A Consensus Outlook of the Global Economy And What It Implies for Semiconductors

Surface Preparation and Cleaning Conference (SPCC) April 2016 Duncan Meldrum Chief Economist, Hilltop Economics, LLC [email protected] 610-709-7951

*A global outlook based on Consensus Economics, Inc. CONSENSUS FORECASTS® Duncan Meldrum SPCC April 19-20 2016

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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

Duncan Meldrum SPCC April 19-20 2016

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Semiconductor Industry Measure: SEMI.ORG’s MSI Million Square Inches 3,000 2,500

Semi MSI Trend 93 - 15 6.3%/year

2,000

1,500

1,000

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MSI = Real GDP Since the Recession Chips are so pervasive in the economy, demand is now driven by the economy Million Square Inches

Billion 2010 US$

3,000

75,000

2,500

Semi MSI World Real GDP (Rt Scale)

2,000

2.4X

70,000 65,000

1.0X

1,500

60,000 55,000 50,000

1,000 45,000 93-15Q4 95% correlation MSI Multiple: 2.1X 500

40,000

35,000 94 96 98 00 02 04 06 08 10 12 14 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

Duncan Meldrum SPCC April 19-20 2016

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World Real GDP Growth Below Par 2012 - 2017 World* Par ~3.2%/Year 2014: +2.6% 2015: +2.4% 2016: +2.4% 2017: +2.8% 5 4

% Change

3 2 1 0 *World: 85 maj or economies, Forecast: Hilltop Economics based on IM F & Consensus Forecasts, M ar 16

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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)

Duncan Meldrum SPCC April 19-20 2016

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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 Duncan Meldrum SPCC April 19-20 2016

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Unprecedented Period of Uncertainty After 2008 Economic Policy Uncertainty 250 Fiscal Cliff

Index 1985-2009 = 100

225 200

Financial Crisis Lehman/TARP

9/11

US Govt Shut Down

Gulf War I

175

Gulf War II Clinton Election

150

LTCM/ Bush/ Russia Gore

125 100 75 50 88

90

92

94

96

98

00

02

04

06

08

10

12

14

16

Source: Scott Baker, Nicholas Bloom and Steven J. Davis at www.PolicyUncertainty.com Shaded areas indicate official recessions

Duncan Meldrum SPCC April 19-20 2016

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Uncertainty In Key Economies Remains A Dampening Factor on Growth: Expect Very Slow Improvement Economic Policy Uncertainty 250

U.S. Europe China

Index 3MMA

200

150

100

50

0

Source: Scott Baker, Nicholas Bloom and Stev en J. Dav is at w w w .PolicyUncertainty.com. Through March 2016

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Long Rates) 5

Difference in Percent Yield

4 3 2 1 0 -1

10 YR Treasury minus 3 Month TBill 10 Yr Treasury minus 1 Year Treasury

-2 -3

Shaded areas official NBER recession periods

-4 1975 Duncan Meldrum SPCC April 19-20 2016

1980

1985

1990

1995

2000

2005

2010

2015

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Stock Market: One Place All the Money Went 2,200 2,000

S&P 500 Index

1,800 1,600 1,400 1,200 1,000 800 600 1998

Duncan Meldrum SPCC April 19-20 2016

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2002

2004

2006

2008

2010

2012

2014

2016

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

Steady reduction in ‘15 and ‘16 forecasts Global Consensus Real GDP Forecasts 3.6 3.4

January May September

February June October

March July November

April August December

Percent Change

3.2 3.0 2.8 2.6 2.4 2.2 2.0 2015 Duncan Meldrum SPCC April 19-20 2016

2016

Forecast for Year By Month in 2015 the Forecast Was Made

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

Steady reduction in ‘16 and ‘17 forecasts Global Consensus-based Real GDP Forecasts 3.6

Annual Percent Change

3.4

January 2015 May September January 2016

February June October February

March July November March

April August December

3.2 3.0 2.8 2.6 2.4 2.2 2.0 2016

Duncan Meldrum SPCC April 19-20 2016

2017

Forecast for Year By Month Forecast Made 24

Oil Prices Rise a Little Modest demand growth plus plenty of supply limit increases 140

$/BBL - Brent Oil Price

120 100 80 60 40 20

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

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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) 6.5 Consumer Spending on Energy Percent of Disposable Income

6.0 5.5 5.0 4.5 4.0 3.5 Src: US BEA Underlying Detail Shaded areas indicate official NBER recessions

3.0

2000 Duncan Meldrum SPCC April 19-20 2016

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2004

2006

2008

2010

2012

2014

2016 26

Recent Dollar Retreat Expected to Reverse U.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 Dollar Strong VS Yen and Euro 130

1.0

Yen/$ Euro/$

1.1

110

1.2

100

1.3

90

1.4

80

1.5

70

1.6 05

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Euro/$

Yen/$

120

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Duncan Meldrum Chief Economist Hilltop Economics, LLC [email protected] 610.709.7951

Duncan Meldrum SPCC April 19-20 2016

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