Electronics orders plunge in US

In a disturbing development that has baffled economists, the US Commerce

Department announced this week that factory orders for electronics products

(anything from DRAM memory chips to cellular telephones) in the US plummeted a

record 20.1 per cent in April. This is despite an on-going boom in the sales of

these products at the retail level.

Economists warn that a continuation of the downward trend in factory orders

for electronics products could disrupt the economy in several ways. If the trend

reflects a real future slump in consumer demand, then the general economy is

likely to follow suit and a recession could develop. If on the other hand demand

continues to be strong, shortages will quickly develop causing inflation, which

will result in higher interest rates and a slowing of the economy.

In the near-term, the latter scenario appears most likely. Just this week,

the latest Consumer Confidence Index showed a sharp increase from first quarter

levels, indicating Americans will be able to continue spending heavily. But

still, the factory order plunge is troubling experts. A large decline in orders

for new semiconductors and other electronic components would indicate a slump in

PC sales. But this grew by a healthy 20 per cent in the first quarter and there

are no signs that the growth would not meet second quarter expectations. On the

contrary, many PC makers reported that their ability to meet the demand has been

impacted negatively by a shortage of components.

Others caution that no one should overlook the 20 per cent drop in

electronics orders. "Silicon Valley has been the leading edge of the

economy. When it heads South, it is going to pull all the wagons with it,"

said economics professor at the University of San Francisco Michael Lehmann. The

best scenario is that the April order dip was a mere blip on the radar screen

and that May orders will be higher than expected as things average out. But

Lehmann believes that a recession in the US economy is likely in the face of a

strong economic indicator. Others suggest that the order slump may have

resulted, in part due to higher interest rates forcing retailers and other

buyers to reduce their inventories by temporarily holding back orders.