Semiconductor sales increase?

Semiconductor sales were steady in May, remaining at the $18.3B seasonally adjusted monthly level where they have been since November. Much higher average prices for processors, caused by a higher share of laptop processors in the sales mix, failed to keep the average IC price from declining 2 cents, but the price drop was offset by slightly higher unit volume.

Source: Semiconductor Industry Association Forecast: Reed Research Group

The absorption of surplus circuits continues to offset expansion of end-product demand for semiconductors. While inventory cutting has ebbed since the beginning of the year, chip demand growth has also slowed as world economic growth slowed from an above average to an average pace. This small slowdown caused a more rapid slowing in demand in Europe and Asia for consumer durables and capital goods, the dominant semiconductor product end markets.

May reports on economic demand in key electronics consuming countries are mixed, but the balance is positive because the good news is in the larger economies. Spending in the United States is improving again after a mild slowing earlier this year. Spending in China also appears to be improving, but that data is harder to interpret. European spending has stopped slowing, but it is not clear that it is improving yet. Spending remains stalled in Japan after a burst of growth early in the year. The smaller Korean and Taiwanese economies remain stuck at a sub-par growth rate, but there are no signs suggesting further slowing.

The acceleration in spending has not yet boosted factory output, except in the United States. May factory production increased 0.5% in the United States, stayed at a 16% annual growth pace in China, but declined elsewhere in Asia and Europe. Further spending increases in the United States and China, together with the shrinking inventory surplus, will require added factory output in the rest of the world by the end of summer.

In the United States, the added spending will come from a revival in the auto and aircraft markets and more consumers at the malls because of higher consumer confidence. Deep discounts for new cars in June and July will boost vehicle sales, and quickly production, about 10%. Aircraft orders more than doubled in May; production schedules will be raised soon. Consumer confidence hit a 38-month high in June. While well below the late 1990s, the recent increase will revive recently lagging durable goods sales.

The improving economic climate will spur an increase in semiconductor sales by the end of summer, bringing total 2005 sales to 6.5% above last year, even though June and July sales may dip slightly with depressed DRAM prices. A further 8.8% sales gain is expected in 2006. This is based on further slowing in world economic growth, but beginning the year with balanced semiconductor inventories.