Semiconductor Outlook and the Implications for the Northeast Economy Macroeconomics turning in favor of semiconductors

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1 Semiconductor Outlook and the Implications for the Northeast Economy Macroeconomics turning in favor of semiconductors FALL CONFERENCE Portland, Oregon Chief Economist Hilltop Economics, LLC *Outlook Based on Consensus Economics, Inc CONSENSUS FORECASTS

2 Outline Global economic outlook a high level look Final demand drivers Semiconductors versus final demand Implications of outlook for semiconductor MSI Econometric Semiconductor Forecast ARIMA (time series) outlook Forecast bands Assessing accuracy

3 Global Economy Outlook Themes Subdued performance of the past five years begins to give way to better growth Developed economies contribute more to growth Emerging economies contributions fade Financial crisis impact continues to slowly fade Economic policy uncertainty recedes Low inflation, low interest rates, better private sector balance sheets Risks high

4 5 4 3 World* Real GDP Growth 2012: +2.2% 2013: +2.3% 2014: +2.5% 2015: +3.1% 2016: +3.2% Percent Change *World: 85 major economies History: IMF Forecast: Consensus Forecasts, Hilltop Economics

5 Real GDP Growth By Region More balanced in 2014, 2015 developed world economies contribute 50% to growth, up from 33% in 2012, 2013 % Change WORLD DEVELOPED US W. Europe (0.3) Japan Rest of World China Other Asia L. America

6 World GDP and Semiconductors IMF History for 85 countries forecast by Consensus Forecasts, Inc. 2,800 2,400 SEMI MSI World Real GDP 60,000 55,000 Million Square Inches 2,000 1,600 1,200 50,000 45,000 40,000 Billion 05 US$ , Sources: SEMI (MSI) IMF; Consensus Forecasts, Inc ,000

7 17,000 16,000 15,000 Real GDP Still Lags Potential (And not just in the U.S.) U.S. Potential Real GDP (CBO) U.S. Real GDP BN2009$ 14,000 13,000 12,000 11,000 10,000 9,000 8,000 Shaded areas indicate official U.S. recessions Trend Growth: Potential Actual As of 2013, actual Real GDP lags potential by about 4% in the U.S. (CBO) and about 3% in Europe, 2% in Japan (IMF) even though potential growth rates have dropped due in part to weak investment growth, slower labor force growth and modest productivity trends

8 What Suppressed Global Growth? A financial crisis caused the Great Recession An inventory cycle overlaid the financial crisis Initial inventory snap-back in 2010 did not spark a strong recovery cycle Recoveries from financial crises slower due to: Asset excesses & balance sheet hangovers clear very slowly Expanded government debt increases stresses on markets Economic policies change dramatically, increasing uncertainty that increases risk aversion and Businesses delay or avoid making investments Consumers delay or cancel purchasing decisions, increase saving Policy makers & forecasters have consistently overanticipated stronger economic growth

9 Economic Policy Uncertainty Extremely high through U.S. Europe China 160 Index Source: Scott Baker, Nicholas Bloom and Steven J. Davis at <- Financial Crisis

10 Economic Policy Uncertainty Dropping to more normal levels in 2014: reducing risk aversion U.S. Europe China 160 Index Source: Scott Baker, Nicholas Bloom and Steven J. Davis at <- Financial Crisis

11 Global Risks Middle East crisis Oil Shock Russia / Ukraine China policy shift/debt risks Lesser risks: Latin American recessions US Fed policy mistake (interest rate shock) next big event Fed tightening then the election EU/ECB: shift from austerity to stimulus (a version of Quantitative Easing?) Japan: structural reforms and third leg of Abe s program Ebola

12 GDP Components More important to Semiconductor MSI patterns than total GDP Consumer behavior has found a more conservative pattern Less credit-dependent, less debt, saving more Job prospects and housing markets continue to improve modestly in most major economies Businesses begin to invest for economic opportunities Policies less uncertain (e.g. Dodd-Frank & ACA, ECB, Abenomics in Japan, China financial markets) Risk aversion slowly recedes Topline growth improves modestly Business sector remains profitable Capital costs, while rising, remain low

13 Key GDP Components: Real Consumption Steady in aggregate, but improving in key developed markets % Change Global U.S Europe (EZ+4) Japan 2.0 (0.2) 0.5 Asia ex Japan Latin America

14 Key GDP Components: Real Business Investment (Finally) beginning to expand in major developed markets even as it moderates in emerging economies % Change Global U.S Europe (EZ+4) (1.9) Japan (1.4) Asia ex Japan Latin America 2.2 (2.1) 2.5

15 U.S. Business Investment Momentum already positive in 2014 after stalling in U.S. Business Investment (P&E) % CH VS YR AGO, 4QMA Shaded Areas Indicate U.S. Recessions History: U.S. Bureau of Ecnomic Analysis Forecast: Consensus Forecasts & Hilltop Economics

16 U.S. Business Investment Tech equipment investment (semiconductor-containing) contracted in both 2012 and 2013 now recovering U.S. Business Investment (P&E) U.S. Technology Equipment Investment %CH VS YR AGO, 4QMA Shaded Areas Indicate U.S. Recessions History: U.S. Bureau of Ecnomic Analysis Forecast: Consensus Forecasts & Hilltop Economics

17 Business Investment Helps Stabilize PC Units (And Tablet Penetration Finally Slows?) ESTIMATED GLOBAL PC SALES Estimated History Forecast Sep 2014 Update 80 Million Units

18 Business Investment Helps Stabilize PC Units 100 ESTIMATED GLOBAL PC SALES 90 Estimated History Forecast Sep 2014 Update 80 Million Units %CH VS YR AGO - 4QMA

19 U.S. Final Demand: Tech Business still dominates consumer sector in tech goods spending 10 U.S. Technology Goods Spending Growth %CH VS YR AGO, 4QTR MOV AVE Total Business Consumers History: U.S. Bureau of Economic Analysis (To 2014 Q2) Forecast: Hilltop Economics

20 MSI Model: Step 1: Semiconductors 2,800 2,400 SEMI MSI Seasonally Adjusted (X-13) Million Square Inches 2,000 1,600 1,

21 MSI Final Model An ECM with final demand measures, critical supply shock factors 3,000 SEMI MSI Model "Fit" over History 2,500 Million Square Inches 2,000 1,500 1, Sources: SEMI (MSI) Hilltop Economics, LLC (Model)

22 Semiconductor MSI Outlook MSI 9,043 9,031 9,067 10,055 10,472 11,031 %CH -3.5% -0.1% 0.4% 10.9% +4.2% +5.3% Better final demand environment Business investment recovery Steady, more globally balanced consumer spending PC unit sales stabilizing (to improving) No serious supply issues Final product inventories should stabilize with flat PCs Reclaim wafers share anticipated to fall slightly More normal inventory situation for wafers

23 Still A Very Wide Risk Range Forecast Error Bands 3,400 3,200 3,000 2,800 SEMI MSI History to 14Q2 SEMI MSI (Sep 2014 Update) 50% Band High 50% Band Low 95% Band High 95% Band Low 2,600 2,400 2,200 2,000 1, History: Semi.org Forecast: Hilltop Economics

24 Implications for Northeast Region Limited data for 334 NAICS (Computers and Components) Relate Semiconductor MSI and global outlook to IP 334 Examine relative compensation measures and employment trends Project 334 employment (BEA jobs) from IP334, NE Region from relative trends

25 Employment Situation The 334NAICS employment in the NE Region is roughly the same proportion as the NE Region is to the US. The industry has been shrinking at a faster rate. Employment TLGR US 100.0% 0.70% Northeast Region 21.0% 0.66% US 334 Industry 0.62% -2.8% NE Region 0.13% (21.6%) -3.2% Others 0.49% (78.4%) -2.7% US BEA: SA25N

26 Compensation per Employee: 334 Relatively lower compensation per employee, growing more slowly on trend Compensation Per Employee ($000) NE Region Rest of US NE Region: 3.3% /YR Rest o f US: 3.9% /YR All US C/EM: 2.5% / YR US IP Computers & Components (NAICS 334)

27 Output Trends The compensation advantage should enable the NE Region at least slow its rate of decline in employment. Output should be greater given the implied productivity differential and lower compensation TLGR TLGR Semiconductors (world) 6.4% 6.5% IP Manufacturing (US) 0.2% 3.6% IP 334 (US) 9.2% 9.0% Employment % -3.0% Employment 334NE -3.2% -2.9% Semi.org, FRB, Hilltop Economics

28 ESF Forecast Model Accuracy Percent Difference Between Actual and ESF Model Forecast By Forecast // By Horizon (Cumulative Quarters) Horizon: Forecast 1 QTR Ahead Sum 2 QTRS Sum 3 QTRS Sum 4 QTRS Average Error : 0.3% 1.2% 2.3% 3.5% MAPE: 2.6% 3.5% 3.7% 3.5% First Quarter of ESF Quarterly Forecast: N=7 N=6 N=5 N=4 12Q4 1.6% 4.1% 4.4% 5.3% 13Q1 2.6% 1.9% 4.2% 5.0% 13Q2 (0.4%) 3.0% 3.8% 2.5% 13Q3 5.7% 5.0% 2.5% 1.2% 13Q4 0.0% (3.3%) (3.8%) 14Q1 (5.6%) (3.8%) 14Q2 (1.9%)

29 Summary Despite macroeconomic risks, the fundamentals support improving growth in global real GDP Accelerating business investment and steady but unspectacular consumer spending should drive demand for technology goods higher MSI growth should slightly exceed trend growth through 2016 US IP for computers and components, however, grows a bit more slowly than its trend growth The NE region computer industry should slightly outperform the rest of the US, although employment will likely continue to decline.