Ending the Economic Limbo

The US Federal Reserve Open Market Committee summarized the prevailing sentiment about the economy aptly in a statement following its last meeting: The economy “has been disappointingly slow,” despite low inflation and a relatively stable pricing environment.

Electronics companies need to consider this as they plan for what everyone is predicting will be a robust growth year for the sector. Everything seems to be looking up for the industry: Inventories are at reasonable levels; manufacturing capacity is relatively high, after some manufacturers shuttered plants during the last downturn; demand remains robust in most market segments, including consumer electronics; corporate profits are at historic highs; and the industry is awash in cash.

Combined, {complink 379|Apple Inc.} and {complink 2657|Intel Corp.}, for instance, had almost $86 billion in cash and short-term and long-term investments at the end of 2010. The cash and short-term investment portion of this — what analysts and investors refer to as liquid assets — totaled $48.9 billion for the two companies, enormous resources both companies can tap to finance aggressive acquisitions, R&D, capital expenditure, or extensive hiring. High-tech companies, by a rough calculation, have more than $200 billion in cash swirling around in their kitties. Hiring, though, is not really in the cards for many of these companies.

Manufacturers, whether in electronics, industrial, or automation, are scared stiff of the unknown. They see sales growing and profits rising but cannot with any measure of confidence discuss expectations for anything beyond the current quarter. The boldest players plan capex levels for a whole year ahead — Intel and {complink 5703|Texas Instruments Inc.}, for example — but the industry is in short supply of such daring companies; most manufacturers today are keeping their gunpowder dry and won't increase expenses unless absolutely pressed.

That position may seem smart as long as the economic uncertainty persists, but how do you explain missed sales opportunities to shareholders if the economy turns around smartly and demand skyrockets? On the other hand, the handful of companies that are expanding operations today and slowly increasing hiring may also get similarly blamed if the economy contracts and expected sales fail to materialize.

It's a riddle even the Fed has not been able to solve. The Central Bank wants to see increased hiring and has kept the federal funds rate at 0 percent to 0.25 percent as a result, but the unemployment rate remains stubbornly high. Inflation is holding steady despite higher commodity prices, the Federal Reserve said, but getting employers to recruit has been extremely difficult.

Again, there's no mystery here. Employers just don't have enough confidence in the sustainability of the current economic expansion. Electronics manufacturers may seem to be in a different position because many of the companies that have announced results are predicting steady growth ahead — but how sure can we be optimistic if the rest of the economy is holding its breath?

Here's the full statement from the Fed:

    Information received since the Federal Open Market Committee met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions. Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, while investment in nonresidential structures is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.

    Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

    To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

    The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

    The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

    Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

4 comments on “Ending the Economic Limbo

  1. jbond
    January 27, 2011

    This is some good news. It's promising to hear that some of the major electronics companies have a vast surplus of liquid assets. It is also understandable to read about their concerns on spending and what that would mean to the bottom line if things don't go as well as expected. Hopefully as a little more confidence grows; these companies will look at reinvesting and possibly adding to their workforce. I know they would hate to get caught with an increase in demand and not be able to deliver their products on time. 

  2. Barbara Jorgensen
    January 27, 2011

    This is a little more sobering than some of the other reports released this week, and I think that's a good thing. It's true that within the electronics and manufacturing sectors there's reason for optimism, but we have to remember it was the financial sector (and unbridled optimism) that got us here in the first place.  Remember when it seemed like the value of your home would go up forever? When debt was some vague amount of money you'd pay off someday? Kudos to the Fed for keeping things in perspective.

  3. Himanshugupta
    January 28, 2011

    The growth has been quite weak in the developed economies and is mainly fuelled by the growth in the developing worlds. This is what i have been reading in many news items. So global economy is upbeat about higher growth and i hope that electronic sector gets benefit from it.

  4. Ms. Daisy
    January 30, 2011

    I am frustrated about the stubborn pessimisim of the private sector. If everyone is predicting this year will be a robust growth year for the sector and everything seems to be looking up for the industry, then what more does these companies need to improve their confidence in the economy?

    Its good that the combined liquid assets of both Apple and Intel is impressive, how does this translate to improving the unemployment problem. 

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