Expert's Panel

A collection of timely and important topics posed to our panel of experts.

What red flags can we identify that might signal a pending downturn?

 (ep10143)
1. One of many inputs that you should be looking at is the absorption rate of equipment. It is normally 20% per year, plus or minus 5. If you were to take the last 30 years, and exclude any macroeconomic problems, we grew pretty much in a plus 20% straight line. Any time you exceed that absorption rate, you pay a price. In 2000 we grew 87%, and it took about three years to get back up to the normal rate. All that equipment had to get absorbed. There was too much sold too early. With materials it has significantly less peaks and valleys as it directly supports that volume of production at a point in time.
2. Interestingly enough in the worst downturn years of equipment, material was still up. Track millions of square inches of silicon. That drives materials, but not equipment. Try and find a year when there wasn’t more silicon being processed than the year before.
3. Some other factors to watch are interest rates, energy costs, housing costs and unemployment. Consumers drive the semiconductor market through their purchases of various electronic things. If they don’t have a good job; an ability to buy at reasonable interest rate; and have disposable income, they won’t be buying TVs, computer, cars and so forth.
4. Be careful of the experts prediction numbers. In the semiconductor industry they have predicted ten of the last four downturns. When the downturn doesn’t come, they say their prediction was six months early. They do this repeatedly and eventually the downturn comes.
5. When looking at employment you get a better feel by looking at the employment numbers, rather than the unemployment numbers. The unemployment number is basically the number of filings which is a reflection of large companies. Looking at employment, however, takes it from the entire economy and it is small companies that hire the most people.
6. There are a couple of little micro statistics to watch in your own area. The backlog of orders for your products is important. Lead times are important. If the lead times of your suppliers and your lead times to your customers are shrinking, this is evidence of a slowdown.