Stalled investment spending, weak global economy and a decline in the semiconductor market add up to a less-than-stellar outlook for the electronics industry.

The U.S. manufacturing sector can’t seem to make it out of the slow climb it’s been stuck in since the Great Recession, as economists and industry watchers alike point to much of the same for the remainder of 2016. Soft global economic conditions, a weak business investment climate here at home, and contraction in the global semiconductor market are some of the factors keeping growth to a minimum in the electronics supply channel, as suppliers, distributors, and end customers await stronger growth. Many distributors point to pockets of strength in supplying industries such as automotive, lighting, and the Internet of Things, but most agree it’s not enough to pull them out of the slow-growth normthey have been in for the past several years.

The outlook didn’t improve much in the second quarter. The economy’s modest 1.2% growth rate—as reported by the Commerce Department in late July—was slightly better than the 0.8% growth rate reported in the first quarter, but it also marked the third straight quarter of less than 2% growth—one of the worst stretches in recent years. The numbers reflect that the economy continues to “trudge along,” a factor emphasized in recent reports from the purchasing, manufacturing and semiconductor communities.

Buyers Report Slow Growth

The manufacturing economy continued to grow in July, though at a slower rate compared with June, according to the most recent Report on Business from the Institute for Supply Management (ISM). ISM’s Purchasing Managers Index registered 52.6 in July, down less than a percentage point compared to June but still above the 50-point mark indicating growth in the sector. The PMI has remained in growth territory since March following five months of contraction.

Buyers in 11 of 18 industries reported growth during the month, including computer and electronic products. The seven industries reporting contraction in July included electrical equipment, appliances and components; machinery; and transportation equipment.

That the PMI remained in positive territory for the fifth straight month is a good sign, but the outlook remains uncertain due largely to global factors. A sluggish worldwide economy and the strong U.S. dollar have hampered exports, for instance, and low oil prices continue to dampen prospects in drilling and related industrial markets.

Manufacturers Lament Investment, Low Productivity Gains

Economists watching the manufacturing sector continue to highlight the lack of equipment investment this far into the recovery. In a recent blog post, Cliff Waldman, director of economic studies for the Manufacturers Alliance for Productivity and Innovation (MAPI) Foundation, pointed to three consecutive quarters of substantial contraction in capital spending—2.6% contraction in the fourth quarter of 2015, 9.5% contraction in the first quarter of 2016, and 3.5% contraction during the second quarter of 2016—as a thorn in the side of U.S. manufacturers.

“Investment weakness and export weakness are making life more than a little difficult for U.S. manufacturers,” Waldman wrote. “And these are factors that have held growth to an average of just 1% for the first half of 2016.”

He goes on to explain that despite the other troubles affecting the sector, smart, persistent investments are the key to a stronger, more productive manufacturing economy.

“… the long-standing capital investment malaise must be a point of intense policy focus,” he wrote. “It is a factor in an exceptionally weak productivity picture, significantly constraining potential growth.”

Semiconductor Market Declines in 2016

The electronics supply channel will suffer the effects of another tough year for the semiconductor market, which is expected to decline 2% in 2016, following a 1% drop last year. The major culprit is falling prices, especially in the DRAM segment, which has seen a rapid decline in pricing over the last 18 months, according to market researcher IC Insights. This comes on top of the soft global economic conditions that also influence the industry, which closely follows GDP growth.

“The IC industry as a whole is really being influenced by general economic conditions—not only in the U.S. and Europe, but also in some of the more emerging markets,” says Brian Matas, vice president of market research at IC Insights.

IC Insights projects the DRAM market to be down 19% this year, taking 3% to 4% out of the overall market. “If DRAM was flat, the IC market would likely show a 2% gain,” Matas adds.

Declining shipments of computers and tablets, along with smaller annual increases in smartphone unit growth, also add to the problem as manufacturers must “adjust a little bit and back off on the number and amount of DRAM they buy,” Matas adds. That, in turn, works its way down to DRAM suppliers, who must plan for capacity and what to build.

The end result is that the slow climb out of the recession continues, at least for the second half of the year. But Matas adds that the long-term outlook for the semiconductor market is more promising, as IC Insights forecasts 3% to 8% growth annually, through 2020. “Once we get past this year we see a bit brighter next four or five years—[with gains] mostly in the low- to mid-single digits,” he says.

Victoria Kickham

Victoria Kickham

Victoria  Fraza Kickham is a Boston-based freelance writer covering manufacturing, distribution and supply chain issues. She is the former managing editor of Industrial Distribution magazine, and her articles also have appeared in The Electrical Distributor magazine,,
Electronic Design, and Machine Design magazines. Contact her at and follow her on Twitter: @vfkickham.

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