How Economics and The Electronics Market Will Diverge in H2 2023

Despite ongoing uncertainty, the second-half outlook for the worldwide economy and the electronics industry is coming into focus. Economists are increasingly reaching a consensus that the U.S. will endure a mild recession while China will attain moderate growth. Many market researchers are issuing increasingly pessimistic outlooks for electronics market growth in the second half of the year, but few are predicting a catastrophic plunge.

Supplyframe Commodity IQ endorses the view that the U.S. economy will enter a moderate recession in the second half while China will attain respectable growth. However, market events and seasonal factors indicate that electronics demand will recover during the last six months of the year. For electronics buyers who have seen refreshingly favorable pricing and lead-time trends in the first half of 2023, the shift in market conditions is projected to change the purchasing environment, with the availability of certain devices becoming stressed.

The Die-Hard U.S. Economy

The U.S. economy has withstood multiple body blows during the first half of 2023, from stubbornly high inflation to the banking crisis to soaring interest rates. And against all odds, America’s economic train has remained on track.

Since the U.S. unemployment rate hit a 54-year low of 3.4% in January, joblessness has remained at rock-bottom levels, with a slight rise to 3.7% in May, according to the U.S. Department of Labor’s Bureau of Labor Statistics. Meanwhile, U.S. GDP rose by 1.1% in the first quarter, a slowdown from 2.6% growth in the fourth quarter of 2022, but still expanding, according to the U.S. Commerce Department.

Other statistics also pointed toward U.S. economic strength. U.S. retail sales in April rose by 0.4% compared to March following two months of declines, although the electronics segment decreased by 0.5%. At the same time, inflation eased, with the

U.S. consumer price index increased at the lowest rate in more than two years in May, but still above historical averages, with a rise of 4% over the previous 12 months, according to the Bureau of Labor Statistics. Moreover, U.S. efforts to re-shore manufacturing operations are resulting in massive gains in industrial jobs in the country; factory job announcements in Q4 2022 were at the highest rate ever recorded, according to the Reshoring Initiative.

Mild U.S. Recession in Store

With all these positive economic signals, the current economic situation does not fit the technical definition of a recession, i.e., two or more consecutive quarters of economic decline. Nor does it match the more popular description of a recession as a sustained period of weak or negative growth in GDP combined with a significant increase in the unemployment rate.

However, in light of factors like continued high inflation and the potential for another interest rate hike, most economists now forecast a mild recession starting this year. Citigroup expects the U.S. economy to fall into a mild recession in the fourth quarter. Bank of America forecasts a slight technical recession stretching from the third quarter of 2023 through the first quarter of 2024, with quarterly GDP contractions ranging from 0.5% and 1%. The Federal Reserve in April predicted a mild recession in the second half, with economic growth slowing to 0.4% for the entire year. It is widely anticipated that no interest rate increase will result from its June policy meeting after 10 straight increases.

China Rebound Disappoints

Following lifting its draconian COVID restrictions in late 2022, China’s economy perked up, with a rebound in manufacturing activity in January and surprisingly strong year-over-year GDP growth of 4.5% in the first quarter. Moreover, China’s commodity production surged in March as economic activity rose following the lifting of COVID restrictions; steel output rose 6.9% year-on-year, while aluminum increased by 3%. On the electronics front, China’s chip manufacturing grew for the first time in 16 months in April, with integrated circuit unit production rising 3.8% year-on-year.

However, other readings for April indicate the nation’s economic rebound is losing momentum. According to the National Bureau of Statistics (NBS), China’s industrial production expanded by 5.6% during the month compared to a year earlier, far below expectations of 10%-plus growth. Retail sales for the month rose 18.4%, which was 

short of the projected 21% increase. In May, China’s purchasing managers index from the NBS dropped to a five-month low of 48.8, down from 49.2 in April. The numbers below 50 indicate a contraction in factory activity.

In response to the disappointing economic figures, economists have marginally trimmed their forecasts for China’s economic performance. However, the overall average reduction amounts to just one-tenth of a percentage point, with the country still expected to attain GDP growth of 5.5% in 2023. While this is up from 3% in 2022, this expansion is well below the nearly 9% average rise in Chinese GDP from 1989 until 2023.

Commodity IQ on Economics

The U.S. economy is fundamentally strong, with low unemployment and GDP growth continuing early in the year. However, the headwinds of inflation and the potential of another interest rate hike this summer mean that the economy is likely headed for a recession starting in the third quarter. 

Commodity IQ predicts this event will fit the definition of a technical recession, with at least two consecutive quarters of GDP declines. However, it will not rise to the level of a broadly-felt economic downturn that will strongly affect consumers and businesses. The quarterly GDP decreases are projected to be mild, and with unemployment at record-low rates, there’s headroom for joblessness to rise without nullifying an expected recovery in consumer and business spending.

Commodity IQ believes that while China’s GDP growth is rebounding in 2023, the rise in economic activity is not robust enough to return the country to its customary expansion rate. However, growth is expected to rise compared to 2022, driving an overall increase in consumer and business spending.

Commodity IQ also foresees a possible but less likely alternative scenario, with the U.S. delaying a recession until 2024 or avoiding a recession entirely if inflation continues to moderate and the Federal Reserve dramatically decelerates its monetary tightening program. 

A Recession’s Impact on The Electronics Supply Chain

Without a doubt, the global inflation crisis and subsequent tightening of monetary policies has tempered demand.

According to World Semiconductor Trade Statistics (WSTS), first quarter semiconductor billings were down 21% year-on-year, aligned to the 24% decline in the Commodity IQ Demand Index for all electronic components during the same period. One of the worst growth results since the U.S. recession and Lehman Brothers crisis of 2008 and 2009 when total year-on-year WSTS billings declined by 14%. 

Although the U.S. recession and the Chinese slowdown will dampen electronics demand moderately, sales are still expected to grow in the second half. U.S. consumer
activity remains strong, a factor that will likely drive up sales of electronic devices like PCs and smartphones compared to the first half, diluting the impact of the recession. 

Moreover, the second half represents the peak season for electronics sales as companies purchase components to support production ramps to serve consumer 

demand during the holidays. This seasonal event will drive sales growth throughout the electronics supply chain.

In addition, the ChatGPT craze has thrust the data center business into an AI arms race. Cloud and enterprise data center operators are doubling down on investments in AI-accelerated servers and related equipment to avoid being left behind by the generative AI revolution. This phenomenon is expected to fuel a rise in server shipments in the second half, following a double-digit year-on-year drop in shipments earlier in the year, driving growth in the critical MPU, memory, programmable logic, and ASIC markets.

If the U.S. skirts a recession this year, Supplyframe expects the usual second-half boost in consumer demand to be enhanced, driving greater sales growth for PCs, smartphones, and other electronics. With no U.S. recession or even a moderate recession, data center investments will trend upward on more positive economic sentiment.

Semiconductor outlook for H2
Book-to-bill ratios below 1.0 are being experienced by many semiconductor manufacturers, indicating a decline in new orders compared to device shipments. Subsequent lead time reductions and pricing adjusts are resulting as customers continue to aggressively trim and limit inventories while exercising caution in placing forward orders. General-purpose semiconductors like memory and standard logic (standard logic sourcing activities slid by 37% in H1 compared to H1 2022) devices are most affected. 

Excluding memory, upwards of 65% semiconductor pricing dimensions in the Commodity IQ Price Index will stabilize in H2 and nearly 30% will decrease. Semiconductor lead time (not including memory) dimensions will mirror pricing, with 35% projected to contract and 61% will equalize.

Amid these dynamics, industrial and automotive segments will remain resilient. Solid electric vehicle (EV) demand and the increasing incorporation of advanced safety systems in EVs and traditional autos will continue to be a focus for semiconductor suppliers. An uptick in industrial segment demand related mostly to power-related applications is also anticipated. 

Suppliers supporting these segments continue to be constrained and will be for the foreseeable future – with analog and power management (particularly power MOSFETs), microcontrollers (MCUs), and SiC and GaN products being especially troublesome.

Based on Commodity IQ Demand Index (down on average by 15% for semiconductors excluding memory in H1 compared to the same period last year) data, persistent macroeconomic concerns, and a variety of other factors – overall semiconductor demand actions in H2 will retreat in the range of 10%, with noted application-specific IC exceptions. 

Passive component outlook for H2

As with semiconductors, heightened automotive-grade passive component demand is forecast to persist well into 2024 while a lackluster consumer electronics segment will continue into Q3. This characterization will translate into enduring procurement challenges for larger case size, high-voltage capacitors employed in automobiles while adequate supply and declining prices for smaller case size devices will remain for other applications including smartphones through Q3.

Some passive manufacturers are anticipating late-2023 demand growth for some infrastructure markets. And EV charging, energy storage, and renewable energy sectors are seen as robust in H2.

Capacity utilization for capacitor suppliers is as low as 60% – encouraging mindfulness of a potential shortages if demand increases abruptly. Similarly, connector manufacturers are operating near or below 80% of capacity on weak demand outside of the automotive segment.

Nearly 60% of all passive pricing dimensions in H2 are forecast to decline and about 4% will rise, according to Commodity IQ Price Index data. Most (84%) passive component lead time dimensions will decline in H2, averaging about 15 weeks and supply apart from automotive-qualified devices should remain plentiful into Q4.

Let The Buyer Beware

The second-half increase in electronics demand may well change the wind for electronics buyers, who have been enjoying a respite from the rising prices and interminable lead times of the past few years in late 2022 and the first half of 2023. 

Lead time and price increases are expected to resume in H2 for various electronic components, including MPUs and MCUs, analog signal circuits, and transistors, according to Commodity IQ.

As a result, buyers should consider commencing their holiday and H1 2024 purchasing programs as early as possible to take advantage of current favorable conditions.

Subsequent articles in this series will study the forecast for the electronics supply chain, specific component categories, and the implications for electronics buyers. Subscribe to Commodity IQ to read the full series!