Semiconductor investors had to be disheartened by the second-quarter earnings report from FlextronicsInternational (NASDAQ:FLEX) on Tuesday. Flextronics is a semiconductor contract manufacturer that makes parts for many products, including handheld devices, PC-related electronics, and communications and IT equipment. By extending its tentacles into many aspects of the high-tech economy, Flextronics may have a better view than many tech companies of economic conditions. Unfortunately, the company's view is not pretty, and neither was the market's reaction to its results. Flextronics shares fell 24% on Wednesday.

Beginning in July and continuing into August, Flextronics experienced a broad-based weakness across all product lines, including its cell-phone segment, which lost two large European customers, Alcatel and Siemens. This led to sales for the quarter ended Sept. 30 dropping 6% from a year ago to $3.9 billion, which was about 5% below analyst estimates. Earnings also came in lower than expected. The company recorded a generally accepted accounting principles loss of $2.4 million. Ignoring restructuring charges and some other items, Flextronics earned $0.17 per share, short of analyst estimates by two pennies. Adding salt to the wound, it also lowered its earnings and sales guidance for the next two quarters.

Flextronics definitely has some of its own problems, but I worry that the broad-based softness in customer demand in its business may be hinting at a general industry slowdown as well.

You sure wouldn't think so by looking at current industry statistics. After an inventory build last year, business has improved markedly for semiconductor manufacturers. Certain segments of the market are doing great (like flash memory), and fellow foundry operator United Microelectronics (NYSE:UMC) is showing improved results. The capacity utilization rate, which measures the percentage of a manufacturing plant's production capability that is being used to produce chips, has been rising, and the Semiconductor Industry Association recently reported that global semiconductor sales were up sharply in August. Furthermore, the book-to-bill ratio for printed circuit boards continues to improve as the year progresses.

Unfortunately, statistics like capacity utilization and book-to-bill ratios aren't perfect for describing the health of the industry. The problem is that most semiconductor manufacturers sell to OEMs (original equipment manufacturers), which then sell their products to consumers and businesses. For example, Hewlett-Packard (NYSE:HPQ) buys microprocessors from Intel (NASDAQ:INTC) and Advanced Micro Devices (NYSE:AMD) and then sells them to consumers via their purchase of computers. If Intel has extra capacity, it can always produce more microprocessors, but that doesn't mean HP will be able to sell more computers. Semiconductor companies do their best to balance their production with end-user demand, but there is a lot of semiconductor capacity in this world, so it is easy to overdo it. The result is that capacity utilization and book-to-bill statistics can be lagging indicators of semiconductor manufacturers' health.

Excess production caused bloated inventories last year, and I have to wonder if high production, combined with the effect of high energy prices on consumers, is going to bloat inventories again. If so, Flextronics would not recover anytime soon.

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Fool contributor Dan Bloom has no financial interest in any stock mentioned in this article.