After a few years of garnering only moderate profits, the U.S. electronics industry caught fire in 2010. According to data recently released by the Bureau of Economic Analysis (BEA) in the U.S. Dept. of Commerce, the computer and electronics industry is on pace to see sales grow 10% but profits soar 250% in 2010 compared with total earnings in 2009. Through the first half of this year, this industry has amassed more profits than any other major manufacturing sector, even the perennially profitable food products and petroleum products.
This is good news for suppliers of electronics parts and components, including plastics processors. Profits drive corporate spending and bank lending for plants, equipment, and hiring employees. They also drive R&D activity, which in turn generates new products and increasing market demand, which then creates more profits. All of this is a self-sustaining “virtuous circle” made possible by a steady uptrend in profits.
Everybody knows that electronics have become ubiquitous, finding their way into autos, appliances, medical devices, and scores of other products. This trend will persist for the foreseeable future.
Unfortunately, it is difficult to capture steady and reliable data on the level of penetration of electronic components into these larger products. But data that the BEA compiles in two major areas show big gains thus far in 2010. These two areas are consumer spending for video, audio, photographic, and computer equipment and media; and business investment in computers and peripheral equipment.
In 2009, U.S. businesses purchased $80 billion worth of computers and peripheral equipment. Through the first two quarters of 2010, nonresidential investment in computers is running at a pace of more than $95 billion for the year, or an increase of about 20%. It has not gone unnoticed by many analysts that this propensity by businesses to invest large sums of money in computers and other types of equipment this year is a sharp contrast to their willingness to hire employees. This divergence will not be sustained over the long run, but it is one of the characteristics of the current recovery cycle that will be analyzed and debated for years to come.
And while overall consumer spending has been sluggish this year, Americans’ enthusiasm for electronic products appears to be impervious to the lackluster rate of overall economic and employment growth. In 2009, U.S. consumers spent just over $270 billion on video, audio, photographic, and information-processing equipment and media. That is about the same amount that Americans spent on gasoline last year.
Through the first half of this year, spending on these products is expected to come in at $285 billion, or a 5% increase from last year. That may not seem such a robust rise when compared with the 20% jump in business spending, but it is quite strong when overall consumer spending is expected to rise only about 1% to 2% this year. Consumers are spending significantly more of their household budgets on electronics this year than last, even though growth in household incomes is stagnant.