Slower growth attributable to consumers spending less.

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Electronics production has been well below average for at least the last two years, a result of decelerating growth in consumer spending. And electronics production is likely to see even slower growth in 2016. Let me explain why.

Real 10-Yr Treasury Rate. The real 10-yr U.S. Treasury bond rate (the nominal rate minus inflation) was 1.74% in July, the sixth month in a row that the real rate has risen from the previous month. The nominal rate has risen for three months, but is still only about a third of its historical average. However, inflation is historically low. The current annual average inflation is just 0.17% vs. a historical average of 4.14%. Therefore, the real rate is about two-thirds of its historical average. Low inflation is keeping real rates higher than in the past.

The Fed has indicated a desire for interest rates to rise, but due to a host of economic concerns it may not take any action. However, with very low (or negative) inflation and a generally stable yield,  the change in real 10-yr Treasury rates will likely continue to increase. This is a negative sign for electronics manufacturing. However, interest rates have a long lead time before they begin to affect industrial production and capital-equipment spending.

Real Disposable Income. June real disposable income was $12,176 billion (seasonally adjusted annual rate), an all-time high. In June, disposable income grew 3% compared with a year ago. This was the slowest rate of month-over-month growth in incomes since September 2014 and the first month of below-average income growth since that date. The annual rate of change ticked up to 3.2%. Disposable income has been growing at an accelerating rate since June 2014, but that trend looks like it will end soon, which would become a negative indicator for electronics production.

Real Electronics Spending. In June 2015, real electronics consumer spending was $361.8 billion (seasonally adjusted at an annual rate). Compared with a year ago, electronics spending in June 2015 was up 8.8%. This rate of growth was nearly 33% below the historical average of 13.9% monthly growth. While the annual rate of change has been growing faster, the rate of growth is historically weak. 

Electronics Industrial Production. The electronics production index was near its all-time high in June 2015. However, the rate of growth has been decelerating since last December. Despite the ups and downs from recessions, the overall trend since 1998 has been for slower and slower growth in electronics production. And given the trend in many of the leading indicators, it appears that electronics production will continue to see slower growth heading into 2016.