Analysts expect moderate, single-digit growth in coming years for the industry whose products are the brains of most popular and high-end electronics, but signals for future growth are mixed.
Among the bright spots: sales in the first three quarters of 2005 were up more than 6 percent over the same period a year earlier and chipmakers are using most of their capacity, good news for prices and margins.
But high energy prices, rising interest rates, and a string of damaging hurricanes have battered consumer confidence, which may hit purchases of computers and devices that run on chips from companies like Corp and Texas Instruments Inc.
"I'm fairly optimistic about the industry, but I'm not absolutely convinced that the (United States) is going to be very strong given our current macroeconomic situation," said Nathan Brookwood, head of market research firm Insight 64.
He spoke ahead of the Reuters Semiconductor Industry Summit, which is being held in San Francisco on Wednesday and Thursday.
The industry is also grasping for the kind of direction that it used to draw from must-have products like personal computers. Growth is now broad-based, fuelled not only by PCs, but by mobile phone and consumer electronics with no particular star performer, or "killer app."
"Now, there are a lot of small drivers such as the MP3 players, handsets, and PCs, so it's harder to forecast the outlook," Doug Andrey, an analyst with the Semiconductor Industry Association, told Reuters Television.
Market research firm Gartner expects world-wide chip sales will rise about 7 percent this year and 8 percent next year. The SIA is even more bullish as it looks for growth to accelerate from a forecast 8.8 percent next year to 13 percent in 2008.
With many microchip plants using more than 90 percent of their capacity in recent months, analysts say companies like Applied Materials Inc and KLA-Tencor Corp, which make the equipment used to manufacturer semiconductors, are poised to benefit most. "We are at the bottom, we've already fallen 60 percent. The key question is if there is any more downside at these levels and will things start moving up?" said Suresh Balaraman, an analyst with ThinkEquity Partners in San Francisco, referring to stock prices of equipment makers.
The industry is also facing a potential landmark shift as more companies, faced with spiralling costs of setting up factories tooled with the latest technology, opt to outsource their manufacturing.
"The economics of the industry are changing in that as the manufacturing processes go to smaller and smaller geometries ... the overhead and fixed costs of creating geometries of a smaller design keep on going up," Brookwood said.
"Today those costs are just out of sight."
For instance, Intel has just retooled one of its plants to handle larger wafer sizes - allowing it to get more chips per wafer - and a 65 nanometer etching process that allows it to make smaller, more powerful chips.