Forecasting the Global Electronics Cycle with Leading Indicators: A VAR Approach

Developments in the global electronics industry are typically monitored by tracking indicators that span a whole spectrum of activities in the sector. However, these indicators invariably give mixed signals at each point in time, thereby hampering efforts at prediction. In this paper, we present a unified framework for forecasting the global electronics cycle by constructing a VAR model that captures the economic interactions between leading indicators representing expectations, investments, orders, inventories and prices. The ability of the indicators to presage world semiconductor sales is assessed by Granger causality tests. The VAR model is also used to derive the dynamic paths of adjustment of global chip sales in response to shocks in each of the leading variables. These impulse response functions conform to our theoretical priors and confirm the leading quality of the selected indicators. Finally, out-of-sample forecasts of global chip sales are generated from the VAR model and compared with predictions from a univariate model as well as a model which uses a composite index of the leading indicators. An evaluation of their relative accuracy suggests that the VAR model's forecasting performance is superior to that of the univariate model and comparable to that of the composite index model