NEW YORK ( TheStreet) -- The semiconductor-equipment market's recovery, which we pointed out last week appears to have begun, will exhibit a U-shaped trend, based on proprietary leading indicators.

Our proprietary leading indicators, which determine inflection points in economic activity and which we utilize to show turning points in semiconductor-equipment sales, have turned positive for the past three months and are exhibiting U-shaped growth so far.

Based on past cycles, there is a corresponding shape to the semiconductor-equipment market, so we postulate that the growth will also exhibit a U shaped behavior.

For 2009, we forecast that the semiconductor equipment market will drop 46%. Most importantly, based again on our proprietary leading indicators, growth will continue through 2012, increasing 20% in 2010 and 49% in 2011.

Chip-Equipment Sales and the Economy
Source: The Infornation Network

Objective, concrete evidence comes from the positive activity in our proprietary leading indicators in the U.S. Both our long and short indicators turned up in late 2008, pointing to a business recovery cycle and giving visibility that the days of the recession are numbered.

Semiconductor-equipment companies are reporting sequential gains in revenue.

KLA-Tencor ( KLAC) reported that new orders for the fourth quarter were $327 million, an increase of 19% over thre third quarter, while Novellus ( NVLS) reported that second-quarter 2009 bookings were $111.2 million, up 43% off the low the company saw in the first quarter. Both noted that foundry activity had increased. KLA-Tencor's foundry customers comprised 53% of semiconductor systems orders in the fourth quarter vs. 40% in the third.

Singapore-based foundry Chartered Semiconductor ( CHRT) raised its 2009 capital budget forecast by a third on growing demand, and we expect similar positive activity coming from Taiwan-based foundries Taiwan Semiconductor ( TSMC)and United Microelectronics ( UMC) as they report this week.

Foundries have been increasing market share over the past 10 years as fabless chip designers, with a clever chip design, can enter the market with nothing more than a PC and design software. Several semiconductor manufactures have shuttered their own fabs to save costs and have become fab-lit by contracting these foundries to manufacture chips for them.

And several semiconductor manufacturers with fabs (integrated device manufacturers IDMs) have reported strong sequential revenue growth. Intel's ( INTC) quarterly results and outlook exceeded analysts' forecasts on improved consumer demand for PCs. Texas Instruments' ( TXN) revenue increased 18% compared with the first quarter of 2009.

A keynote for investors is knowledge of where revenue ise coming from, which would reflect growth in certain sectors. Companies will never give out revenue by customer, but will point out sectors of their growth which will infer growth in a particular company.

Take Novellus, for example. The company noted that NAND prices were up dramatically, 75% year to date on the mainstream 16-gigabyte chips, due to both robust demand of smartphones and some supply cuts. NAND is used in flash memory cards for electronic applications.

By inference, the largest NAND supplier is SanDisk ( SNDK), which reported that revenue increased 11% on a sequential basis. And if we look at the smartphone market where these NAND devices go into, Apple ( AAPL) comes to mind with its iPhone.

Another indicator of the growth of the semiconductor market is results from chemical and materials suppliers to the chipmakers. Chemical consumption is a function of silicon real estate; the greater the number of square inches of silicon wafers used, the greater the amount of chemicals and materials consumed.

MEMC ( WFR), a U.S.-based silicon wafer supplier, reported second-quarter 2009 net sales of $282.9 million, which represented an increase of 32.2% from first- quarter 2009 net sales of $214 million;. the sequential increase in sales primarily the result of significantly higher wafer volumes for semiconductor applications. Cabot Microelectronics ( CCMP), a supplier of slurries and pads for chemical mechanical planarization, reported fiscal third-quarter revenue of $86.4 million represented a 90.4% increase from $45.4 million in the prior quarter.

As the recession eases, companies and consumers will unleash pent-up demand and make the electronic purchases driving the semiconductor market, which has already turned positive. Although unemployment in the U.S. is tending upward to 10%, there is still an employment rate of 90%.

Once the unemployment rate stabilizes and employed people no longer fear they will lose their jobs, they will again start making purchases, enjoying the benefits of lower prices of consumer-related products.

-- Robert Castellano is based in New Tripoli, Pa.
Robert N. Castellano, Ph.D, is president of The Information Network, a leading consulting and market-research firm for the semiconductor, LCD, HDD and solar industries. Castellano is internationally recognized as one of the leading experts in these areas. He has nearly 25 years of expertise as an industry analyst. Castellano has provided insight on emerging technologies to many business and technical publications, including Business 2.0, BusinessWeek, The Economist, Forbes, Investor's Business Daily, Los Angeles Times Magazine, The New York Times, USA Today and The Wall Street Journal. He is a frequent speaker at conferences and corporate events. He has over 10 years' experience in the field of wafer fabrication at AT&T Bell Laboratories and Stanford University before founding The Information Network in 1985. He has been editor of the peer-reviewed Journal of Active and Passive Electronic Devices since 1985. He is author of the book "Technology Trends in VLSI Manufacturing," published by Gordon and Breach. His book "Solar Cell Processing" was published in 2009 by Old City Publishing. He received his Ph.D. in solid state chemistry from Oxford University.