Stimulate This!
By David Pheteplace, Bishop & Associates Inc.

As the worldwide economic crisis started to unfold, most countries reacted by trying to stabilize their financial institutions and guarantee the supply of money. Hundreds of billions of dollars were pumped into these institutions to shore them up. Trillions of dollars of net worth were lost. As the worldwide recession began to unfold, however, most countries were reluctant to commit similar sums of money to try and stimulate their economies to shorten the recession. The notable exceptions to this were China and the United States.

The American Recovery and Reinvestment Act of February 2009 and the Chinese stimulus package of November 2008 bare some similarities. Both are multi-billion dollar programs—$787 billion in the U.S. and four trillion yuan ($587 billion) in China; both aim to stimulate their respective economies and curb unemployment; both include welfare and stimulus spending; both include central government and state spending; and both are short on details of spending and analysis of specific results. A key difference in the plans is that the Chinese package has been implemented more quickly and is having a more significant short-term impact on their economy. What are the key elements of these stimulus packages, and how are they likely to impact the interconnect industry?

The U.S. package is a mixed bag of congressional/political projects and federal spending that were not coordinated for maximum benefit to economic growth and creating jobs. A portion of the package is administered by state governments—$280 billion—and the remainder will be controlled by the federal government. The package is, thus, a bit confusing to breakdown. It can basically be divided into two parts. The first part is tax relief for individuals and corporations (37 percent) and fiscal relief for state and local governments (18 percent), totaling $432 billion, or 55 percent of the total package. Some portions of tax relief will potentially help stimulate sales of cars, housing, computers, and capital equipment in the form of refunds, rebates, credits, and accelerated depreciation. Having a bit more money in the individual’s and the corporation’s pockets will help increase their spending, but in a semi-directed way. Most of the state and local fiscal relief will go into Medicaid and education (salaries for teachers), so there will be no direct stimulus effect through government spending. The second part of the package, or $355 billion, is targeted toward spending programs (although some monies from tax relief are also allocated to spending, according to the government website, www.recovery.gov).

• $111 billion will go to infrastructure and science (plus $15 billion from tax relief), including $30 billion for upgrades and new government facilities, $28 billion for bridges and roads, $8 billion for rail projects, including high-speed rail, $7 billion for equipment for public transportation projects, $6 billion for water/wastewater projects, and $4 billion for broadband and wireless Internet access

• $81 billion for “protecting the vulnerable,” (plus $61 billion from tax relief), which is primarily aid for low-income individuals, unemployment benefits, and retirees

• $53 billion for education and training (plus $25 billion from tax relief), which is primarily for supporting various education programs

• $59 billion for healthcare, which is primarily going into Medicare

• $43 billion for energy (plus $22 billion from tax relief), including funds for the electric smart grid, energy efficiency, weatherizing, renewable energy (wind, solar, etc.), and carbon capture

• $8 billion is for miscellaneous projects and programs

Of the $355 billion for spending (plus the $123 billion from tax relief), it appears that approximately $50 billion will be spent for purchases which could directly impact the sale of electronic interconnect products, including computer equipment, broadband equipment, equipment for transportation projects, industrial equipment, health information technology, government vehicles, and other infrastructure projects. There is also the more visible, direct spending, such as the cash for clunkers program, which gave rebates of approximately $2.8 billion to stimulate the sale of an estimated 700,000 new cars. It would be nice if all of the stimulus spending was that visible and direct. The biggest issue with the U.S. package is that most of the spending does not start until 2010/2011. Although the social welfare in the program is helping put food on the table now, the unemployed, the under-employed, and those concerned about their jobs are unlikely to buy televisions and cars. By the government’s own estimate, they have provided tax relief of $62.5 billion as of August 2009. They will not start reporting the results of spending programs until late October 2009.

The good news is that there are signs that the economy is slowly coming out of the recession. The U.S. GDP decreased 6.4 percent in the first quarter, and decreased at an annualized rate of 1.0 percent in the second quarter. Exports of goods and services decreased 29.9 percent in the first quarter, and 5 percent in the second, while imports decreased 36.4 percent and 15.1 percent. Business inventories decreased $273.1 billion in the first half of the year. Although unemployment is expected to stay high, over 10 percent through the middle of 2010, the GDP growth is expected to be annualized at -2.5 percent for 2009 and +2.5 percent in 2010.

The Chinese package of $587 billion is also a combination of central government and state government spending—with $148 billion coming from the central government and $439 billion from the states. Many of the proposed programs, in the beginning, were a combination of new initiatives and old programs, and there has been a great deal of confusion as to what was stimulus and what was not. There was a broad 10-point program of spending proposed in November 2008, but few details of where the money would be spent. Although it appears that most of the spending will be on longer-term infrastructure projects (roads, bridges, railroads, hospitals, disaster relief, etc.), there has been enough concern over the end results and corruption that a group of liberal Communist Party elders wrote to President Hu Jintao in early March 2009 asking for checks and balances to be implemented. On March 6, the Chinese National Development and Reform Commission (NDRC) came out with a revised spending package, which divided the spending as follows:

• 38 percent (1,500 billion yuan) to public infrastructure projects

• 25 percent (1,000 billion yuan) to post-earthquake reconstruction

• 10 percent (400 billion yuan) to social welfare

• 9 percent (370 billion yuan to rural development

• 9 percent (370 billion yuan) to technology and industry advancement

• 5 percent (210 billion yuan) to sustainable environment development

• 4 percent (150 billion yuan) to educational and cultural projects

In April 2009, signs of a successful, working stimulus package included sales growth in the construction and construction equipment industries, and the GDP grew by 6.1 percent in the first quarter. The NDRC reported that China had spent 230 billion yuan of the package. While exports were still down, China’s domestic economy was doing well. Much of the funding for the stimulus package and growth has come from the state-funded banks and revised lending practices. Bank lending was over $1 trillion in the first half of the year, which was a 201 percent increase. In July, second quarter GDP growth was reported at 7.9 percent.

The direct impact on the interconnect industry has been somewhat quantifiable. The infrastructure programs went primarily to state-owned companies, which quickly started hiring people unemployed by the export companies, which are in a 22 percent downturn through June of this year. Coupled with subsidies and tax breaks to buy automobiles and appliances, and a ready supply of loans from the state-owned banks, retail sales grew 15 percent in May and June, and factory output is up 10.7 percent in the first five months of the year.

Chinese auto sales are now forecasted to increase as much as 28 percent in 2009, to 12 million units. GDP predictions are around 8 percent for the year, and unemployment has remained below 5 percent. The big question will be if China can continue at the same pace in 2010.

Differences and similarities in the two plans make for some interesting discussions and comparisons.

Both plans have sizable allocations for social/welfare plans. This resulted in a softer landing for the newly unemployed and under-employed, which helped foster an atmosphere of (relative) stability and mitigated the larger panic reaction. This should help reduce the length and severity of the recession.

Both countries have loosened the money supply. In China, this helped lenders get more money to the consumers, which helped increase domestic spending. The Chinese government also provided tax breaks and subsidies, which further stimulated spending. In the U.S., it did not work. Americans had already borrowed money beyond prudent levels, and coupled with the mortgage crisis, lenders were not distributing the money they had even for well-qualified loans. American consumers began saving money at historic levels, particularly when their jobs were potentially on the line. Even wealthy Americans stopped spending, as they saw the value of their investment portfolios plummet. This contributed to a large plunge in domestic spending in the last half of 2008 and the first half of 2009.

Both countries have begun large infrastructure building/rebuilding programs. China has been able to implement their program quickly, as many of the companies that received the stimulus programs are government-owned and the bureaucracy to start the projects was not a hurdle. These companies quickly began to hire the people unemployed by the exporting companies, which helped reduce unemployment and support increased domestic spending. In the U.S., some of the infrastructure monies were distributed in 2009 to the states for roads and bridge repair/construction. Much of this money, however, will not be spent until 2010/2011, as the bureaucracy for starting many projects simply could not be overcome or the projects started fast enough. And, the U.S. must overcome the high unemployment problem before the economy can truly get back on its feet.

Spending for new technology has been much ballyhooed by both countries, but particularly in the U.S. Renewable energy, both solar and wind, has been hyped, but most of the spending seems to be for research, not actual projects. Electric, hybrid, and fuel cell technology for automobiles has also been talked up, but again, the spending seems to be more for research. It does not appear in the short-run that these technologies will drive interconnect sales in the next two years. China’s programs have not been detailed to any great extent, but they have proclaimed that they would like to become the leader in electric car production. They are also in the investigative stages of building the largest solar collection field in the world in the Gobi desert. China is already investing heavily in wind power, and is predicted to be generating 30,000 megawatts by the end of 2010. Both these programs will require that they greatly expand their electrical grid.

Of the two countries, it appears that China’s programs will have more impact on the sales of interconnect products over the next two years. They have greatly stimulated their internal demand for all types of electrical and electronic products. As the various world economies start coming out of recession, they are also well positioned to supply products to these markets. The big question for China will be their ability to sustain the internal growth. Hopefully, they have not created an economic bubble, particularly with the large amount of money they have pumped into the credit market. That may be the positive side of the U.S. program. Although it is not pumping up the economy as much in the short-run, it may have better long-term sustainability.

Bishop & Associates is forecasting that the electronic connector market will be down 25 percent for 2009. This number would undoubtedly be larger if not for the actions of China and the United States to stimulate their economies and dampen the downturn of the recession.

David Pheteplace
Bishop & Associates Inc., Market Segment Director - Cable Assemblies
David Pheteplace joined Bishop & Associates in 2008 as its market segment director for cable assemblies. Pheteplace, a management consultant for the electronic and interconnect industry, specializes in operational and strategic analysis, problem solving, and solution implementation. He has more than 20 years of experience in the connector industry, including managing divisions for Amphenol, Cinch, and Robinson Nugent. Pheteplace can be reached at www.pheteplace.com.