After two months of growth, EBN's Electronics Buyers' Index in June fell to 38.1 from 42.7 in May, slipping further away from 50, the midpoint between industry expansion and contraction.
The EBI production index in June dropped a sharp 20%, to 37 from 42.6 in May.
"This is at odds with the earlier Federal Reserve Board report stating gains in April and May production both for the whole economy and for computers and components," said Jim Haughey, EBN's staff economist. "However, the industrial production report did record declines in telecom equipment production and no change for OEM end-market industries."
The price index also dipped last month, to 34.6 from 37 in May, confirming the widespread price weakness found in the EBN Price/Lead Time survey two weeks ago. This is the price index's lowest point since December.
"The decline in the EBI widens the gap between electronics and the rest of the economy, where a solid, sustainable recovery is under way," Haughey said. "The pessimistic responses by buyers may be due to frustration about the length and depth of the recession in electronics or internal company budget cutting that has clearly not yet run its course in electronics. Or some of the sour answers may derive from a loss in U.S. share in the world electronics market as the dollar soared 42% over the last five years."
After increasing to 51.7 in May from 49.6 in April, the EBI Leading Index declined to 49 in June, the lowest level since plunging to 45.5 in September 2001. The leading index usually precedes the EBI by several weeks.
The decline could be attributed to the less-optimistic reports from economists, quelling hopes for a strong second-half recovery.
"I don't think there is a solid, sustainable recovery," said Delos Smith, senior business analyst at the Conference Board in New York. "It's much more fragile than that. We expect the electronics industry could be the laggard. Hopefully by the end of the year, electronics will show some growth, but it won't be solid."
Counting on an increase in corporate IT budgets to help drive the recovery, the lack of spending has been a cause of concern for electronics companies.
"Business spending has started to show some signs of improving," said Daniel Laufenberg, chief U.S. economist at American Express Financial Advisors Inc., Minneapolis. "Whether or not this follows through, it's too early to tell. I don't expect it to reach the levels prior to Y2K."
Laufenberg expects business spending to increase just 2.5% this year, an improvement over last year's decline of 9.5% but a far cry from the 8.9% gain in 2000.
Fears of a "double dip" recession also continue to dampen hopes for a recovery, especially as new accounting scandals and other negative news come to light each day. A double-dip occurs when the economy begins to grow only to contract again before pulling out of recession.
"We see flickers of a return, an order here and an order there, but nothing as consistent as we would like," wrote a purchasing manager responding to the monthly EBI survey. "Still, [we] continue with R&D and have reduced our inventory to [the] lowest level possible."
Last week, the Conference Board announced that for the first time in nine years, average salary increases in key industries, including manufacturing, trade, and utilities, dropped below 4% for some major employee groups. In manufacturing, salary budgets increased just 3.5% compared with the expected 4%.
The Conference Board attributed the decline to the recent economic downturn, a continued atmosphere of uncertainty in the aftermath of the Sept. 11 attacks, and the Enron collapse.
"It should also be noted that a number of companies have taken actions that have the effect of reducing company salary expenditures but are not reflected in the size of the budget," said Charles Peck, Conference Board compensation specialist, in a statement. "These include actions like delayed pay increases, hiring freezes, and layoffs."
EBN's June employment index declined slightly to 35.1 and has fluctuated the past six months from a low of 30.9 in January to a high of 36.8 in March.
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