The Semiconductor Window Into the Economy
Semiconductors are the universal common denominator of the 21st-century economy. Once upon a time, these parts were mostly found in only a few things: computers, calculators, and consumer electronics. Today, semiconductors are in everything from balloons that sing Happy Birthday to pets that are microchipped. The ubiquity of semiconductors is breathtaking.
Semiconductors are also the lifeblood of the modern economy. By the time the dot-com bubble burst in 2001, semiconductors had successfully penetrated the manufacturing supply chain. If a semiconductor isn’t in it, it is in the machine that made it. The shift from coincident to leading indicator is evident in the chart of GDP and Semiconductor Billings below.
Indeed, the only significant divergence is the emergence of the Bakken oil boom in 2011-2012, which boosted GDP significantly without affecting the semiconductor uptake.
The Advantages of the Semiconductor Economic Signals
- Leading: Semiconductors are an early component of the manufacturing cycle.
- The line of sight to end-user demand: Technology obsoletes quickly, and semiconductors have a short shelf life. Unique features and functionality necessitate application-specific semiconductors. It all leads to strong build-to-order characteristics and tight inventory controls, which translates into strong visibility to end-user demand.
- Fixed production cycle: The silicon production cycle is fairly set, boosting signal reliability and timing.
- Large scale production: A new Apple (Nasdaq: AAPL) iPhone release means 100 million units available in less than 90 days. Ensuring parts availability means significant planning, as much as six months advance orders.
- Oligopolistic: Highly consolidated production reinforces visibility to end-user demand and consumption.
Taken together, semiconductor market today is economic need tomorrow. Or, typically four months from now. In fact, the tight semiconductor production cycle, coupled with the upstream position in the overall manufacturing life cycle, gives semiconductors at least a one-quarter lead.
Silicon Wafers and GDP
Semiconductors are prone to boom-bust cycles where prices either soar or crash.
That adds noise to the GDP/semiconductor billings connection.
An alternative is to measure unit demand. If more cars are being sold, more iron is being purchased. Silicon wafers are the equivalent of iron in the semiconductor production cycle with a distinct advantage: unlike iron, semiconductors have a much broader product reach. It will tell us more. If more stuff is getting made, more silicon is demanded, and vice-versa.
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In looking at silicon wafer shipments, we see the GDP economic correlation again (note the distortion of the Bakken oil boom again).
Actual wafer contraction was worse than it appears. Remember that semiconductor penetration is increasing. For example, autos are incorporating more sensors and more electronic systems. So for unit sales to be dropping in the face of expanding penetration, it points to reduced unit sales of end products.
The tide could be turning less negative.
Actual wafer contraction was worse than it appears. Remember that semiconductor penetration is increasing. For example, autos are incorporating more sensors and more electronic systems. Organic growth is expected. So for unit sales to be dropping in the face of expanding penetration, it points to reduced unit sales of end products. Less stuff is being made, so less silicon is being required. Because it is a leading signal, it means producers are planning on selling less stuff in the 1H 2016.
Forecasting GDP Using Silicon Wafers
Using Wafers as a window into GDP, here are some scenarios to consider:
- The best case scenario is for 0.5% GDP quarter over quarter growth.
- A more likely scenario is close to 0%.