January 27, 2023

The US chip sector is experiencing both feasting and famine. This week, the US signed $52 billion in grants into law. It is a transformative support level designed to aid the expansion of domestic chip production. However, the timing is unfortunate. The demand for chips is collapsing all over the world.

With inflation at 8.5 percent in the US, it makes sense that spending on PCs and other personal technology is falling. The domino effect has been reported by Intel and Nvidia. But Idaho-based Micron Technology has also pointed to weaker demand for cloud computing and automobiles. These two areas were expected to hold up better than consumer technology.

Before inflation rose, the chip sector was already dealing with the end of the sales boom from the coronavirus pandemic and the aftermath of a production increase that could lead to overcapacity. The inventory is running out. Sales of the chips that power computers, cars and other electronics are unlikely to recover this year. According to the Semiconductor Industry Association, worldwide sales rose 13 percent in the second quarter of the year. But within that period, sales in June were 2 percent lower than in the previous year. Overall, they are expected to rise just 7 percent this year, up from 26 percent in 2021, Gartner said.

The Philadelphia semiconductor index, which includes the 30 largest U.S. companies involved in the design, manufacture and sale of semiconductors, is down 25 percent this year. That’s twice the size of the decline in the broader S&P 500. Still, valuations remain high. For example, Micron is valued at more than 10 times projected earnings for 2023 – a 12-month high.

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The saving grace is that US government investment will not cause oversupply. Projects will take years, maybe decades to reach maturity. It will be three or four years before production starts at Intel’s chip factory in Ohio. Micron’s $40 billion investment will be spread over 10 years. The chip cycle is typically about three to five years. With any luck, the next upswing will coincide with a renaissance in American manufacturing.