SAN FRANCISCO—The business climate for the semiconductor industry is deteriorating, and leading indicators point to an imminent correction in the semiconductor market according to an analyst.

While the semiconductor sector has in 2010 enjoyed a dramatic rebound from a disastrous 2009, the party is nearly over, according to Robert Castellano, president of The Information Network, a high-tech market research firm.

Castellano predicted that a drop in sales of electronic gadgets would first impact the DRAM sector, which showed year-to-year sales growth of 135 percent in the second quarter. Castellano predicted that slowing PC sales would hurt microprocessor vendors Intel Corp. and Advanced Micro Devices Inc. and said semiconductor foundries would also feel the impact.

In recent weeks, several market research firms have revised upward their forecasts for semiconductor industry growth in 2010, with many now predicting the industry will see growth of better than 30 percent this year. But some chip firms, including Intel and AMD, have also lowered their sales targets due to slowing PC sales, and even the market research houses that raised their forecasts have predicted a slowdown in the second half of 2010.

Earlier this week, Vernon Essi, an analyst with Needham & Co. LLC, lowered estimates for several analog chip vendors. Both Exar Corp. and PMC-Sierra Inc. also lowered their sales targets this week, but some wireless chip vendors including Infineon Technologies AG and Skyworks Solutions Inc. have recently increased their outlooks.

According to Castellano, the "hyper-growth" shown by the semiconductor industry through the first half of this year cannot be sustained because the global macroeconomic climate cannot support semiconductor industry growth of greater than 50 percent. Castellano warned against forecasts for semiconductor and chip equipment industry growth that "seem to get bigger with each monthly announcement," saying "the fragile economies of the Western world do not warrant such growth."

Castellano predicted that a drop in semiconductor sales would also usher in a corresponding drop in sales for semiconductor equipment and materials. The front-end market will suffer pushouts and the lithography sector will be impacted most, Castellano predicted.

Castellano also drew parallels between 2010 and 2000, when he said poor inventory control, fear of IC shortages and concern over long waiting times for leading-edge equipment translated into a year that ended with $10 billion in excess IC capacity and a devastated chip equipment industry that never fully recovered until this year.