The electronics industry kicked off the new year better than it ended 1998, but still on the same lackadaisical course, according to purchasers polled for EBN's monthly report.
The Electronic Buyers' Index (EBI) registered 48.0 in January, up from 46.9 in December. The EBI read below 50, the figure that measures growth and contraction in the electronics industry, for the fifth consecutive month.
Although the latest EBI reading was sub par, analysts pointed out that the rate of contraction stabilized in January-a seasonally weaker month-vs. December.
Some pointed to improved business conditions in pockets of the electronics industry, particularly the semiconductor market.
"There's a little more firmness than there would be normally. The [semiconductor] industry downturn bottomed last summer and we have seen improvement in the supply-and-demand balance," said William Milton, an analyst with Brown Brothers Harriman & Co., New York. "But [the recovery] has not been as broad-based as I would like to see it."
Production and new-orders activity were still lackluster in January. The production index decreased to 46.6 vs. 48 in December; new orders fell 0.2 points, to 46.6.
"As a whole, I think we'll see conditions steadily improving," said Milton, who expects worldwide semiconductor revenue to grow 7% this year vs. -10.9% in 1998.
Reductions in capital spending in the past year or so could result in some component shortages, possibly even by the end of this year, analysts said. As a result, major OEMs are stockpiling inventory.
"There are more longer-term supply agreements among the major OEMs," Milton said.
That explains the steady increase in the supplier-deliveries index, which read 50.7 in January vs. 49.3 in December and 47.3 in November.
While supplier deliveries have risen, the electronics industry continues to make cuts in inventory levels.
"Nobody wants to hold inventory of anything in times of uncertainty," said Larry Horowitz, senior economist at Primark Decision Economics Inc., Boston.
The electronic materials inventories index fell to 42.6 in January compared with 46.7 in December.
The underlying economic situation remains the same: The overall economy continues to slow, particularly in the U.S. manufacturing sector. Meanwhile, the electronics industry continues to run counter this trend, recovering from last year's price and Asian export problems, economists said.
"There's still a wave of technology spending related to equipment that the industry is purchasing to solve the Y2K problems. That will continue a little while yet," Horowitz said.
Industry prognosticators are observing whether companies will curtail their
IT spending budgets as 2000 approaches because they've spent too much on avoiding Y2K problems already. "We're looking at an overall slowing in economic growth and slower spending, which could ripple through the technology sector," Horowitz said.
Economists are also watching how the recent currency devaluation in Brazil could be a potential problem for the electronics industry. According to EBN's staff economist Jim Haughey, it will "weaken trade to all of Latin America," which accounts for 20% of U.S. trade, and could prompt China to devalue its currency. "Like Brazil, China thinks it has enough reserves to run an overvalued currency to stimulate the economy," Haughey said.
Still, analysts believe that market conditions bode well for the industry in 1999. The EBI leading index, whose readings have preceded the EBI by three to four months since the report's inception in 1988, read 59.8, down slightly from 60.3 in December.