It is amazing how quickly people's view of the economy can change. By some accounts, we have gone from plunging off the fiscal cliff at the beginning of the year to now scaling the dizzying heights of the stock market. It would seem many people have a "nothing but blue sky" mentality, and that is not a good thing. This has unfortunately led to some overly optimistic views about 2013 and 2014. While we share the near-term positive outlook, we believe a nuanced outlook on the opportunities and challenges beyond 2013 will be the best guidance to success in tomorrow's economy.
The stock market, retail sales, housing construction and nonresidential construction are all performing well and the continued stimulative monetary policy is helping boost this trend. However, based on internal trends of sector activity and the inevitability of market corrections, the good times will not last forever. Changes in regulation, taxation and trends in economic indicators such as corporate bond prices indicate that our anticipated change in consumer behavior in 2014 will catch many businesses unprepared and with too much inventory.
New orders of computer and electronics new are in the recessionary phase of the business cycle. New orders are at $258.4 billion (annual basis), a level 0.9% below last year. We forecast 2013 and 2014 will bring more of the same as the new orders trend continues to move lower. Look for new orders in 2013 to end the year 3.5% below 2012. Expect 2014 will be even more challenging with new orders falling almost 10% below the 2013 level.
Computer & Electronics Production Mirrors U.S. Industrial Production
Computers and electronics production, which includes computers, computer peripherals, communications equipment and similar electronic products, has fared better with activity now 5.8% above the year-ago level. The rate-of-change has entered the slower growth phase of the business cycle, but we expect the growth in manufacturing to continue.
Record levels of unfilled orders are helping sustain the current activity in production even as new orders are weakening. The built-up backlog will help maintain positive momentum for manufacturers in the first part of the year. However, expect that the ongoing weakness in the new orders trend will translate into a continued slower rate of rise in production levels later this year.
See Also: Make Your Move Blog
Communications equipment production is in the accelerating growth phase of the business cycle, reaching a level 1.2% above last year's activity. New orders for communications equipment (nondefense) are also gaining momentum; currently new orders are at $37.7 billion, 13.5% higher than last year.
New orders for defense communications equipment, however, have not fared as well. While new orders are only 4.4% below last year's level, the annualized total of $4.4 billion is only 56.6% of the $7.7 billion of new orders in January 2011. The backlog of unfilled defense orders has also steadily decreased. With both new and unfilled orders dropping and sequestration in effect, leaner days are ahead for readers in this sector. Expect these divergent trends in new orders to result in production finishing 2013 only 1.2% above 2012.
On a more positive note, the audio and video equipment production subsector is growing at a rapid pace, increasing 9.2% from one year ago. Internal trends suggest additional gains lie ahead and consumer expenditures on audio and video equipment are showing healthy rates of growth. Readers participating in this market should plan on solid gains in 2013, but be wary of straight-line forecasting when it comes to 2014.
Choose your path carefully as you look ahead to the remainder of 2013 and 2014. While we do not agree with some of the current "irrational exuberance" of today's economic headlines, we do think there will be profitable opportunities in the coming quarters. Use the next 18 months to enhance your training and technology propositions, as both will help you be ready for a stronger rate of rise in 2015.
Contributing Editor Alan Beaulieu is an economist and president of ITR (itreconomics.com). He is co-author, with his brother Brian, of "Make Your Move," a book on spotting business-cycle trends.