A Slower Global Economy with a Recession Watch in 2019 Implications for the Semiconductor Outlook Surface Preparation and Cleaning Conference (SPCC) April 3, 2019 Chief Economist, Hilltop Economics, LLC duncan.meldrum@hilltopeconomics.com 610-709-7951 *A global outlook based on Consensus Economics, Inc. CONSENSUS FORECASTS SPCC April 3, 2019 1
Outline Forecast with key themes: Slower growth forecast from the Consensus Higher uncertainty Rising risk of recession Recession Risk Dashboard Semiconductors: Near term risk Long term strength SPCC April 3, 2019 2
SPCC 2019 Forecast Summary Overview: 2019-2020 Now in the mature phase of the business cycle with decelerating growth and a rising risk of recession Healthy but more cautious consumer Investment moderating despite need Low inflation, diverging interest rates, currency unsettled Higher economic policy uncertainty: Domestic fiscal and monetary policy (China, US, EU, Japan) Trade Geopolitics Less-healthy backdrop for semiconductor industry SPCC April 3, 2019 3
% Change MARCH 2019 Consensus: Growth Weakens to Trend in 2019-20 World* Real GDP Growth 2018: 3.0% 2019: 2.7% 2020: 2.7% 5 4 Consensus has lowered 2019 outlook by almost 0.5% since last year s SPCC 3 2 1 0-1 -2 *World: 85 major economies, Data: World Bank, Hilltop Economics, Consensus Forecasts, Mar19 07 08 09 10 11 12 13 14 15 16 17 18 19 20 SPCC April 3, 2019 4
~60% of GDP Global Consumer Healthy Unemployment rates are low below equilibrium Wages are stable to rising Inflation is low at or below policy maker targets Oil prices are not a big problem Consumer debt is under control Confidence has slipped off the peaks of 2018 SPCC April 3, 2019 5
Percent Change ~60% of GDP World* Real Consumption 6 5 4 2018 +2.8% 2019 +2.6% 2020 +2.5% 3 2 1 0-1 -2 97-07: 2.9% TLGR World: 45 Key Countries; Src: World Bank, National Sources, Hilltop Economics, Consensus Forecasts March 2019 07 08 09 10 11 12 13 14 15 16 17 18 19 20 SPCC April 3, 2019 6
~25% of GDP Investment Should Be Growing at this Point: Needed to Drive Cycle Higher The largest developed economies are growing ABOVE their potential rate of growth (i.e. above capacity) Investment typically grows more rapidly when potential is reached Revenue growth OK Real GDP growth (volume) now at 2.7% Some inflation (price) on average from ~1% - 2% Revenue now ~4 ½ % Interest rates generally remain low Modest cost pressures in most regions Profitability still positive SPCC April 3, 2019 7
Percent Change ~25% of GDP World* Real Investment 8 6 4 Mar 19 2018 +4.1% 2019 +3.0% 2020 +3.2% 2 0-2 -4-6 92-07: 3.7% TLGR World: 45 Key Countries Src Hist: World Bank, National Sources, Fcst: Hilltop Economics, Consensus Forecasts Mar 19 07 08 09 10 11 12 13 14 15 16 17 18 19 20 SPCC April 3, 2019 8
Investment Should Be Growing at this Point: But Forecast to SLOW What s the Problem? Risk aversion is the problem again Economic policy uncertainty volatile and high on a global level Trade wars (shifting international institutional arrangement) US (post-stimulus fiscal policy, post-govt shutdown, monetary policy, immigration) Europe (Brexit, Italy, France, EU-wide e.g. immigration) China stimulus impact, international situations Japan tax increases Geopolitical concerns Forecasts on a downward trajectory Interest rates reflecting the uncertainty SPCC April 3, 2019 9
Recession Watch Dashboard: Cautious (Yellow) Output momentum (Real GDP, Investment, Ind. Production) Employment momentum (Unemployment rates) Consumer confidence measures (US & majors) Equities (recovered & but still a bit volatile) Profits & Small Business Earnings (strong, but off peak) Oil Prices & Inflation (pressure eased) Global Economic Policy Uncertainty (Very high) World Consensus Forecast (weaker each month since April) U.S. Yield Curve (close to inverting) Interest Differentials (US vs EU rising) Recession watch: leading indicators that may help identify turning points that precede a downturn in the next 18 to 24 months Business of Cleans April 1, 2019 10
Index, 1997-2015 Mean=100.0 Uncertainty Peaked at Crisis Levels in January 2019 Global Economic Policy Uncertainty 350 Financial Crisis > 300 250 200 150 100 50 0 Source: Scott Baker, Nicholas Bloom and Stev en J. Dav is at w w w.policyuncertainty.com. March 2019 estimated by Hilltop Economics LLC 98 00 02 04 06 08 10 12 14 16 18 Uncertainty over future economic policy skyrocketed back to levels high enough- in the grey zone on the graph- to dampen investment by the middle of 2018. SPCC April 3, 2019 11
<- Low Uncertainty High-> Index Index Index Uncertainty UP Everywhere (Even U.S.) Econom ic Policy Uncertainty: U.S. & Europe Econom ic Policy Uncertainty: Japan 400 Financial Crisis > US Europe 300 250 Financial Crisis > 300 200 200 150 100 100 50 0 Source: Scott Baker, Nicholas Bloom and Steven J. Davis at www.policyuncertainty.com. Through Mar 19 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 0 Source: Scott Baker, Nicholas Bloom and Steven J. Davis at www.policyuncertainty.com. Through Mar 19 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 UK Economic Policy Uncertainty Econom ic Policy Uncertainty: China 1,200 1,000 1,000 Source: Scott Baker, Nicholas Bloom and Steven J. Davis at www.policyuncertainty.com. Through Mar 19 800 Source: Scott Baker, Nicholas Bloom and Steven J. Davis at www.policyuncertainty.com. Through Mar 19 800 600 600 400 200 400 200 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 SPCC April 3, 2019 12 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Percent Change for the Full Year Global Real GDP Forecasts for 2019 Lowered Eleven Months in a Row 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2018 2019 2020 Month-by-month Real GDP Forecasts From March 2018 to March 2019 SPCC April 3, 2019 13
Percent Yield Curve on Verge of Signaling Recession Uncertainty & fear of recession driving U.S. longer-term rates lower; Consensus (the arrows) too optimistic as of the end of March 6 5 Fed Funds Rate (Policy) 3 Month T-Bill 10 Year T-Bond 4 3 2 1 0-1 Shaded area indicates recession 2004 2006 2008 2010 2012 2014 2016 2018 2020 SPCC April 3, 2019 14
Percent U.S. Yield Curve Foreshadows Recession Seven (eight?) inversions, seven recessions in the past 50 years 4 3 2 1 0-1 -2 YIELD CURVE DAILY: 10 YR Minus 1 YR Treasuries -3-4 Shaded areas indicate recessions 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 SPCC April 3, 2019 15
Percent Different International Interest Rate Trends A risk to financial flows, currencies, and a contributor to uncertainty 7 6 5 4 3 Month LIBOR - US$ 3 Month LIBOR - Euro 3 Month LIBOR - Japanese Yen 3 2 1 0-1 00 02 04 06 08 10 12 14 16 18 20 SPCC April 3, 2019 16
Summary of Semiconductor Driving Forces in 2019 Demand drivers from the economic outlook weakening Slower investment growth weakens growth in: Servers PCs Industrial applications Moderating consumer growth dampens growth in: Mobile phones PCs Autos Evidence of inventory builds Falling prices for key products & recently expanded capacity Evidence of slowing trade, declining revenue RESULT: Moderate decline in MSI in 2019 LONG-RUN STAYS VERY HEALTHY: AI/5G/ML and continued expansion of the digitalization of the economy SPCC April 3, 2019 17
%CH VS YR AGO (Month and 12MMA) 2019 MSI Demand Outlook Retail Sales at US Electronics & Appliance Stores U.S. Consumer Spending on Tech Goods Weakening 12 8 4 0-4 -8-12 @PCY(@MOVAV(RSEAS(5),12)) @PCY(RSEAS) Src: Census Bureau, through Feb 2019 Shaded areas official recessions -16 96 98 00 02 04 06 08 10 12 14 16 18 20 SPCC April 3, 2019 18
Million Units 2019 MSI Demand Outlook Stable PC Outlook, Minimal Growth Estimated Global PC Sales 100 90 Annual Percent Change 2016 2017 2018 2019 2020-7.0% -2.1% -1.0% 0.8% 0.8% 80 70 60 Estimated PC Units Forecast April 18 50 Source: Hilltop Economics Shaded area indicates main period of tablet penetration 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 SPCC April 3, 2019 19
Millions Per Quarter 2019 MSI Demand Outlook Global Smartphones Grow Slowly 500 400 Gartner IDC 300 200 Outlook stabilizing around 3% - 4% average annual growth 100 0 10 11 12 13 14 15 16 17 18 19 20 SPCC April 3, 2019 20
%CH VS YR AGO %CH VS YR AGO 15 10 Investm ent (Left Scale) Server Units (Right Scale) MSI Demand Outlook Servers Likely heading to low single-digit unit growth temporarily with the slipping in investment growth 5G, AI, ML will sustain growth after 2020 30 20 5 10 0 0-5 -10-10 -20-15 Server Units: Gartner Press Releases Shaded areas U.S. recessions 00 02 04 06 08 10 12 14 16 18 20-30 SPCC April 3, 2019 21
Inventory:Shipments Ratio (Months) Months Inventory Per Shipment (MSI) 2019 MSI Demand Outlook Hints of Inventory Building (Upstream and Downstream) 3.2 US Computers & Peripheral Devices 150 Information and Communications Electronics Equipment Inventory-Shipments Ratio (Indexed) 2.8 2.4 2.0 1.6 140 130 120 110 100 1.2 0.8 0.4 History: US Census Bureau Shaded areas U.S. recessions 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 90 Src: METI Feb 2019 prelim report (March 29, 2019) 80 IV I II III IV I II III IV I II III IV I 2017 2018 2019 2020 Japan (METI) Wafer Data Inventories Divided by Shipments.8.7.6.5.4.3 Src: METI, Hilltop Economics, LLC through December 2018.2 SPCC April 3, 2019 22 09 10 11 12 13 14 15 16 17 18 19
Million Square Inches Shipped $MM (3MMA) Billion $ 2019 MSI Demand Outlook Lots of Semiconductor Measures Turning Down Semiconductor Equipment Billing North American & Japanese Manufacturers WSTS Revenue 5,000 48 4,000 NA Billings Japan Billing Combined Billings 44 40 WSTS 3MMA WSTS 3,000 2,000-32% from Peak to Most Recent 36 32 1,000 28 24-30% from Peak to Most Recent 0 Src: SEMI & Semiconductor Equipment Assoc Japan 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 20 2011 2012 2013 2014 2015 2016 2017 2018 2019 Wafers From Japanese Manufacturers 600 500 400 South Korea semi chip exports vs sample DRAM price 300 200 100 0 300mm 200mm 150mm 125mm SRC: METI 09 10 11 12 13 14 15 16 17 18 19 SPCC April 3, 2019 23
Short-term MSI Demand Outlook Weaker Final Demand Pulls MSI Down in 2019 Semiconductor MSI Outlook 3,400 3,200 March 2019 ESF Forecast SEMI MSI (History to 18Q4) Million Square Inches 3,000 2,800 2,600 2,400 2,200 2,000 1,800 History: Semi.org Forecasts: Hilltop Economics, LLC Annual Percent Change In MSI 2016 2017 2018 2019 2020 2.9% 10.0% 7.9% -1.5% 2.9% 11 12 13 14 15 16 17 18 19 20 SPCC April 3, 2019 24
Million Square Inches Semiconductors beyond the cycle BN 2010 US$ Semiconductors VS. World Real GDP 4,000 3,200 2,400 2,000 1,600 SEMI MSI World Real GDP 90,000 80,000 70,000 60,000 1,200 50,000 800 40,000 400 Shaded areas indicate U.S. recessions 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 30,000 SPCC April 3, 2019 25
MSI PER UNIT REAL GDP Semiconductors beyond the cycle Semiconductor Penetration of the Global Economy.20.18.16.14.12.10 A (too) simplistic forecasting tool: the slope equates MSI to ~2 X real GDP growth.08.06.04 QTR at annual rates, 12QMA Shaded areas US recessions Penetration: the number of semiconductors (MSI wafers) used to produce a unit of real GDP that is, GDP measured without inflation, a volume concept 1995 2000 2005 2010 2015 2020 SPCC April 3, 2019 26
MSI PER UNIT REAL GDP Semiconductors beyond the cycle Semiconductor Penetration of the Global Economy.20.18.16.14.12.10.08 AI / 5G / ADAS Keeps MSI at a long term trend that is ~1½ to 2 times real GDP growth.06.04 QTR at annual rates, 12QMA Shaded areas US recessions Penetration: the number of semiconductors (MSI wafers) used to produe a unit of real GDP that is, GDP measured without inflation, a volume concept 1995 2000 2005 2010 2015 2020 SPCC April 3, 2019 27
SPCC 2019 Forecast Summary: 2019-20 The world economy has moved into a decelerating phase of the business cycle. Consensus expects slightly below-trend growth in key final demand measures that drive semiconductors (investment, consumption). Recession risks rising (economic policy uncertainty). Semiconductors slide in 2019, but surge back to a healthy trend (1.5 to 2 times real GDP growth) once past the down cycle. Growth Rates: Annual % Change 2017 2018 2019 2020 World Real GDP 3.1 3.0 2.7 2.7 Investment 4.7 4.1 3.0 3.2 Consumption 3.1 2.8 2.6 2.5 SEMI MSI 10.0 7.9 (1.5) 2.9 SPCC April 3, 2019 28
Chief Economist Hilltop Economics, LLC duncan.meldrum@hilltopeconomics.com 610.709.7951 SPCC April 3, 2019 29
Percent of Labor Forece 12 11 10 Jobs Markets Support Consumption 9 8 EU Japan US - Headline Rate Unemployment Rates % Unemp. 2018 2019 2020 Japan 2.4 2.4 2.4 So. Korea 3.8 3.9 3.9 Taiwan 3.7 3.7 3.8 Germany 5.2 4.9 4.8 Eurozone 8.2 7.8 7.6 UK 4.1 4.1 4.2 US 3.9 3.7 3.7 7 6 5 4 3 2 Sources: US NBER Recession Shading, US BLS, OECD, "Main Economic Indicators - complete database", Main Economic Indicators (database), http://dx.doi.org/10.1787/data-00052-en Mar 26, 19 00 02 04 06 08 10 12 14 16 18 SPCC April 3, 2019 30
Consumer Confidence Indexes Are High But off the 2018 peaks, with the exception of China 110 100 USA (to March 2019) Peak 105 104 103 CHINA (to December 18) 90 102 101 80 100 70 99 98 60 50 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 97 96 95 OECD, "Main Economic Indicators - complete database", http://dx.doi.org/10.1787/data-00052-en (Accessed on 3/27/19) Copyright, 2016, OECD. Reprinted with permission. 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 102.0 102.0 101.5 101.0 EUROZONE GREAT BRITAIN 101.5 101.0 JAPAN (to February 2019) 100.5 100.5 100.0 100.0 99.5 99.5 99.0 99.0 98.5 98.5 98.0 98.0 97.5 97.0 OECD, "Main Economic Indicators - complete database", http://dx.doi.org/10.1787/data-00052-en (Accessed on 3/27/19) Copyright, 2016, OECD. Reprinted with permission. 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 97.5 97.0 OECD, "Main Economic Indicators - complete database", http://dx.doi.org/10.1787/data-00052-en (Accessed on 3/27/19) Copyright, 2016, OECD. Reprinted with permission. 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 SPCC April 3, 2019 31
CPI Inflation Weakens in 2019 Despite tightness in labor markets and closed output gaps CPI % Change 2016 2017 2018 2019 2020 China 2.0 1.6 2.1 2.1 2.1 Japan (0.1) 0.5 1.0 0.7 1.0 South Korea 1.0 1.9 1.5 1.3 1.6 Taiwan 1.4 0.6 1.4 0.8 1.1 Germany 0.5 1.8 1.8 1.5 1.6 France 0.2 1.0 1.9 1.3 1.5 Italy (0.1) 1.2 1.2 0.9 1.2 UK 0.7 2.7 2.6 2.2 2.2 US 1.3 2.1 2.4 1.8 2.2 Hilltop Economics, Based on Consensus Forecasts, March 19 2018 actual vs. forecast: China: -0.2, Germany: +0.1, US & Japan no error SPCC April 3, 2019 32
$/BBL - Brent Oil Price Oil Prices 140 120 100 80 60 40 20 0 Source: NBER - Recession dating, EIA, St Louis Federal Reserv e Economic Database Fcst: Hilltop Economics from Consensus Forecasts Mar 19 98 00 02 04 06 08 10 12 14 16 18 20 22 SPCC April 3, 2019 33
S&P 500 Index Equity Prices Well Above December Lows as of End- March, but Volatility Unsettling 3,200 2,800 2,400 2,000 3,000 2,900 2,800 2,700 2,600 2,500 2,400 2,300 II III IV I II III IV I II 2017 2018 2019 1,600 1,200 800 400 Shaded areas indicate recessions 98 00 02 04 06 08 10 12 14 16 18 34 SPCC April 3, 2019 34
Percent of GDP ("Margin") 13 12 Consensus: Profits Grow in Line with Revenue At Least Through 2020 Before Tax Profit (ZCPROFIT/GDP) After Tax Profit (ZCPAT/GDP) 11 10 9 8 7 6 5 4 Src: U.S. Bureau of Economic Analysis, Hilltop Economics forecast based on Consensus Mar 19 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 SPCC April 3, 2019 35
Currency Per US$, Indexed 2008M1=100.0 Dollar Strengthened, Trade War an Issue 160 150 140 130 120 110 100 90 80 70 CHN RMB JPN Yen KOR Won TWN NT$ Euro 08 09 10 11 12 13 14 15 16 17 18 19 20 SPCC April 3, 2019 36
Metrics Real GDP: Gross Domestic Product (final real or volume demand for goods and services, in the largest 85 countries measured in Billions of 2010 US$ - that is, with inflation removed) Real consumer spending (for key 45 countries in Consensus Economics) Real business investment (for key 45 countries in Consensus Economics) WHY Real GDP and its final demand components? Semiconductors have become so ubiquitous, used in almost every product and in support of almost every service, that broad final demand measures best explain MSI trends. Million Square Inches (MSI) of silicon wafers shipped to semiconductor manufacturers (Source: SEMI.ORG) WHY MSI? Best volume measure of semiconductors, to relate to the volume of demand as measured by real GDP and other units of products WSTS semiconductor revenue (World Semiconductor Trade Statistics) - $000 sales by major region reported by WSTS.ORG Semiconductor Equipment Billings (~90% of worldwide semiconductor equipment sales) Reported for North America by SEMI.ORG Reported for Japan by SEAJ.ORG SPCC April 3, 2019 37
Semiconductor Data Concerns Disconnect between MSI and WSTS revenue U.S. Government shutdown METI discontinuing monthly wafers (?) MSI quarter-to-quarter distortions due to increases in long-term contracts (?) SPCC April 3, 2019 38