Semiconductor End Markets Still Expanding Strongly in 2005

We are beginning the second year of strong expansion in the key semiconductor end markets. Last year, growth quickened in most end markets over the year, even with the mid-year slump in sales that created a small accumulation of semiconductor inventories throughout the supply chain. Expect the reverse pattern beginning a few months into this year. Most end markets will be growing more slowly at the end of 2005 than earlier in the year. This will be most pronounced in North America and China; elsewhere, the currently much lower market growth could rise slightly, but not enough to offset the slowing in the two largest markets.
 
Market forecasts for 2005 are more difficult to make than in 2004, and should be treated accordingly. That's because a small timing error in forecasting when growth stops accelerating in any market and begins to slow can cause a significant error in the average annual growth rate. The forecasts in the Figure are for the United States only for lack of compatible and timely data. Generally, growth rates will be markedly lower in Europe, but higher in Asia.

Source: U.S. Census Bureau Forecast: Reed Research Group

The computer market will expand at a 9%+ pace again this year, but the product mix will continue shifting from home to office models. There will be no consumer tax cuts in 2005. Corporate replacement and expansion investment is booming in the mature end of the business cycle. Unit growth will be ~5% higher than dollar sales growth.

The telecom market is always later in the business cycle. Also, it was slow to recover in 2003-04 because of the lingering financial woes of many large network operators. The product mix will continue changing from wired to wireless, although wired networks have been raising their investments since mid-2004. The rollout of 3G cellular services in Europe and Asia also contributes to the forecasted rise in annual growth.

Instruments are at the tail end of the business cycle, so the double-digit growth last year was unusual. It was caused by non-cyclical spikes in spending for defense search and navigation systems and for civilian aviation systems in Asia.

Aerospace sales in 2004 were boosted by a 15% jump in defense orders and the rapid expansion of passenger and cargo air service in Asia. Air travel is extremely income elastic, so the demand for aircrafts is soaring in China and other fast-growth Asian countries. This year, defense orders and Asian exports will not be as significant.