Is Tech Immune to Manufacturing Decline?

The U.S. manufacturing sector shrank sharply in December, but some analysts argue that tech is more resilient.

U.S. manufacturing shrank by the largest margin in almost five years, despite news that the overall economy still grew in December, which marked the 74th straight month of expansion.

The Institute for Supply Managements factory index, published on Jan. 2, fell to 47.7, from 50.8 the prior month. Any number above 50 signifies growth; any number below reflects contraction.

While the December numbers fell far below economists expectations that the index would hold steady through the end of the year, they did not come completely out of the blue. According to the ISM, new orders, production and employment all fell below 50. Moreover, inflation—as measured by the Prices Paid index—grew despite the weakness in activity.

Some observers argued that the ISM report heralds an imminent recession, and the stock market reacted accordingly. The Dow Jones index fell by more 1.7 percent, or more than 230 points, by mid-afternoon trading.

But analysts believe technology, particularly in the hardware and chip manufacturing sectors, may enjoy some immunity to a decline in the general U.S. manufacturing sector because of the global nature of its supply chain.

"Most electronics are finished goods. There are not a lot of tech things built in the U.S. Most finished goods and their components are assembled and produced in Asia," said Stephen Baker, vice president of industry analysis for The NPD Group, a global provider of consumer and retail market research.

Baker argued that it would take a fairly significant economic downturn for the supply chain to be affected.

"Traditionally, tech is much more immune than other sectors because consumer technologies are usually selling something new, great and something people didnt have before," Baker told eWEEK. "Theyre often expensive, so theyre being sold to consumers who are not affected by slowdowns. Yet more and more consumer products now are replacements, not new devices, purchases that can be delayed if you already own one."

But other analysts point to the fact that tech, being discretionary, is often seen as the easiest expense to cut should the economy further contract.

"I dont buy into this idea that tech is not affected by these slowdowns," Doug Freeman, a technology analyst with American Technology Research told eWEEK. "Technology is both on a consumer and corporate level a discretionary spending item. There are few businesses that will grind to a halt if tech spending slows down. They can dry it up, but they wont stop the business from running."

Baker agreed that a full-blown recession would affect consumer electronics and, to a lesser extent, enterprises, said Baker.

"From a selling-to atmosphere, the tech sector is certainly not immune to whatever happens in the economy, especially if it is pretty weak or already in a recession. If we do go into a recession, the electronics sector would be affected. It may affect enterprise sales too, but just a little bit," he said.


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