01/26/2022 | News release | Distributed by Public on 01/26/2022 07:56
Shortages of some electronic components are well known. However, several global electronics PMIs indicate a varying degree of inventory building across electronics subsectors. Electronic equipment PMIs suggest stocks of finished products are low relative to historical levels. At the same time, stocks of input materials have accelerated, while new orders have slowed since the second quarter of 2021.
Companies are stockpiling inputs even as new orders are falling
(IHS Markit Global Electronics Purchasing Managers' Index)
Source: IHS Markit, as of December 31, 2021.
Within the electronic computing equipment subsector, the pace of input material stocking has slowed since the summer of 2021. New orders have also decelerated. Meanwhile, electronic consumer equipment orders have fallen since the second quarter of 2021. Still, producers accelerated their purchases of raw and intermediate goods as finished product inventories dropped in the summer.Similarly, electronic communications equipment new orders have slowed, and stocks of input materials have risen. But, in this subsector, the stocks of finished goods also increased. This subsector is likely to slow before electronic computing and consumer equipment. All subsectors have purchased input materials at a rapid pace even as orders slowed, although the inventories of finished products show greater variation.
In the eurozone, stocks of input materials have grown at an unprecedented pace, while stocks of finished goods seem to have normalized. New orders have slowed. A further drop in orders (which is likely given the evolving nature of the pandemic in Europe) or a break from purchasing input materials can quickly decelerate activity in the area. The euro area appears to be the most advanced in inventory accumulation and, hence, the most vulnerable to shifts in orders and sentiment.
Japan was reported to be at the epicenter of supply shortages because of the dearth of electronic components needed for auto production. Nevertheless, Japanese firms seem to have accumulated enough inventories both in production goods and finished products. The order growth gradually slowed since the second quarter of 2021, and in December, producers started decelerating the pace of inventory accumulation.
Inventory building is based on expectations that household consumption will continue to be strong in 2022. A slowdown in final demand can exacerbate the inventory and the associated manufacturing cycles. So far, final demand has been strong but off its highs.
As life continues to normalize, we foresee that growth in final demand will slow. Households might be able to maintain high consumption levels, but if there are expectations for even stronger demand, any decline in spending can exacerbate the impact of precautionary inventory building. A slowdown or a reversal in inventory building will ease price pressures in the global economy. As the Federal Reserve and other central banks tighten monetary policy - and inflation starts to slow - we expect market calls for further tightening to abate.
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