Making sense of GDP for semi industry projections

The surge in demand for consumer electronics has led to tracking broader economic trends such as consumer spending as one more factor influencing semiconductor demand, and thus industry growth projections. But analysts are split as to whether the industry should adopt such a broad-based economic benchmark as a leading indicator.

“Continuing to use the GDP as a predictive tool for the semiconductor industry today may greatly mislead decision-makers,” according to Rosa Luis, director of marketing and sales for Saratoga, CA-based firm Advanced Forecasting. In a statement, she noted that the GDP’s historical year-on-year quarterly growth rate lined up well with IC revenues from the period of 2000-2004, but the two metrics were not closely associated in the decade before that, and have not been linked since 2005 to the present. Further, the 2001 “dot-com” recession hit many US industries particularly hard, not just the IC industry — metal fabrication, construction materials, and automobiles all experienced increasing growth rates leading to a peak in 2000, followed by a severe decline. Those other industries similarly lined up with the US GDP during 2000-2004, with correlations varying from “non-existent to strong” in the other periods. (Click here for graphical comparisons of US GDP vs. IC and other industries.

“The fact that IC revenues matched GDP (with a lag of three months) wasn’t unique to the semiconductor industry, and like in other industries, this phenomenon vanished afterward,” noted the firm, in a statement. “Therefore, continued use of the GDP as a predictive tool for the IC industry based on the strong correlation during that period is risky.”

At least one analyst disagrees, noting that a more appropriate metric is actually worldwide GDP, not just for the US, and it’s certainly not the only predictive tool in the belt of industry analysts. “Global economic health certainly plays a hand in shaping growth in the semiconductor industry,” Rob Lineback, analyst with IC Insights, told WaferNews, noting that overall economic conditions also impact other industries, but that shouldn’t discount the influence of GDP growth on IC demand. “Other industries use semiconductors, and if they suffer a downturn, so do companies in the IC supply chain,” he said.

In the firm’s mid-year 2006 conference call, Bill McClean, president of IC Insights, pointed to a clear correlation between a booming worldwide economy and semiconductor boom years [see chart below]. Four out of the past five peak years for semiconductor sales (1984, 1988, 1995, and 2004) occurred when the worldwide economy grew 4.5% or better, he noted. Meanwhile, two of the four years of declining semiconductor sales also occurred during global recessions (1998, 2001). The other two years (1985, 1996) were due to “a tremendous amount of overcapacity after overspending,” he said.

Worldwide GDP is “more of a ‘coincident’ indicator,” part of an overall set of assumptions as a semiconductor forecasting tool along with the usual suspects — capital spending, IC average selling price trends, unit volume shipments, capacity utilization, number of good die per wafer, etc, said McClean. Other factors to be considered include where the industry is in terms of a technology/feature-size transition, or if there’s a hot new product making a splash in the marketplace (e.g., MP3 player or PC cycle upgrade).

“There is no magic formula, no magic leading indicator, but we expect and believe that GDP growth on a worldwide basis gives us another key assumption in our forecasting methodology,” McClean told IC Insights’ clients in the conference call.


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