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Check In On Semiconductors for 2017 Growth

If you want a grasp on how the global economy is doing, look at semiconductors.

Semiconductor companies are proxies for all factory production. These companies crank out billions of parts each year (from nearly all things electronic). Semiconductors sit early in the production cycle, which gives them a strong leading view.

This makes semiconductor companies leading indicators. Today’s semi demand is tomorrow’s capital goods demand.  

Monitoring data from this industry will give you a better picture of what’s to come.

We should first look at the trends of the second half (2H) of 2016 before we extrapolate what’s to come in 2017.

The iPhone Effect

A new iPhone release generates a lot of activity and it makes business conditions look

better than they really are.

Apple (NYSE: AAPL) sold $28 billion worth of iPhone’s in its 2016 fiscal fourth quarter ending this past September. It expects a much bigger surge for its first fiscal quarter of 2017 (holiday season).

To see how Apple’s iPhone’s affect the global economy, look at Taiwan’s exports.  

Over half of Taiwan’s exports are semiconductors and cell phones. Every smartphone and tablet in the world uses Taiwan’s semiconductors.

Notice how their exports surge in advance of every major iPhone release – only to come down sharply afterwards. 

That’s the iPhone effect at work. And in China, Taiwan and South Korea, it matters. So a lot of macroeconomic measurements coming out of Asia tend to jump during these periods only to fall back to earth: notice that Taiwan’s export orders are already crashing back to 0% year-over-year.  

KEY POINT: a lot of activity that is happening post US presidential election seems to point to strength heading into 2017.  It doesn’t.

The key metric to watch moving forward is Japanese Silicon Wafer production.   

Silicon wafers are the building blocks of semiconductors.  

And Japan makes most of the world’s silicon wafers.  (Also, the Japanese wafer data is more current than the global figures released by SEMI.)

From wafers to end product is a 3~4 month cycle.  So if iPhones need to be in the stores in September, wafer production had to jump start in May.  

And that’s what we see in the Japanese wafer production data: demand went up during Summertime production and it’s already coming down. The iPhone wave is done and demand is reverting to mean.

Take note that semiconductor demand momentum is already slowing.

Based on Japanese wafer production, there was a near-term peak in demand that has already ended. It means that demand for stuff in the 1H will be better than last year but slightly below 2H 2016. If stock prices are extrapolating from the 2H demand, then they will be disappointed.

Adding in The Trump Effect Two key questions:  

  1. Did the Presidential election restrain spending?   
  2. And does the Trump Effect boost factory spending?   

Sentiment has shifted strongly positive in the U.S..  Survey after survey shows a more positive view of the future economy.

But businesses are discounting the positive sentiment.

You see, businesses want to see proof that positive consumer sentiment will turn into more spending.  (Answer: it hasn’t so far).

Pending home sales collapsed in December. Industrial production and all other hard data that reflects economic activity did too.

And they want to see Trump’s policies.  

The real impact in early 2017 is that companies may be less likely to fire people.

No CEO expects Trump’s policies to affect them directly in the 1H of 2017. It takes too long for tax cuts and other fiscal moves to get implemented

But these companies may benefit from the knock-on effects generated by a positive shift in consumer sentiment.

KEY TAKEAWAY: Semiconductor companies are leading indicators: Demand is growing but the degree is about to slow. Businesses are discounting the future… waiting to see actual results. Expectations may be running ahead of reality for 2017 growth.  

Sincerely,

 

Andrew Zatlin

Editor of Moneyball Economics

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