Stage set for strong recovery - Wall Street Q1 Preview

Electronic News, April 1, 2002 by Bill McClean

What a difference a year makes in the IC industry.

The headline we wrote a year ago read, "Cycle 6 Downturn Hits Hard." With most of the first quarter of 2002 already completed, almost all of the news encountered thus far concerning the global economic environment is landing on the positive side of our range of expectations. We believe strengthening global economic conditions are now setting the stage for a strong IC industry recovery in the second half of 2002.

The United States is still the engine that drives the global economy. Overall, the U.S. economy is rebounding strongly from its negative GDP growth in the third quarter of 2001. In fact, recently released GDP figures put U.S. growth at 1.4 percent in the fourth quarter of 2001. This means that the U.S. economy did not meet the commonly accepted definition of a recession, two successive quarters of negative GDP, in 2001.

Additional positive U.S. economic news in the first quarter of 2002 includes the February unemployment rate dropping to 5.5 percent, the Institute For Supply Management's (formerly NAPM) U.S. purchasing managers index rising to 54.7 percent in February, the U.S. printed circuit board book-to-bill ratio hitting 1.01 in January and a U.S. economic stimulus bill, worth about $40 billion, enacted in March.

On a cautionary note, it's possible that the U.S. economy may receive an inventory replenishment surge of activity in early 2002, only to encounter a consumer spending retrenchment setback in the spring. This double-dip effect occurred in four out of the last five U.S. recessions. However, even if a double-dip occurs this time, economic recovery is expected to resume in earnest sometime in the second half of 2002 and drive late third-quarter and fourth-quarter IC market growth.

Given the strong start in the U.S. economy this year, IC Insights is raising its U.S. GDP forecast for 2002 to 2.6 percent. Because the United States is still the engine for global growth, other regions of the world, specifically non-Japan Asia, are likely to benefit from a stronger U.S. economic picture. Overall, IC Insights now expects worldwide GDP to grow 2.5 percent in 2002, up from our previous forecast of 2.1 percent--with any future revisions likely to be on the upside.

In March, many large IC companies preannounced slightly negative to flat first quarter of 2002 sequential sales expectations. Overall, the totals expected for the first-quarter results were in line with IC Insights' estimate for a 2 percent sequential decline in the worldwide IC market.

IC Insights assumes that February's worldwide IC market was comparable to January's level, about $8 billion. Even with the typical 20 percent to 25 percent March/February IC market increase caused by March being a five-week accounting month compared to a four-week February, the worldwide IC market is on a path to register about $25.8 billion in sales in the first quarter, compared to $26.4 billion in the fourth quarter of 2001.

The year-over-year January 2002/January 2001 IC market comparison showed a 29 percent decline. However, IC Insights believes that it is more revealing to compare January 2002 with the first month of the previous quarter, October 2001. The shallow 4 percent January 2002/October 2001 IC market decline illustrates the bottoming of the current IC industry cycle. With electronic system sales typically much stronger in the second half of a given year as compared to the first half, it appears that the first quarter of 2002 IC market results are reflecting this seasonal weakness pattern.

It is interesting to note how uneven the early stages of this IC industry recovery have been. Five IC product categories registered double-digit declines in dollar volume when comparing January 2002 to October 2001, while two IC product categories (PLDs and DRAMs) increased greater than 60 percent. Although January 2002 PLD and DRAM sales rebounded strongly from the abysmal levels of October 2001, the January 2002/January 2001 comparisons are still very poor (23 percent for DRAMs and 62 percent for PLDs).

IC Insights continues to stress the importance of changes in IC average selling prices (ASPs) in determining the overall health of the IC industry. With IC ASPs increasing 6 percent in January 2002 as compared with October 2001, led by a surge in MPU and DRAM ASPs, we believe that a foundation is being established for a significant IC market upturn in the second half of the year.

1999-2002 GDP Trends

Region

             99   00    01    02 (*)

U.S.        4.2  4.1   1.2   2.6
Europe      2.2  3.2   1.6   1.2
Japan       0.8  1.7  -0.5  -1.3
China       7.1  8.1   7.4   7.2
S.Korea    10.9  8.8   2.5   3.5
Singapore   1.0  9.9  -2.5   2.0
Taiwan      5.5  6.4  -2.0   1.5
Worldwide   3.4  4.5   1.9   2.5

(*)Forecast

SOURCE: IC INSIGHTS

Note: Table made from bar graph

Bill McClean is president of the research company IC Insights, based in Scottsdale, Ariz.