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Strong Demand in Electronic Components Expected Through First Half of 2018

Surging demand and shrinking inventories are causing an increase in lead times.

Robust sales of electronic components can be expected to continue well into 2018, with expanding lead times looming as the only major threat on the horizon, says Nick Hawtrey, chief financial officer of Allied Electronics.

New distributor total available market (DTAM) figures released by the Electronic Components Industry Association (ECIA) show strong growth in the first two quarters of 2017. Total sales of semiconductors, passive components, electromechanical products, and connectors in the Americas increased from $3.2 billion in Q4 2016 to $3.5 billion in Q1 2017 and $3.6 billion in the second quarter of this year. Gains have been notched among many sectors, notably automotive, industrial, medical, telecom networks, and avionics/military/space.

With demand surging and inventories shrinking, lead times for most components are widening, however.

"I don't want to be gloom and doom, but I'm very, very concerned about the impact of lead times," Hawtrey told an audience at the 2017 ECIA Executive Conference in Chicago. "Ours is an industry where lead times have caused massive problems sometimes. We need to make sure that we don't create an artificial shortage."

Data from ECIA, which is reported by member distributors and aggregated, shows that lead times have been increasing throughout the year for interconnect and electromechanical, passive, and semiconductor components. By the third week in September, passives and semiconductors both had average lead times of over 11 weeks. Discrete semiconductors and resistors now have lead times of over 16 weeks.

Elsewhere, Hawtrey expressed concern at the growing spread between the Purchasing Managers Index (PMI) and industrial production growth. The September PMI registered 60.8%, an increase of 2 percentage points over August, as the overall economy grew for the 100th consecutive month.

The Institute for Supply Management collects PMI data from purchasing executives at more than 300 industrial companies and incorporates employment levels, factory orders, inventories, new orders, and suppliers' delivery times. But while PMI is an extremely important indicator of economic growth, it is only a sentiment reading.

"My concern is that the PMI is at an astonishing level," Hawtrey noted. "What I like to see is industrial production following the PMI. I like to feel that there's substance behind the sentiment."

Hawtrey predicted a continuation of "fast to medium growth" in the electronic components market with a slowdown likely in the second half of 2018 as market demand eases and "comparators begin to get tougher." He also forecasts more acquisitions and consolidation within the market, particularly at the manufacturer level.

Continued Slow, Steady Growth in the U.S. Economy
Growth in the larger U.S economy will ease slightly, from the current 2.3% (forecast) for 2017 to 2.1% in 2018, Jim Doti, founder of the Chapman University Economic Forecast Conferences, told the ECIA audience.

The current economic expansion is likely to soon become the second-longest recovery ever, Doti noted. However it has been a soft one, averaging only 2.1% growth in real GDP per annum and a relatively modest 18% in cumulative gains since it began in 2010, he added.

"Ordinarily, that might be a good thing because it means we have room to grow," Doti commented. "But we're bumping against full employment."

Doti expressed modest concern over trends in several economic indicators that he said can be predictive of an impending recession—most notably the short-term/long-term interest rate spread. With recent interest rate hikes by the Federal Reserve, short-term rates are gaining on long-term rates, making it less profitable for banks to lend money.

A negative interest rate spread—the 10-Year Treasury bond rate minus the 90-Day Treasury bill rate—has preceded the last three recessions, Doti said. And while he forecasts further hikes by the Fed in the coming year, he predicts that the interest rate spread will stay in positive territory.

Among several other data points worth watching, Doti said, is the effect of the Federal Reserve's planned tightening of the money supply through its sale of government securities. The Fed plans to shed $1.8 trillion—40% of all assets held by Federal Reserve banks throughout its system—over the next three years.

Doti says that while this tightening "won't have a devastating effect," there remains uncertainty, as "we've never experienced this before."

Concerns of an overheated stock market are likewise misplaced, in Doti's view, as the average price-to-equity ratio—which measures a company's current share price relative to its per-share earnings and is a common metric for assessing whether stocks are over or underpriced—currently hovers around 23. And while that is higher than the historical average of 19.5 since 1990, it is still well below the 30 level that was reached in the late 1990s prior to the bursting of the dot-com bubble.

"Right now, in my 401k, I'm 100% in stocks," the 70-year-old Doti said, by way of expressing his continuing bullishness in the market.

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