com­pa­nies will scale back on in­vest­ments in new equip­ment. De­mand for com­put­ers and elec­tron­ics plunged 7.7 per­cent, the first de­cline since July and the biggest onemonth drop since De­cem­ber 2008, when the cen­tral bank low­ered its tar­get rate on overnight loans among banks to near zero for the first time. The Fed has yet to raise rates.

"Af­ter a very strong in­crease in the first half of the year, busi­ness in­vest­ment in equip­ment and soft­ware posted a smaller, but still solid, gain in the third quar­ter," the Fed's Open Mar­ket Com­mit­tee said in min­utes of the Novem­ber 2-3 meet­ing re­leased last week. "But ris­ing de­mand for equip­ment and soft­ware dur­ing the third quar­ter was also sat­is­fied in part by a fur­ther rise in im­ports of cap­i­tal goods." The cen­tral bank also cited "con­strained" con­sumer spend­ing, "weak" in­vest­ment in com­mer­cial con­struc­tion and "de­pressed" lev­els of new-home con­struc­tion in the FOMC state­ment as rea­sons for pur­chas­ing Trea­suries. The U.S. econ­omy grew at a 2.5 per­cent an­nual pace in July through Septem­ber, af­ter ex­pand­ing 5 per­cent in the last three months of 2009, ac­cord­ing to the Com­merce Depart­ment. Con­struc­tion of new homes in Oc­to­ber fell to a 519,000 an­nual rate, the fewest since a record low of 477,000 in April 2009, and the un­em­ploy­ment rate held at 9.6 per­cent. Amitabh Passi, an an­a­lyst at UBS Se­cu­ri­ties LLC in San Fran­cisco, sees "mod­er­at­ing, de­cel­er­at­ing year-over-year growth" in the next three quar­ters for mak­ers of elec­tronic equip­ment such as Ja­bil and Singapore-based Flex­tron­ics In­ter­na­tional Ltd. -Bloomberg

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