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Electronics Production | September 30, 2008

Part 1: IC Insights lowers 2008 IC market forecast by 3 points

The market researcher IC Insight has lowered their IC market forecast - in their September Update of the McClean Report - by 3 points. Part 1 of 4.
Economic Trends
As was mentioned in the August update, 2Q/08 GDP results in the euro-zone (-0.2%) and Japan (-0.6%) were negative. In contrast, U.S. GDP growth in 2Q/08 was revised upward to 3.3% from initial reports of 1.9% growth. However, as the $160 billion U.S. economic stimulus boost continues to wear off in the second half of the year, 3Q08 GDP growth in the U.S. is forecast to slow to only 1.0% with an increasing possibility of negative GDP growth in 4Q/08 and 1Q/09 (which would technically put the U.S. into a recession).



As shown above, China’s GDP growth rate slowed only slightly in 2Q/08 from 1Q/08 and was still above 10%. Because of surging inflation over the past couple of years, the Chinese government has been attempting to slow its double-digit GDP growth to less than 10%. However, over the past few months, inflation has moderated in China and with its exports already showing the negative effects of a slowing worldwide economy, the Chinese government, in mid-September, reduced its interest rates for the first time in six years! With a “hard” economic landing for the Chinese economy being loosely defined as 8% or less GDP growth, it appears that the Chinese government, with its reduction of interest rates, is trying to make sure economic growth does not fall too much over the next few quarters.

On September 15, the U.S. stock markets had their biggest one-day percentage decline since September 14, 2001, when the U.S. stock markets first opened after the terrorist attacks of September 11, 2001. While the volatility in the U.S. stock markets (the Dow Jones Industrial average declined by over 500 points on September 15, 2008) may be a precursor to a significant slowdown or recession in the U.S. economy, historically, the annual change in the Dow Jones industrial average has not had a very good correlation with worldwide semiconductor market growth.



It is interesting to note that even after the big drop in the U.S. stock markets on September 15, 2008, hurricane Ike hitting the Houston, Texas, area hard on September 13 and 14, and OPEC’s decision to cut back oil production, the price per barrel of oil dropped to $95 on September 15. At this level, the price per barrel was down over 35% from its record high of $147 per barrel set in mid-July. Of course, the lower the price per barrel of oil, the better chances for a stronger worldwide economy heading into 2009.

Another positive sign is the relatively healthy U.S. ISM PMI (Purchasing Managers Index) figure. This index was described in detail in the Mid-Year Update and is a good gauge of manufacturing strength in the U.S. With “50” being the dividing line between expansion and contraction of this sector, the figures through August indicate a flat manufacturing environment. While the current levels are certainly not exciting, past U.S. recessions have witnessed this number dropping all the way down into the high-30s to low-40s. Thus, at this point, we should probably be thankful for figures near 50.



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NOTE: As of September 25, 2008, the proposed massive $700 billion U.S. economic bailout package had not been passed. IC Insights assumes that this bill will pass in some form and that a collapse of the U.S. financial system will not occur. Moreover, assuming a large bailout package is enacted, IC Insights believes that it will help set the stage for a noticeable recovery in the U.S. economy in the second half of 2009, which in turn supports our forecast for 8% growth in the worldwide IC market next year.

Chart Source: IC Insight

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