A Consensus Outlook of the Global Economy · 4/2/2016 · • Global final demand grows marginally in 2016, better in 2017 & 2018 –Real GDP should increase in 2016, reach “trend”

Duncan MeldrumSPCC April 19-20 2016 1

A Consensus Outlook of the Global EconomyAnd What It Implies for Semiconductors

Surface Preparation and Cleaning Conference (SPCC)April 2016

Duncan MeldrumChief Economist, Hilltop Economics, LLC

[email protected]

*A global outlook based on Consensus Economics, Inc. CONSENSUS FORECASTS®

mailto:[email protected]


Outline

• Why the semiconductor industry should care about the broader economy (real GDP)

• Global outlook and how we got here

• Semi MSI outlook (ESF March 2016)

• Risks in the economy


Semiconductor Industry Measure:SEMI.ORG’s MSI

3,000

2,500

2,000

1,500

1,000

500

94 96 98 00 02 04 06 08 10 12 14

Million Square Inches

Semi MSI Trend

93 - 15

6.3%/year


3,000

2,500

2,000

1,500

1,000

500

75,000

70,000

65,000

60,000

55,000

50,000

45,000

40,000

35,000

94 96 98 00 02 04 06 08 10 12 14

Semi MSI

World Real GDP (Rt Scale)

Million Square Inches Billion 2010 US$

93-15Q4

95% correlation

MSI Multiple: 2.1X

MSI = Real GDP Since the RecessionChips are so pervasive in the economy, demand is now driven by the economy

Total real (inflation-removed) spending on finished goods and services by businesses, governments and consumers in 85 of the largest economies: highly correlated with Semi MSI

1.0X

2.4X


World Real GDP Growth Below Par 2012 - 2017

-2

-1

0

1

2

3

4

5

94 96 98 00 02 04 06 08 10 12 14 16 18

World* Par ~3.2%/Year

2014: +2.6% 2015: +2.4% 2016: +2.4% 2017: +2.8%

% C

ha

ng

e

*World: 85 maj or economies,

Forecast: Hilltop Economics based on

IMF & Consensus Forecasts, Mar 16


Why Slow and Will It Continue?

• Governments changed the “Rules”

• Consumer and business aversion to risk skyrocketed

• Demand did not recover to pre-crisis growth rates once the crisis passed (by 2010)


Why Slow and Will It Continue?-I

• Governments changed the “Rules”– Economic policies & regulations to “fix” the financial

system– Monetary policy: low interest rates, oceans of money– Economic policies to cope with demand collapse– Creating high economic policy uncertainty as policies

& regulations continue to adjust

• Expect policies to SLOWLY stabilize but…• Economic policy uncertainty will remain high until

the preponderance of polices stabilize• Watch: Economic Policy Uncertainty Indexes


Unprecedented Period of Uncertainty After 2008

50

75

100

125

150

175

200

225

250

88 90 92 94 96 98 00 02 04 06 08 10 12 14 16Source: Scott Baker, Nicholas Bloom and Steven J. Davis at www.PolicyUncertainty.com

Shaded areas indicate official recessions

9/11

Gulf War II

Gulf War I

Financial Crisis

Lehman/TARP

Fiscal

Cliff

US Govt

Shut Down

Economic Policy Uncertainty

LTCM/

Russia

Clinton

ElectionBush/

Gore

Ind

ex

19

85

-20

09

= 1

00


0

50

100

150

200

250

94 96 98 00 02 04 06 08 10 12 14 16

U.S.

Europe

China

Source: Scott Baker, Nicholas Bloom and Stev en J. Dav is

at w w w .PolicyUncertainty.com. Through March 2016

Ind

ex

3M

MA

<- Financial Crisis

Economic Policy Uncertainty

Uncertainty In Key Economies Remains A Dampening Factor on Growth: Expect Very Slow Improvement


Why Slow and Will It Continue?- II

• Consumer and business aversion to risk skyrocketed – Stopped borrowing to spend

– Paid down debt even as governments took on debt

– Raised cash

• Risk aversion should recede slowly:– As jobs recover

– As businesses begin to perceive growth opportunities

• Forecast Risk: potential for permanent change in consumer, business and government behavior with all the negative feedbacks (e.g. the Depression Generation, part II)


U.S. Household Debt Drops as Government Rises

50

60

70

80

90

100

110

90 92 94 96 98 00 02 04 06 08 10 12 14 16

Household Debt

Federal Debt

% O

F G

DP

Src: Federal Reserve; Bureau of Economic Analysis

Through 15Q4


Why Slow and Will It Continue? - III

• Demand did not recover to pre-crisis growth rates

– Consumers remain cautious

– Investment remains very weak

• Slow real GDP + low inflation = weak topline growth

• High uncertainty

• Excess capacity (until output gap closes all the way)

– Cheap capital (low interest rates) not enough to stimulate investment or consumption.

• Stimulates M&A activity

• Demand is forecast to recover by 2017-2018


What the Global Economy Can Produce:Much Slower Growth Since the Financial Crisis

48,000

44,000

40,000

36,000

32,000

28,000

24,000

90 92 94 96 98 00 02 04 06 08 10 12 14 16

Potential Output

BN

20

10

US

$

IMF, US CBO, 21 Countries

Hilltop Economics calculations

~4%/YR

~2%/YR


Slower Potential Growth Has Closed the Output GapGiving Support to the Forecast for Investment in 2017

-6

-5

-4

-3

-2

-1

0

1

2

90 92 94 96 98 00 02 04 06 08 10 12 14 16

GLOBAL OUTPUT GAP

Pe

rce

nt

Ab

ov

e (

Be

low

) P

ote

nti

al

21 Major Developed Economies

Source: IMF WEO October 2010

US Congressional Budget Office

Hilltop Economics Calculations

The gap is FINALLY starting to close


Global Investment Continues To Grow Too Slowly

-6

-4

-2

0

2

4

6

8

10

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Pe

rce

nt

Ch

an

ge

World: Key 40 Countries

Src: IMF, Consensus Forecasts,

Hilltop Economics Mar 16 Forecast

World* Real Investment

2016 now forecast to be

even weaker than 2015


Real Investment Critical for Semiconductors

3,000

2,500

2,000

1,500

1,000

500

12,000

10,000

8,000

6,000

4,000

94 96 98 00 02 04 06 08 10 12 14

SEMI MSI

Real Investment, 44 Consensus Countries

Million Square Inches Billion 2010 US$

93-15Q3

96% correlation

MSI Multiple: 1.67X

Final spending on fixed investment – plant, equipment & structures - is even more highly related to MSI over the past 23 years than total real GDP

17Duncan MeldrumSPCC April 19-20 2016 17

Semiconductor MSI Outlook Summary

• MSI: Flat in 16 on poor investment outlook, snaps back in 2017, falls to around trend in 2018

• Global final demand grows marginally in 2016, better in 2017 & 2018– Real GDP should increase in 2016, reach “trend” by 2017– Business investment stalls in 2016, begins to recover in 2017– Consumer spending rises back toward trend of 3%– PC unit sales down sharply in 2015; down modestly in 2016;

increase slightly in 2017– Mobile phone sales growth slows– No major new markets

March Update to ESF 2016 Q1

2014 2015 2016 2017 2018

MSI 10,097 10,434 10,465 11,264 11,744

%Change 11.4% 3.3% 0.3% 7.6% 4.3%


Linx-Consulting Econometric Semiconductor Forecast (ESF)

Does the “final demand” forecast modeling technique work?

800

1,200

1,600

2,000

2,400

2,800

3,200

2008 2009 2010 2011 2012 2013 2014 2015

SEMI MSI

Q4 2012 ESF Forecast

The First ESF Quarterly Forecast:

Overforecast Actual MSI by 0.4% (13 Qtr Trend)

<-History Forecast (12Q4->)

Forecast VS Actual 12Q4-15Q4

ESF 12Q4 MSI: 7.4%/yr trend

Actual MSI: 7.0%/yr trend

Real GDP: 2.9%/yr

Actual: 2.4%/yr


Forecast Performance for ESF Three Years, Real Time

Final demand approach provided superior forecasts. Longer term error attributed to over-forecasts of economic growth, not model error. Pervasiveness of semiconductors

key to success of the “final demand” approach to forecasting semiconductors

Cumulative Error on LEVELS

1 Quarter Ahead

2 Quarters

Ahead

3 Quarters

Ahead

4 Quarters

Ahead

8 Quarters

Ahead

Ave Percent Error

-0.5% 0.0% 0.0% -0.1% 0.8%

Mean Absolute Percent Error

2.5% 2.8% 3.0% 2.9% 2.6%

# Forecasts 13 12 11 10 6

Does the “final demand” forecast modeling technique work?


Things to Watch: Risks• Yield Curve (expected to stay near current levels)• Federal Reserve interest rate increases impact on financial

markets– (forecasters don’t expect more than two in 2016)

• Magnitude of oil price increase (expected to gradually rise)• Value of the Dollar (expect to strengthen modestly)• Inflation

– (expected to slowly rise to ~2% in US, lower in other parts of the developed world)

• Jobs keep growing and unemployment rates hold– (forecasters expect unemployment rate in US to stay in the

range of 4.5% and 4.9% in 2016)

• Forecasts getting lowered in a systematic fashion through the year


The Best Single Recession Predictor:Treasury Yield Curve Inverts (Short Rates > Long Rates)

-4

-3

-2

-1

0

1

2

3

4

5

1975 1980 1985 1990 1995 2000 2005 2010 2015

10 YR Treasury minus 3 Month TBill

10 Yr Treasury minus 1 Year Treasury

Dif

fere

nc

e in

Pe

rce

nt

Yie

ld

Shaded areas official NBER recession periods


Stock Market: One Place All the Money Went

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

S&

P 5

00

In

de

x


2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6

2015 2016

January February March April

May June July August

September October November December

Forecast for Year By Month in 2015 the Forecast Was Made

Pe

rce

nt

Ch

an

ge

Global Consensus Real GDP Forecasts

Steady reduction in ‘15 and ‘16 forecasts

Forecasts always seem to expect “next year” to be back to “normal”


2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6

2016 2017

January 2015 February March April

May June July August

September October November December

January 2016 February March

An

nu

al P

erc

en

t C

ha

ng

e

Global Consensus-based Real GDP Forecasts

Forecast for Year By Month Forecast Made

Steady reduction in ‘16 and ‘17 forecasts

Forecasters continue the trend: “next year” gets closer to “normal” but 2017 already below “normal” 3+% trend


Oil Prices Rise a LittleModest demand growth plus plenty of supply limit increases

0

20

40

60

80

100

120

140

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

$/B

BL

- B

ren

t O

il P

ric

e

Current: $43

(Brent)Source: EIA, St Louis Federal Reserv e Economic Database (FRED)

NBER - Recession dating

Forecast: Hilltop Economics based on Consensus Forecasts Mar 16


3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

2000 2002 2004 2006 2008 2010 2012 2014 2016

Consumer Spending on Energy

Pe

rce

nt

of

Dis

po

sa

ble

In

co

me

Src: US BEA Underlying Detail

Shaded areas indicate official NBER recessions

Consumers Globally Benefit From Low Energy Prices(U.S. consumers alone gained almost 2% of disposable income since the end

of 2013: almost $250 BN)


Recent Dollar Retreat Expected to ReverseU.S. Interest rates are rising, key trading partners (Europe, China, Japan) are keeping

rates steady or cutting: capital will flow to U.S., pushing dollar stronger

70

80

90

100

110

120

130 1.0

1.1

1.2

1.3

1.4

1.5

1.6

05 06 07 08 09 10 11 12 13 14 15 16 17

Yen/$

Euro/$

Ye

n/$

Eu

ro/$

Dollar Strong VS Yen and Euro


Duncan MeldrumChief Economist

Hilltop Economics, [email protected]

610.709.7951

mailto:[email protected]

Documents

A Consensus Outlook of the Global Economy · 4/2/2016 · • Global final demand grows marginally in 2016, better in 2017 & 2018 –Real GDP should increase in 2016, reach “trend”