Products demand of 3 US electronic equipment makers weakening
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