1. Global Economy Outlook*: A Healthy Backdrop for Semiconductors
Business of Cleans
April 9, 2018
Duncan Meldrum
Chief Economist, Hilltop Economics, LLC
*A global outlook based on Consensus Economics, Inc.
CONSENSUS FORECASTS®

2. Outline Metrics Global outlook Semiconductor outlook Risks MSI outlook
Wafer fab equipment/capacity
Risks

3. Metrics
Real GDP: Gross Domestic Product (final demand for goods and services, in the largest 85 countries measured in Billions of 2010 US$ - that is, inflation removed, so a “real” or “volume” measure)
Real consumer spending (for key 45 countries)
Real business investment (for key 45 countries)
Million Square Inches (MSI) of silicon wafers shipped to semiconductor manufacturers (Source: SEMI.ORG)
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

4. Summary Overview:
In the accelerating phase of the economic cycle
Healthy consumer
Investment upsurge driving the global economy stronger
Slightly higher inflation, diverging interest rates
Currency unsettled
Potential for much higher economic policy uncertainty: trade, geopolitics the current wild cards
Healthy backdrop for semiconductor industry:
Demand for semiconductors grows above trend
Wafer Fab Equipment investment strong
Risks: excess capacity expansion, supply chain imbalances (wafers?) and final demand uncertainty (5G, AI, mobile and computing devices)

5. Accelerating: Growth Gets Stronger Than Past Five Years
Cyclical Upswing
Accelerating: Growth Gets Stronger Than Past Five Years

6. Accelerating: Growth Gets Stronger Than Past Five Years
Cyclical Upswing
Accelerating: Growth Gets Stronger Than Past Five Years

7. Accelerating: Growth Gets Stronger Than Past Five Years
Cyclical Upswing
Accelerating: Growth Gets Stronger Than Past Five Years

8. Consumption roughly 60% of real GDP
Cyclical Upswing
Consumption Strengthened in 2017 Little downside risk in consumer outlook in the current upswing
Consumption roughly 60% of real GDP

9. Global Consumer Outlook
Economies are growing
Unemployment rates are coming down
Wages are at least stable
Inflation is low
Oil prices are not a big problem
Consumer debt is under control
Risks (interest rates, trade wars, policy) are not of immediate concern to consumers
Confidence is high

10. Consumer Confidence Indexes Are High US – Japan – Germany - China

11. Oil Prices

12. CPI Inflation Higher, But Not a Problem
CPI % Change
2015
2016
2017
2018
2019
China
1.4
2.0
1.6
2.3
Japan
0.8
(0.1)
0.5
1.0
1.1
South Korea
0.7
1.9
Taiwan
(0.3)
0.6
1.3
1.2
Germany
0.2
1.8
1.7
France
0.0
1.5
Italy
0.1 UK
2.7
2.6
2.2 US
2.1
2.4
Hilltop Economics, Based on Consensus Forecasts, March 18
Sign of stronger demand + tighter supply
Businesses have a chance to get price increases

13. Global Investment Out of a Cycle Low in 2016
Cyclical Upswing
Global Investment Out of a Cycle Low in 2016
This key component of final demand (real GDP) begins to improve in 2017 with tighter output gap, less uncertainty, and modestly stronger real GDP
Investment Roughly 1/4 of GDP Demand

14. Investment Positive: A Key Cycle Driver
Cyclical Upswing
Investment Positive: A Key Cycle Driver
Revenue growth more assured
Real GDP growth (volume) keeps looking a little stronger, now at 3.2%
Some inflation (price) on average from ~0 to 1% to ~1% - 2%
“Revenue” now ~5%
Output gaps closed, need capital to grow
Profitability still positive
Productivity-related investment needed
Tax law changes, at least in U.S., positive for investment (at the margin)
Risk aversion declined
Consumer attitudes back to normal
Small business attitudes finally recovered
Chasing the data UP- improving more than expected in earlier forecasts
Economic policy uncertainty down (even with trade)

15. Potential Real GDP: Growth in Labor * Capital * Productivity
Output Gaps Closed
Potential Real GDP: Growth in Labor * Capital * Productivity
Labor force
Number of People times Participation Rate
Capital
Installed capital plus investment minus economically depreciated capital
Productivity
How well the institutional framework (legal, social, political, economic structure) puts Capital and Labor together

16. Output Gaps Closed
U.S. Output Gap

17. Output Gaps Closed
U.S. Output Gap

18. Output Gaps Closed
U.S. Output Gap
Output “Gaps”

19. The US (global) Economy NEEDS Investment
Output Gaps Closed
The US (global) Economy NEEDS Investment

20. The US (global) Economy NEEDS Investment
Output Gaps Closed
The US (global) Economy NEEDS Investment

21. Global Economic Slack Almost Gone by 2017
Output Gaps Closed
Global Economic Slack Almost Gone by 2017

22. Consensus: Profits Healthy in 2018, Slip a Little in 2019

23. Economic Policy Uncertainty Peaked Late 2016
Risk Aversion Lower
Economic Policy Uncertainty Peaked Late 2016
The impact of uncertainty in the model began to lessen in late 2016: evidence the financial crisis impact on investment may have begun to fade.

24. Economic Policy Uncertainty Peaked Late 2016
Risk Aversion Lower
Economic Policy Uncertainty Peaked Late 2016
The impact of uncertainty in the model began to lessen in late 2016: evidence the financial crisis impact on investment may have begun to fade.

25. Trade Conflicts Show in US & China March Data
Risk Aversion Lower
Trade Conflicts Show in US & China March Data

26. Trade Conflicts Show in US & China March Data
Risk Aversion Lower
Trade Conflicts Show in US & China March Data

27. Risk Aversion Lower
Source: NFIB (Mar 2018) – small businesses turned sharply optimistic after Trump elected. Part of the improvement in investment outlook traces to a change in the willingness of these U.S. businesses to invest (50% of the economy)

28. Risk Aversion Lower
Improved Economy: Rising Interest Rates A sign that we are finally moving back to “normal”
Sign of optimism: stronger demand + tighter supply
Not too high to dampen investment (through 18)

29. Healthy Economy: Healthy Semiconductors
MSI Demand Outlook
Healthy Economy: Healthy Semiconductors

30. Healthy Investment, Healthy Semiconductors
MSI Demand Outlook
Healthy Investment, Healthy Semiconductors

31. Stable PC Outlook, Minimal Growth
MSI Demand Outlook
Stable PC Outlook, Minimal Growth

32. Servers, Smartphones: MSI Drivers
MSI Demand Outlook
Servers, Smartphones: MSI Drivers

33. Healthy Final Demand Outlook Drives MSI
MSI Demand Outlook
Healthy Final Demand Outlook Drives MSI

34. Revenue Forecasts Still Chasing the Data UP
Semiconductor Sales Forecasts Chased data up in 2017; consensus rises for 2018, but wide range now
Forecaster (Date Made):
2017
(In Jan 17)
(As of Jan 18)
2018
(In Oct 17)
(In Jan 18)
(As of Mar 18)
Cowan LRA (Mar 18)
4.4
20.8
3.3
5.9
16.4
Future Horizons (Feb 18)
11.0
20.0
16.0
21.0
Gartner (Jan 18)
7.2
22.2
4.0
7.5
IC Insights (Mar 18)
22.0
8.0
15.0
IHS Markit (Jan 18)
4.8
21.7
7.4
Semi Intelligence (Feb 18)
10.0
12.0
Semico (Jan 18)
VLSI (Jan 18)
7.7
WSTS (Feb 18)
20.6
4.3
7.0
9.5
Consensus (Average):
6.1
21.6 actual
9.0
11.5
Range/Standard Dev:
7.7/2.8
2.3/0.8
12.3/4.9
10.1/3.3
13.8/5.0

35. Revenue Forecasts Still Chasing the Data UP
Semiconductor Sales Forecasts Chased data up in 2017; consensus rises for 2018, but wide range now
Forecaster (Date Made):
2017
(In Jan 17)
(As of Jan 18)
2018
(In Oct 17)
(In Jan 18)
(As of Mar 18)
Cowan LRA (Mar 18)
4.4
20.8
3.3
5.9
16.4
Future Horizons (Feb 18)
11.0
20.0
16.0
21.0
Gartner (Jan 18)
7.2
22.2
4.0
7.5
IC Insights (Mar 18)
22.0
8.0
15.0
IHS Markit (Jan 18)
4.8
21.7
7.4
Semi Intelligence (Feb 18)
10.0
12.0
Semico (Jan 18)
VLSI (Jan 18)
7.7
WSTS (Feb 18)
20.6
4.3
7.0
9.5
Consensus (Average):
6.1
21.6 actual
9.0
11.5
Range/Standard Dev:
7.7/2.8
2.3/0.8
12.3/4.9
10.1/3.3
13.8/5.0

36. Revenue Forecasts Still Chasing the Data UP
Semiconductor Sales Forecasts Chased data up in 2017; consensus rises for 2018, but wider range now
Forecaster (Date Made):
2017
(In Jan 17)
(As of Jan 18)
2018
(In Oct 17)
(In Jan 18)
(As of Mar 18)
Cowan LRA (Mar 18)
4.4
20.8
3.3
5.9
16.4
Future Horizons (Feb 18)
11.0
20.0
16.0
21.0
Gartner (Jan 18)
7.2
22.2
4.0
7.5
IC Insights (Mar 18)
22.0
8.0
15.0
IHS Markit (Jan 18)
4.8
21.7
7.4
Semi Intelligence (Feb 18)
10.0
12.0
Semico (Jan 18)
VLSI (Jan 18)
7.7
WSTS (Feb 18)
20.6
4.3
7.0
9.5
Consensus (Average):
6.1
21.6 actual
9.0
11.5
Range/Standard Dev:
7.7/2.8
2.3/0.8
12.3/4.9
10.1/3.3
13.8/5.0

37. No hints of a turn, yet
Equipment Billings Continue to Set New Record Levels False peak in July ‘17 on a seasonally-adjusted basis

38. No hints of a turn, yet
Equipment Billings Continue to Set New Record Levels False peak in July ‘17 on a seasonally-adjusted basis

39. Total Equipment Spend Outlook Comparison Hilltop Econ estimates based on public sources of information
Percent Change / Forecaster:
2017
2018
2019
2020
2021
Annual (Japan & NA Eqpt)*
+36
+20 +7 -3
-17
Hilltop Econ (NA Equipt)
+41
+12 -2 +1
Gartner (at ISS 2018)
+32
IHS Markit (All, at ISS 2018) +5
SEMI (All Equipment)
+38 +9
VLSI (WFE at ISS 2018)
“Consensus”
+10 +3
(-)
*Hilltop Economic Japan & NA Equipment annual model:
A function of MSI, capacity utilization and the yen-$ exchange rate in a simple dlog equation

40. Long-run Demand VS Capacity Forecasts (Annual Models)

41. Economy Risks One positive, many negative
Forecasters under-anticipate business investment and consumer spending: actual data is better than the expectation
Global trade protectionism
Differential global monetary policy
Interest rates (U.S. tightens as others still easing/loose)
Currency & financial asset turmoil
U.S. yield curve flattening
China post 19th Party Congress (geopolitical, debt, property market bubble, etc.)
Political extremism (US & EU)
Geopolitical
N. Korea, Middle East
Global terrorism
Oil

42. Semiconductor Risks Issues in supply chain:
China
Trade
Industry Upswing leading global
Likely to turn down before global
CONCERN: Momentum has turned
Issues in supply chain:
Selected areas of underinvestment, eg wafers
Uncertainty about speed new manufacturing processes can come online – 7nm
Inventory questions (mobile devices especially iPhone X?)
Overall underinvestment in technology by the rest of the economy (the productivity issue)
End of the roadmap

43. Cyclical Upswing
Summary –
The world economy has moved into an accelerating phase of the business cycle.
Semi MSI growth peaked in 2017, remains above trend in 2018 & 2019 on strong investment-related demand.
Semiconductor revenue forecasts are chasing actual data up – watch for an adjustment downward later this year.
Semi equipment demand momentum booming through 2017, healthy growth in 2018, flattens in 2019
Growth Rates:
2016
2017
2018
2019
World GDP
2.3
3.1
3.2
SEMI MSI
2.9
10.0
6.7
5.2
WFE
9.3
35.8
3.0

44. Duncan Meldrum Chief Economist Hilltop Economics, LLC duncan
Duncan Meldrum Chief Economist Hilltop Economics, LLC