Economic indicators manufacturers should watch in 2H 2022

TTI SVP and President of Exponential Technology Group, Michael Knight, shares economic indicators showing a positive trajectory for manufacturing in the months ahead.

Even as electronics manufacturers confront the high levels of uncertainty in today’s market, now is a good time to recall that stock markets are not a proxy for the economy. Paul Samuelson humorously illustrated this truth by noting that ‘the stock market has predicted nine of the last five recessions’.

In the US, the economy remains strong in spite of uncertainty thanks to low unemployment, rising wages and government subsidies. Despite the impacts of the coronavirus, chip shortages and the trade deficit (which subtracts from GDP), other elements comprising GDP were quite strong. These factors suggest we won’t see recession in the US economy in the short term. 

In fact, many leading indicators are still healthy (in some cases, well above their pre-pandemic levels) including: private sector employment; industrial production rates and capacity utilization; wholesale trade of durable and non-durable goods; and non-defense capital goods new orders.  

Another positive is that the Institute for Supply Management’s Purchasing Managers Index (ISM PMI) has remained in growth territory. Although JP Morgan’s Global PMI declined recently after 22 months (due to lockdowns in China) it has remained positive as well. 

For manufacturers looking to purchase electronic components, this positive economic news collides with the ongoing challenges in getting parts. Supply chain constraints, inflating cost inputs and environmental factors are still impacting semiconductors as well as interconnect, passive and electromechanical components.

Today, production capacity is tapped out and lead times are long and growing. Costs for raw materials and transportation are up significantly versus pre-pandemic levels. Through it all, however, global electronic component unit shipments continue to grow.

Semiconductors in particular are growing logarithmically, which is worth noting. According to the Semiconductor Industry Association (SIA), in 2021 semiconductor sales grew 26 per cent to $556 billion. In a recent CNBC report, SIA president and CEO, John Neuffer, said: “Demand for semiconductor production is projected to rise significantly in the years ahead, as chips become even more heavily embedded in the essential technologies of now and the future.”

What is true for semiconductors holds true for the entire electronic components industry. The demand we’re seeing encompasses all industry verticals and is being driven by a significant surge in demand that is above and beyond the Covid recovery.

This surge is driven by the fact that almost every product being produced today, in almost every industry, is becoming more digital and new technologies are prolific and combining in ways that are creating entirely new applications and markets.

This sustained surge in demand, coupled with growing weather-related shocks, has put tremendous pressure on electronics supply chains. Today’s supply chains were developed over the course of the last fifty years using analog thinking to optimize for cost rather than resiliency. They are keyed to labor rates, not disruption rates; they are built for linear, not exponential, rates of growth.

Despite what you might have learned from Aesop’s fable of the tortoise and the hare, in today’s market ‘slow and steady’ not only fails to win you the race—going forward, it will get you disqualified at the starting line. 

As the present market has shown, incremental change will not future-proof the supply chain. As the US economy demonstrates its resiliency, demand for electronic components is unlikely to abate. As prices moderate and incremental production capacity comes online, pent-up demand for components will consume those parts.

Now is a critical time for electronics manufacturers to develop strong partnerships. Distribution can help businesses roll with those changes and adapt to the needs of a digitalized, agile supply chain.