Information Technology

Industrial production rose to a new cyclical high during June. However, it is still 3.3% below its record high at the end of 2007. Manufacturing output rose 0.7% in June, reversing May’s 0.7% drop, but it seems to have stalled since February. The stall is attributable to consumer goods production, which remains 8% below its record high during February 2007. Output of business equipment rose back to its previous record high during June led by both Information Technology and Industrial goods.

Within the IT industry, the recovery since 2009 was led by Semiconductor & Other Electronic Components, though this output has been relatively flat at a record high for the past two years. Computer & Peripheral Equipment output actually fell in June to the lowest level this year, and is 42% below its record high during May 2008. Communications Equipment output has been moving sideways in a very volatile fashion since 2000.

There is a strong correlation between the forward earnings of the S&P 500 Information Technology industry and the production index for high tech. The former has been rising into record territory since February 2010, led by the Computer Hardware and Systems Software industries.

The earnings and market capitalization shares of the S&P 500 Information Technology sector are both back above 20%, the highest in over a decade. So why did the forward P/E of the sector drop during June to the lowest relative valuation since early 1996? The multiple was 11.2 in June, at a 5% discount to the market.

After the IT bubble burst at the beginning of the previous decade, investors have been willing to pay less and less for growth in general. While IT industries remain among the fastest growing ones in the world, they also face lots of competition and disruptive new technologies such as the iPad and the Cloud. Creative destruction is the norm among IT industries.

Today's Morning Briefing: Ben Is Gloomy. (1) QE3 delayed? (2) Worse than CBO’s scenario. (3) Ben challenges Congress. (4) No more promises. (5) Lame options. (6) Chuck tells Ben to get to work. (7) Manufacturing’s recovery losing steam. (8) IT is cheap, but has some issues. (9) A European cure for back aches. (10) Germexit? (11) Germany wants Europe to be more like Germany. (12) French frying business. (13) Spain’s great perks. (More for subscribers.)