Business Cycles: Not Dead Yet!

By Walt Custer, Custer Consulting Group

The global electronic industry has historically experienced strong business cycles. This cyclicality is driven by a combination of:

  • Economic fluctuations (recessions and expansions)
  • Cataclysmic events (war, weather, earthquakes)
  • New product cycles (especially high volume consumer driven goods including PCs and cell phones)
  • Inventory build ups and declines (in anticipation of further sales increases or declines)
  • Double ordering in times of anticipated shortages
  • Poor management practices (panic or uninformed business decisions)
  • Geographic shifts (movement of production from higher to lower cost regions)
  • Supplier shifts due to competitive activity or abrupt technology changes

Typically these fluctuations are more moderate for electronic equipment but are then amplified for parts and capital expenditures (including semiconductor equipment).

Economic Fluctuations

Chart 1 shows the growth of purchasing managers indices for some key countries. These PMI values are given as 3/12 growth rates comparing three months to the same three months a year earlier. A PMI value of 1.20 indicates 20 percent growth versus the same period a year earlier.  IHS Markit ( publishes these PMIs for most major countries on a monthly basis.

PMIs are a timely measure of regional manufacturing growth.  For most major countries economic growth is currently positive − but has slowed from the beginning of this year.  Japan is an exception.  The financial recession in 2009 and its recovery in 2010 caused wild swings in economic activity.  Since then global economic cycles have moderated − but are still occurring.

Semiconductor Capital Equipment Billings

Chart 2 compares 3/12 growth rates for semiconductor equipment billings by key country. These billings growth rates have fluctuated significantly over time.  Currently, these regional growth rates are not “in sync” as:

  • South Korea growth is accelerating driven by memory demand and pricing
  • Europe growth is slowing
  • Japan is expanding
  • China, Taiwan and North America are at near zero growth.

The net result was SEMI global equipment billings 3/12 growth was 34 percent in June − but this value varies dramatically by region.

Global Electronic Supply Chain

Chart 3 compares the growth of global semiconductor sales, Taiwan chip foundry sale, and SEMI global equipment billings versus the global Purchasing Managers Index.  While semiconductor chip shipment growth is still accelerating (thanks to robust memory demand and pricing), SEMI equipment growth (although positive) has slowed.  “Leading indicator” PMI growth has moderated and Taiwan chip foundry growth is near zero.

Looking forward, we believe that chip growth is overheated (out of sync with end market growth) and the current geopolitical situation (especially N. Korea) is VERY fragile and could abruptly change the economic landscape.

Our conclusion is that business cycles may have recently moderated but they are certainly not a thing of the past!


Global Update
August 15, 2017