EXECUTIVE COMMENTARY
By Walter Tobin, ERA CEO
Walter Tobin
Did you watch the Netflix Series “Stranger Things”? (If not, I recommend it.) In this series a strange world called the “Upside Down” is the main theme and plot line – a world that seems to make no sense as everything is “upside down.”
I maintain that our world today resembles that world a lot. What seems to make sense to the normal person may, in fact, mean something totally different – something we think may be a good thing may, in fact, be bad.
I am certainly not an economist or any sort of financial wizard. I just read what I read and try to figure out what it means to me, and the impact on ERA – but it can be confusing these days.
Let me give you a few examples.
A strong U.S. dollar
We have a strong U.S. dollar! That’s good, right?
The U.S. dollar has risen 15.2 percent since June 7, 2021. Companies are starting to cite a strong dollar in their earnings releases. In addition to the trade-weighted index, the strength of the U.S. dollar can be seen in the foreign exchange rates for key markets.
For instance, the U.S. dollar achieved its strongest performance against the British pound since March 1985. In addition, the U.S. dollar is at its strongest level since August 1990 against the Japanese yen, in 20 years against the euro and since December 2007 against the Chinese yuan renminbi. So that’s good, right? USA, USA! Our dollar is strong!
Oops, not so fast…
It is important to note that a stronger dollar has an impact on U.S. manufacturers, making it more expensive for U.S. exports but lowering the cost of imported raw materials imports. Our manufactured goods cost more overseas and imports are cheaper for U.S. companies to buy – that does not sound good!
In an economy where companies are experiencing tighter margins due to inflation and less demand, a stronger dollar makes it easier for them to source goods from overseas, potentially putting their local U.S.-based suppliers out of business.
On the plus side, a rising dollar will probably drive U.S. inflation down somewhat because it makes imports into the U.S. cheaper. However, the con is that it’s harder for U.S. corporations to sell their goods overseas because they are now more expensive.
Huh, what?
Low unemployment
Now, how can this be anything but good? This should be an easy one. Common sense may tell us that low unemployment is good. More folks working, making money and paying taxes equals a happy workforce, a happy nation and a happier economy!
Not so fast.
When unemployment is low, we can have too much of a good thing. Low unemployment, even after the Fed has started to raise borrowing costs at the fastest level in decades, means that the economy is still running hot, and that’s driving inflation higher. More people working and making money, and then spending more money, can help fuel inflation perhaps to the point of us resulting in a recession.
Inflation has historically had an inverse relationship with unemployment. This means that when inflation rises, unemployment drops. Higher unemployment, on the other hand, equates to lower inflation. When more people are working, they have the power to spend, which leads to an increase in demand of goods and services.
The November job report added 263,000 new jobs and kept the jobless rate at 3.7 percent, almost a half-century low. Plus, the job market is incredibly tight with 10 million open jobs.
So, a low unemployment rate is both good and bad…
Huh? What?
Low interest rates
Now, how can these be anything but good?
Lower interest rates stimulate economic
growth by making it cheaper for businesses and consumers to borrow money to pay for things like office equipment and new cars. Super news! Lower interest rates make it easier for all of us to invest in our businesses and in our personal lives, buy homes with low mortgage rates and obtain lower credit card interest. All good, right?
Hold on there! Low interest rates can also potentially encourage overspending and unwise investment, leading to unproductive economic activity and inflation.
Yet – higher interest rates also reward folks who have savings/cash who can earn higher interest on CDs and other financial packages; therefore, high interest rates are good for some folks.
Yet – consumers say they feel lousy about the economy.
Yet – a record 196 million Americans went shopping over the Thanksgiving weekend — and those roaring sales numbers were a combination of people making more transactions! The economy may not be doing as poorly as we think! What’s more, Americans are traveling at pre-pandemic levels, even with higher airfare and hotel prices.
The Fed has been trying to contain the highest inflation since the 1980s, jacking up interest rates six times in 2022 and even rolling out a bumper three-quarter-point hike, not once, but four times in a row.
That means the next year will no question be a challenge as all that tightening continues to work its way through the economy.
This concludes our Economics 101 lesson from the “Upside Down.” What’s good is bad and what’s bad is good. So, what are we to do? Who do we listen to? What economic barometers can help guide us in 2023?
Trust your gut
My own personal economic models are the following:
1. How tough is it to get a parking space at the airport? If spaces are tough to get, it means a lot of folks are traveling, both for personal time and for business. Both signify a high level of confidence to spend and invest money, based on our feelings about the economy.
2. The line at the shoeshine stand at the airport – like the parking space shortage, men and women getting their shoes shined while on business travel (hence, dress shoes) indicate the level of business travel and the willingness to spend $10 on a shoe shine. A long line means a lot of business travelers who feel good about their trip.
3. When you check in at the front desk of a hotel, ask them “How’s business?” or “Gee – the hotel looks busy. What has been the occupancy rate of the property over the last 30 days?” They will usually tell you. A high occupancy rate means a lot of folks are traveling for both work and play.
My advice is to listen to your own homegrown economic tool, your internal instinct (a.k.a. your gut!) Think about it. Look back at your own experience, your personal life and your business career. When has your gut ever been wrong? I say “never.” Where we get in harm’s way in our life is when our brain tries to outthink our gut. We analyze, agonize and rationalize. We base our decisions on more than our gut feel. We overrule our gut and vote in favor of our brain…and bam! We make the wrong decision!
Be cautious while adventurous. Seize the opportunities without overextending yourself. No matter what: capitalize on the 2023 market conditions. Run your business as you have done all these years. Trust your gut and do not try to outthink it.
Your gut is calling…do not ignore it or you will pay the price!
The Winter 2023 issue of The Representor is out and it is packed full of great content for the electronics industry.
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> There’s no place like home
VIEWPOINTS
by Chuck Tanzola, CPMR
Chuck Tanzola, CPMR
The Fusion Sourcing Group Inc.
ERA Chairman of the Board
ctanzola@fusionsourcing.com
In June of 2020, I wrote an article for The Representor entitled, “I Have a Feeling We’re not in Kansas Anymore” in which I chronicled the three periods I thought we would go through as the world faced an unprecedented, life-changing, abnormal, uncomfortable, unfamiliar, strange and once-in-a-century situation. (I suspect you know what I am referring to.)
Imagine my shock and surprise when some two years later, while reporting at the October 2022 ERA Board of Directors meeting regarding the ERA website’s Google Analytics metrics, Clare Kluck, ERA’s director of communications, noted that: “Side note and fun fact: Chuck Tanzola’s column ‘I Have a Feeling We’re not in Kansas Anymore’ continues to get a large number of clicks and visits and is consistently one of our top visited pages each month!”
I vowed to myself that I was done writing about the pandemic, but since I always struggle determining what to write about, I thought “Why not write a sequel article?” So naturally, I went back and read my prior work. I will not repeat everything that I wrote before – you can check it out at www.era.org. (Yes, I know this is an obvious and shameless strategy to keep the click visit count up.) However, I did find one section that struck me as appropriate for discussion today. In it, I described what I thought the emergence from the pandemic would look like, when I wrote:
“Period 3 – Stability | Beyond COVID-19 (BC19)
If today we are searching, then tomorrow we will move towards a new equilibrium beyond Covid-19: I have named that period “stability.” When that will be seems to be a moving target, but I have no doubt that a) it will happen; b) it will encompass a combination of the best of the familiar enhanced with lessons learned during this pandemic; and c) by definition it will be different.”
A few observations: 1) I think this is the period we are in – it feels like we are moving on and moving beyond COVID-19, or we are at least trying hard to do so (though I recognize that some would debate this based on the latest variants); 2) The observation that this period “will encompass a combination of the best of the familiar enhanced with lessons learned” is pretty accurate, though the mix is still evolving and probably will continue to do so for some time; and 3) When I wrote this, while I recognized the “moving target” nature of the situation, I honestly thought we would reach this period much sooner than we have.
I do find it ironic, though, that I labeled the period “stability.” As I think about the industry in early 2023, whether you agree we are past the pandemic or not, I am pretty confident that “stable” is not the first word I would use to describe where we are. Consider the following:
• Analyst reports seem to indicate fundamental changes in the business climate in at least the first half of 2023. The sales growth we have seen over the past two years looks like it is now slowing significantly. (I just finished listening to one report that predicted single-digit declines in sales of all commodities essentially.)
• Lead times are anything but stable. Over the last two years, we have seen lead times for components extend continuously. Today, however, we are hearing of both reduced and extended lead times depending upon manufacturer and product.
• Reports from the channel are that book-to-bill ratios have been steadily declining as a normal adjustment to unsustainable demands placed on factories over the past two years; while at the same time, I have manufacturers advising customers to place backlog in place through 2024.
• While talent acquisition continues to be an ongoing challenge, and unemployment remains at low levels, recent news of layoffs at major companies across various industries have permeated the news.
• Air travel is largely returning to or exceeding pre-pandemic levels – assuming the planes will fly. Air carriers are reporting that 2023 revenues will exceed 2019, and yet we also cannot avoid reading about major cancellations due to weather, pilot shortages and overall system failures.
These and other factors make a pretty convincing argument that “stability” is indeed not the correct short-term definition of where we are today. I would say that while the long-term prognosis for the electronics industry is certainly still stable (and growing), the correct short-term description would be “uncertainty.” From day to day and specific situation to specific situation, it seems we don’t know which side of the dichotomy we will find ourselves having to react to.
Two years ago in paraphrasing John Wooden, I wrote that “Flexibility is the key to stability!” Today, I would write that “Understanding, discipline, strategy and execution are critical to working through uncertainty!” That’s what I’ll be looking for in Austin at the upcoming ERA Conference – “Moving On, Moving Beyond!” Will I see you there?
Click your heels three times and repeat after me…“There’s no place like Austin in February!”
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