Chip manufacturers’ woes are fueling recession concerns

Semiconductor stocks took a beating on Friday after a grim profit warning from Idaho-based Micron Technology Inc raised new concerns about US earnings power as the country may be headed for a recession.

Despite a broader stock rally, the Philadelphia Stock Exchange Semiconductor Index fell 3.8 percent after Micron, the largest maker of memory semiconductors in the US, indicated that demand for chips used in computers and smartphones was cooling.

The index, home to US chip giants Advanced Micro Devices Inc and Nvidia Corp, as well as Micron, is down 38 percent this year.

Photo Courtesy of Micron Technology Taiwan Inc

Historically, semiconductor stocks have been an important barometer for the broader stock market and economy. Chips are used in a wide variety of industries that are important for growth: devices, data centers, gaming and artificial intelligence.

If conditions are weak for chips, it raises questions about demand in other segments of the economy, which is a troubling harbinger for the stock market, said Matt Maley, senior strategist at Miller Tabak + Co.

“We didn’t have nearly enough chips and now demand is falling,” Maley said. “What signal does it give? It points to a growing concern that the slowdown we are experiencing will turn into a recession.”

The shortage of semiconductors, driven by supply and demand factors, has eased somewhat, but there is still limited production for certain chips used in vehicles and home appliances. Disturbing reports from semiconductor companies ahead of their second-quarter results raise fears that demand could outpace supply even longer.

“This weakness indicates that the economy is slowing and there is a possibility of a recession,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder LLC. “Semis are a red flag because they are really everywhere. They are so essential to everything being sold today. It’s the most rudimentary gear, so it’s a big disadvantage for the economy.”

Fears of an impending global recession and rising inflation are forcing consumers and businesses to rein in their spending.

Global PC shipments are down 9.5 percent this year, according to research firm Gartner Inc.

“The second half of the year got off to a rather unfavorable start after Micron’s dismal commentary, which negatively impacted smartphones, data centers and general consumer goods demand,” said Jim Dixon, senior equity trader at Mirabaud Securities. † “The disappointing outlook could be the prelude to an earnings recession.”

Even worse was a Digitimes Asia report that has seen the world’s largest contract chipmaker, Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), see its key customers cut their chip orders for the remainder of this year.

Shares of TSMC fell 4.73 percent Friday and are down about 26.26 percent so far this year.

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