Positive Signals for Electronics Market in Q4

News and Noteworthy
Q4- 2023

Despite the ongoing contraction in the U.S. manufacturing industry, there’s a glimmer of hope as the overall factory index showed a slight uptick in August. Coupled with an optimistic outlook for component sales, experts in the electronics sector are eyeing Q4 as a pivotal period towards increased demand.

In the latest sales trend survey by the Electronics Components Industry Association (ECIA), the sales sentiment for the overall electronic component markets (ECST) saw a notable improvement of 7.3 points in August compared to July, reaching a score of 90.3. Looking ahead, the projections for September maintain this upward trajectory, with an anticipated index of 94.9. While these scores are below the 100-point threshold that indicates growing sales sentiment, they represent the best figures since February 2023, marking a substantial increase of 22.5 points from May 2023, as highlighted by Chief Analyst Dale Ford.

The IPC, another influential electronics association, reported that demand remains robust, with its shipment index solidly rising in August and staying within expansionary territory. IPC’s orders index also displayed a positive trend by increasing one point and remaining in expansionary mode. However, both associations caution about challenges for the remainder of the year. Employment and material costs continue to rise, as reported by the IPC, with labor costs index surging by 4 points and material costs by 5 points in August. U.S. manufacturers are employing attrition strategies to align their headcounts with the soft demand, according to Tim Fiore, chair of the Institute for Supply Management’s manufacturing survey committee.

A significant pickup in demand is not anticipated by the end of the year. The sentiment score for August from the ECIA came in 4.4 points below the expectations set by the July survey. In terms of components, electromechanical/connector results fell slightly short of expectations for August but improved marginally over the July score. On the contrary, semiconductors surpassed expectations by 6.8 points. Semiconductor expectations for September remain relatively steady at 95.7. “Hopefully, if the industry can maintain these recent improvements, it is plausible that sales sentiment for all categories could surpass 100 sometime in Q4, signaling the potential for a return to broad-based growth at the beginning of 2024,” mentioned Ford. ISM’s Fiore added that reaching the 50.0 mark in the U.S. PMI — the line between contraction and growth — by the end of the year is conceivable.

It’s evident that inventory levels of component makers have declined, while the distribution channel still holds high stock levels. ECIA reported that the product sales sentiment of manufacturers during July to September is notably higher, ranging between 8.1 and 9.9 points, compared to the overall average. This discrepancy in sentiment reflects a distinct perspective, with manufacturers exhibiting a more positive outlook compared to others. This divergence could indicate that the distribution channel is in the process of resolving inventory imbalances, while manufacturers benefit from direct sales aligning with end market demand, as explained by Ford.

While an anticipated increase in end-market demand didn’t materialize in August, ECIA reported a substantial increase of 16.5 points in expectations for September. “This optimistic outlook is prevalent across all end markets, with every market indicating an improvement in sales sentiment leading towards September,” emphasized Ford.

The most significant improvements are expected in consumer, industrial, medical, and compute electronics. Sectors like avionics/military/space, medical, automotive, and industrial electronics are all predicted to surpass the 100 threshold in September. The results from the Quarterly ECST survey align with the movement towards a phase where renewed quarter-to-quarter growth can commence in early 2024.

In the Q4 outlook, the balance between improving and declining sentiment is nearly equal, with improving sentiment only 2 points below declining sentiment. This signifies a slight delay in improved sales sentiment from the Q2 survey, observed Ford. Sales sentiment equilibrium is now anticipated in Q4.

Furthermore, the ECIA reported a significant improvement in lead times in the August survey. Every category witnessed a notable surge in reports of declining lead times, accompanied by reports of reductions in increasing lead times. Only memory ICs and analog/linear ICs reported overall increases in lead times, while connector lead times remained mainly stable.

These reports of an improving lead time environment are promising as the industry continues to address excess inventory in the channel, offering a positive outlook for the upcoming quarters, concluded Ford.