We are optimistic about 2006 and are forecasting world connector sales up +7.6%. The following table shows our 2006 connector industry forecast by geographic region.

	2006 Industry Forecast

It is clear to us that China and the Asia Pacific region will continue to be the electronics industry drivers.

Our optimistic outlook for 2006 is based on a number of issues:

1. World economies are very healthy, and the consensus opinion is that 2006 GDPs will rise.

 The following table provides 2006 average forecast GDPs, compared to 2005, for some major industrial countries.

	2006 Forecast GDP Compared to 2005

Additionally, China and the major Asia Pacific countries are thriving and expect to continue strong growth in 2006. The following table shows the substantial GDP growth being achieved in Asia.

	Asia Pacific GDP

Clearly this region will continue to drive connector sales in 2006.

2. The Semiconductor Industry Association (SIA) just released their annual forecast, predicting that semiconductor sales would increase +6.8% in 2005 and +7.9% in 2006. That’s good news for the connector industry because sales of the two components generally move in the same direction at about the same time. This is logical. Semiconductors are installed on printed circuit boards, and more than 50% of all connectors are PCB board mounted types.

The relationship between these components becomes very clear when historical sales are compared.

	Industry Sales Performance

 In eight of the past 11 years, semiconductor and connector sales moved in the same direction. The exceptions were 1996, 1998 and 2002. In 1996, semi’s declined and connectors were up. In 1998, semi’s declined and connectors were up slightly. In 2002, connector sales were negative and semiconductors displayed small growth. The 10-year CAGR’s are very close (connectors 4.5%, and semiconductors 4.7%).

The relationship between semiconductors and connectors becomes stronger and more compelling when additional analysis is performed:

• Sales of public semiconductor and connector companies
• Monthly industry sales
• Mathematical modeling

Public Company Comparisons

Bishop & Associates tracks the quarterly sales of five public connector and 13 public semiconductor companies.  The following chart displays their consolidated quarterly sales.

The relationship is visually obvious.

The names of the semiconductor companies included in this analysis are on page 17 of The Bishop Report (issue no. 154, September 2005). The public connector companies are Molex, Amphenol, Methode, Woodhead, Stratos Lightwave and RF Industries.

Go to http://www.connectorstats.com and The Bishop Report archives for the September 2005 issue.
 

The following chart plots the percentage change in monthly sales of semiconductors (reported by SIA), and connectors reported by the connector companies participating in Bishop & Associates monthly book-to-bill analysis. The relationship between sales of semiconductors and connectors is again obvious.

It is obvious there is a close correlation between the sales of semiconductors and connectors. However, the modeling we conducted in the 1980s suggested the relationship was coincidental, i.e. semiconductors neither lead nor lag connectors but move in the same direction simultaneously.

We are encouraged by recent mathematical analysis because our early findings suggest that semiconductors lead connector sales by one or two months. The different results, 1980s versus now, probably occurred because our connector data is much improved.

This is an important finding (semiconductor sales lead connector sales) and with additional factors, we hope to develop a forecasting tool that would warn us of changes in future demand for connectors.

Final Conclusion Semiconductors

SIA forecasts semiconductors to grow +7.9% in 2006. We can be reasonably sure this is good for connectors. The issue becomes - is the SIA forecast accurate?  We have no history of SIA forecasts in which to offer a judgment, except one.  In 2004, the SIA forecast 2005 semiconductor sales to be flat.  In June 2005 that forecast was raised to growth of +6.8%. 

We will continue to research this subject. It would be useful to know the historical accuracy of the SIA forecasts.  We suspect they are reasonably good in the short term and predictably less accurate in the long term.
 

Connector Industry Forecast

We have forecast connector sales at +7.6% in 2006.

The following table provides the Bishop & Associates connector sales forecast and the SIA forecast for semiconductors.

	Sales Forecast

The SIA forecast from 2005 through 2008 shows each years growth increasing. We are less optimistic than the SIA for year 2007 and 2008.

3. Connector industry personnel are very confident in present and future business conditions. The following provides the results of our confidence survey of industry personnel.

In our opinion, a confidence index above 80.0 is excellent.  We believe current conditions and recent industry performance warrant a high confidence level.
 

The world Connector Confidence Index is the combination of present and future confidence scores from all geographic regions.

Present Business Expectations

Industry personnel were asked, “What is your appraisal of current business conditions (positive, negative, neutral)?”

	Present Situation Index >50 = Positive

Confidence in present business conditions rose in the United States, Europe, and Japan. Asian confidence dropped slightly in February to 95.2 from 98.2 in January. 

	Future Expectations Index >50 = Positive

Future Business Expectations

Industry personnel were asked, “What is your expectation of business conditions six months from now (positive, negative, neutral)?”

	Future Expectations Index >50 = Positive

Confidence increased in the United States, Europe and Japan in February. However, Asia dropped to 95.3 in February.

	Future Expectations Index >50 = Positive

Confidence in U.S. business conditions is above 90.0 for present and future.
 

4. Connector industry bookings began to improve in August 2005 and have now achieved four consecutive double-digit increases.

	Recent Industry Orders

We anticipate similar performance for new orders in December.

Additionally, 2005 orders were flat to down in January through July, meaning the first half of 2006 will have easy monthly comparisons. This is illustrated in the following table.

	Orders - Percent Year-Over-Year Change

5. Inflation remains very low historically, and it is speculated that the U.S. Federal Reserve is nearing the end of interest rate hikes. This is positive for the 2006 U.S. GDP, which is still the world’s largest economy.

6. All end-use markets continue to grow, especially computer, wireless telecom, medical, industrial and transportation. The U.S. auto market is a concern as is U.S. military spending in 2006. However, as the U.S. military budget is reduced, spending on electronics continues to grow because the military estabilishment is trying to reduce costs in personnel as opposed to electronics equipment.

In conclusion, we are bullish on 2006 and believe it will be the fourth consecutive growth year for the industry.