Goods Grief: Despite Nice Surprise on Orders, Tech Still Looks Horrid

The slump in tech orders casts a pall over the sector's future stream of earnings.
By Justin Lahart ,

The May

durable goods report showed a 2.9% rise in orders, and though the data are famously volatile, even severe pessimists must concede this is a welcome ray of light. Economists surveyed by

Reuters

had expected that orders would remain flat for the month, showing no rebound at all from April's 5% decline (revised down to 5.5% today).

Yet though orders numbers suggest that clouds are beginning to break, there was no sign that investors in the beleaguered tech sector should leave the umbrellas at home. Although new orders for computers and electronic products gained by 2.7%, all of that was due to a whopping 35.3% gain in semiconductor orders (a rebound from April's 40% decline). Separately, new orders for computers dropped by 3.1% -- the fifth monthly decline in a row -- and orders for communications equipment fell by 11.5%. Meantime, tech's inventory-to-shipments ratio swelled to its highest level since August 1998, a sign that demand continues to slow more quickly than companies are cutting production.

"You sort of get the feeling that nothing is going on, that we have dropped dead in the IT sector," says

Salomon Smith Barney

senior economist Steven Wieting of the orders report.

Trouble in Techland
Shipments and New Orders for Tech Goods

Source: Census Bureau

The slump in orders casts a pall not just on today's tech environment, but on tech's future stream of earnings. Tech shipments didn't begin to decline until January of this year even though orders for tech goods had begun to decline a half-year earlier. There should not be as much of a lead time between a rebound in new tech orders (whenever it may come) and shipments -- these guys are obviously a lot less busy these days and should be able to fulfill orders more quickly -- but there will be some kind of lag. And until shipments begin to pick up, the prospects for earnings recovery will remain bleak.

After the latest round of warnings, investors have likely come to terms with the idea that tech companies' second quarter will be dismal. Today's economic data make it look as though the third quarter will be no better.

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