US EMS industry still upbeat

10 October 2011

Susan Mucha

It has been a while since I’ve commented on US economic trends, so I thought it would make a good column.

While there is much debate as to the right US government economic policies going forward within the US, many mid-tier and regional EMS providers have seen growth this year.

Companies are hiring and, in some cases, even expanding US operations. While growth last year simply represented recovery from business lost in the prior year, growth this year is coming from continued increases in existing accounts and new accounts.

A weaker dollar has the positive effect of making US labour rates more competitive. However, since offshore materials must be purchased with a weaker dollar, it isn’t a huge advantage. Fears of violence in Mexico and rising costs in China also have contributed to some shift in sourcing back to the US, particularly lower volume or variable demand projects. Energy prices have decreased slightly. Material availability has improved. In short, many of the roadblocks in the way of recovery have been removed.

Electronics trade show traffic seems to be up. Equipment manufacturers are placing ‘sold’ signs on exhibited machines.

LED-related products seem to be an area of potential growth and an area that is attracting many regional EMS players. Medical, industrial and defence products continue to be primary target segments.

However, clouds still remain on the horizon. While continued low interest rates may be beneficial, payroll tax cuts have limited benefits to EMS businesses, given that they represent a very small percentage of the cost of hiring a new employee. Health insurance costs continue to rise and that represents a major cost to employers. Incentives to hire the longer-term unemployed do not necessarily spur job creation. Most businesses prefer to hire individuals who are currently employed or recently laid off, rather than the long-term unemployed. Unemployment reports have been disappointing and the economic indexes are showing slowed growth.

Economic activity in the manufacturing sector expanded in August for the 25th consecutive month, and the overall economy grew for the 27th consecutive month, say the nation's supply executives in the August Manufacturing Institute for Supply Management (ISM) Report On Business. According to the ISM’s Manufacturing Business Survey Committee, the Purchasing Manager Index (PMI) registered 50.6% in August, a decrease of 0.3 percentage point from July, indicating expansion in the manufacturing sector for the 25th consecutive month, at a slightly slower rate. The Production Index registered 48.6%, indicating contraction for the first time since May of 2009, when it registered 45%. The New Orders and Backlog of Orders Indexes edged up slightly from July, but both indexes are indicating contraction in August at slower rates than in July. The rate of increase in prices slowed for the fourth consecutive month, dropping another 3.5 percentage points in August to 55.5%.

There is still debate over whether or not a double dip recession is coming. Consumers are still very conservative in spending. According to the US Commerce Department, gross domestic product (GDP) grew at 1.3% in the second quarter. While that represents an increase over the 0.4% reported for the first quarter, it underscores the fragility of the recovery.

The housing market remains soft. According to Santa Ana research firm CoreLogic, 10.9 million homes with a mortgage were in a negative equity position at the end of the second quarter. These ‘underwater’ mortgages represent 22.5% of all residential properties with a mortgage. That means that nearly a quarter of US homeowners would need to bring money to the closing table to sell their homes. This increases foreclosure risk when people are forced to sell houses due to job loss or underemployment, and concerns about home values and contingency options contribute to decreased consumer spending. Another stock market dip and debates about the structure of Social Security and Medicare (US retirement and senior health insurance programmes) are also contributing to consumer worries. Since consumer spending represents 70% of GDP, that number will likely stay soft unless consumer confidence increases sharply.

So, the US economy continues to be a question mark. No real change in government economic policies are likely until the next election in 2012, since the power base is evenly enough divided to maintain gridlock. A common political ad question is: ‘Are you better off than you were four years ago?’ For most EMS companies, that answer is likely, ‘No.’ However, if the question is: ‘Are you better off than two years ago or last year?” the answer would probably be “Yes.”

Hopefully, growth trends, albeit slow growth, will continue.

As always, the opinions expressed in this column are those of the author and do not necessarily reflect those of EMTWorldWide. If you would like to comment on this article please contact the Editor at: alistair.winning@imlgroup.co.uk.


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