Is a Major Correction Looming for the IC Industry?

The semiconductor industry is currently safe from a major recession. Advanced Forecasting has maintained this position for quite some time. Its opinion is based on the analysis of several of its quantitative forecasting models with horizons ranging from coincidental to 19 months out.

One of these models, the “IC Recovery Index,” is a coincidental indicator designed to confirm the time period at which the IC industry enters a recession, reaches the lowest point of a recession, and returns to a normal rate of growth. The purpose of the index is to help industry decision makers shorten the time it takes to realize a change in direction has taken place and modify their market strategies accordingly. A delay in recognizing the shift in direction can be detrimental to any firm.

Each monthly data point of the IC Recovery Index line is published without affecting data points that were published in preceding months. A data point is calculated based on previous monthly measurements of a set of economic factors that will impact the underlying demand for chips. Industry data or opinions are never used as an input to the model, as their use can greatly distort its predictability.

The IC Recovery Index announces: when the chip industry enters a major recession (the index drops below zero), reaches its minimum, and returns to normalcy (the index surpasses zero). In the past 20 years, it captured all turning points of actual IC WW revenues during recessions.

The charts depict the correlation between the IC Recovery Index and actual shipments of ICs worldwide in dollars. The IC Recovery Index's turning points coincide with actual IC shipment revenues only during recessions. The values of the IC Recovery Index (left-hand scale) utilize a scale assessing the relative severity of a recession. For example, the minimum point of the 2001 recession is lower than the 1985 recession, indicating the latter was not as severe as the more recent one. Note that the IC Recovery Index is not designed to identify IC sales' peaks. Therefore, the IC Recovery Index data points above zero, which represent a healthy industry, are truncated.

The IC Recovery Index has hovered above the zero line for nearly two years, indicating that the industry has been in a strong position and that the occurrence of a recession is highly unlikely in the near-term. While the data points above the zero line are not shown, they are visible to us, and we alert its users at times when the index is on the decline and approaching the “alert” point. This provides users with advance warning that the industry is entering a period in which strategies need to be modified. Currently, the IC Recovery Index is sufficiently above the zero line, proclaiming that another 2001 is not right around the corner for the IC industry.

The value of a coincidental indicator is derived from the process decision makers employ for forecasting. Academic research has proven that when tasked with predicting the future, most individuals have the tendency to place most of the weight on what happened in the most recent period. This is basically an extrapolative mechanism that is only accurate if the next period behaves in a similar fashion to that of the previous one. The mechanism is inaccurate and misleading when the predicted period changes direction. As a change in the industry's direction puts tremendous strain on a company's bottom line, it is critical to confirm to industry players that a change is in progress since they, their clients, and their vendors tend to extrapolate the past and deny the change. As an example, during 3Q00, most forecasters were promising between four and eight additional quarters of continued growth, while the 2001 recession had actually begun in October 2000.