The leading chip-industry group said Wednesday that it was raising its estimates of semiconductor sales to $163 billion for nearly ended 2003, reflecting 16% growth over last year, and predicted even stronger growth for next year.

The latest forecast -- which reflects 3 percentage points of gain from a weak dollar -- is well above June's forecast of 10.1% growth for 2003 by the Semiconductor Industry Association. Wednesday, the group also projected that chip-industry growth would be even stronger in 2004, and above its earlier estimates, although the rate would slow down to single-digit percentages in 2005 and 2006.

SIA officials explained today that the previous 2003 forecast reflected a weaker demand outlook in the immediate aftermath of the war in Iraq and the outbreak of SARS in Asia. Since then, the third quarter has turned out to be much stronger than most analysts expected. For example, PC growth accelerated to 15%, well above forecasts for 8% growth.

In another sign that the recovery is in earnest, the SIA noted that semi outfits have begun to draw much more heavily on the total capacity of their fabs, or chip-producing plants. In 2001, at the low point of the tech downturn, the industry reported using only about 63% of total capacity.

By mid-2003, capacity utilization rates hit 86%, and marketing group VLSI has forecast overall utilization rates to hit at least 90% by the end of 2003.

Meanwhile, the SIA said it expects chips to deliver still more robust growth in 2004, with sales up 19.4% over 2003 levels. That outlook assumes PCs grow at a rate of 11%, with cell phones up 10% and servers up 15%. The SIA's June forecast put the 2004 growth rate at 16.8%.

Much of the expected 2004 chip growth will be fueled by an estimated 32.3% sales increase in the memory market, with all other semiconductors forecast to grow at a relatively more modest 16.3%.

In subsequent years, the semiconductor industry is projected to slow down, with estimated overall growth of 5.8% in 2005 (reflecting a forecast memory sales contraction of 10%) and 6.6% in 2006.

Overall, chips should post compound annual growth of 11.8% between 2002 and 2006, the SIA said.

Observers have at times cast a skeptical eye on forecasts from the SIA, given that its member semiconductor companies have reason to be optimistic. But its current outlook is in line with that of other analysts.

Spurred by robust third-quarter earnings reports and powerful GDP growth, investment banks and companies have likewise sounded sunnier on the near-term outlook for the chip industry.

Tuesday Deutsche Bank hiked its semiconductor growth forecast to 12% to 13% for 2003, citing the surprisingly strong recent growth in the U.S. economy. The bank had previously forecast growth of 8% to 9% this year.

It also raised its forecast for 2004 to 14% to 15% growth, up from 12% to 13%.

On Oct. 28, leading global foundry

Taiwan Semiconductor

(TSM) - Get Report

likewise brightened its official outlook, saying it expects the global semiconductor industry to wrap up 2003 with growth of 13% to 15%, up from a prior forecast range of 9% to 10%.

The TSM forecast is noteworthy because in July the company delivered a more sober 2004 industry forecast than its peers, at 11%. But last month it said it now expects growth of 15% to 20% next year.

Reacting to improved growth prospects and surging gross margins across chipland, investors have bid up the benchmark semiconductor index by a whopping 80% this year. On Wednesday, the Philadephia Stock Exchange Semiconductor Index closed at 519.4, up from 289 on Dec. 31, 2002.