A mid-year economic review
20 September 2010
In January, I described the U.S. economy as resembling a weather forecast (Today’s economic forecast depends on your frame of reference). Whether it is warming or arctic cold depends on one’s frame of reference. Since in the U.S. newscasters are now debating whether we are in a slow recovery or a slow slide into a double dip recession, I thought it might be a good time to review my earlier observations.
In the EMS realm, I’ve seen mixed reviews. Some EMS companies are seeing both new and existing business increase, some are only seeing existing business grow and others continue in a depressed business state. Material availability continues to impact scheduling and revenue, although the market seems to be adjusting a little. The order padding that was prevalent at the start of the recovery seems to be flushing out of the system. Some OEMs are shopping for new suppliers, while others are rationalizing their current supply base. There is some hiring in EMS firms, but there are also new layoffs.
Discretionary spending for training, consulting and capital equipment is continuing. While the trade shows I’ve attended this year (APEX and MDM East) were both still below traffic levels found in times of economic prosperity, they were both far better than in the prior year.
The fundamental economic concerns that I mentioned in the January article are unabated. The housing market is shaky and there is concern that a new wave of foreclosures is imminent. The stock market has also lost ground. Consumers are cutting back on spending. While the reported unemployment rate is under 10%, there are questions about what the true number is if the underemployed and those who have stopped job hunting are counted.
Additionally, the tight job market is motivating older workers eligible for Social Security retirement benefits to file earlier than full retirement age. Government is growing, seemingly unphased by record deficits. Credit is expensive, but seems to be available to those with decent credit histories. Health insurance costs haven’t dropped and now that people have had time to read the Healthcare bill they are finding that some very business-unfriendly clauses that have nothing to do with healthcare were thrown in. There is huge concern about what may be on the horizon in terms of taxes and additional administrative costs.
Here is a review of the top five trends I identified in my January article:
1) OEM Supply Base Rationalisation – OEMs are shopping right now. In some cases they are looking for new suppliers, in other cases they are simply consolidating their existing supply base. There is increased interest in lower cost geographies. However, there also appears to be better total cost analysis, which is driving some work back to the U.S. and more developed regions. There also seems to be preference for suppliers with robust processes and quality systems appropriate to the industry.
2) Increased M&A Activity – There still appear to be more companies quietly for sale than buyers willing (or able) to close deals, but M&A activity has definitely increased. In my opinion, it is still a buyer’s market and buyers know it.
3) Changes in Business Strategy – Business has not increased enough that bad fit accounts are being triaged by larger EMS providers.
4) Changes in Personnel – Companies are doing some hiring and tend to prefer to hire those who are employed. Those who are laid off in the U.S. still can expect a longer than usual period of unemployment. Turnover in Asia is more consistent with a strong recovery pattern.
5) Hair Trigger Forecasting – Given that material availability is still a challenge, I stand by my prediction that 2010 is the year of the stressed out program manager.
In the U.S., I don’t think we’ll know whether or not this will be a very slow recovery or a double dip recession until after the mid-term elections in November. As a small business owner and a long-term participant in the electronics industry, I believe that our economic policy is going in the wrong direction. At the same time, a change in Congressional make-up will not necessarily change economic policy rapidly. Politicians from both parties have contributed to present situation.
I believe the U.S. EMS industry is in far better shape than it was in 2009, but if the economy stalls out or policy continues in a business-unfriendly direction that could change rapidly.
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