Despite Healthy Near-term Prospects, Slower Growth Looms on the Horizon for Industrial Controls
ROSSLYN, Va., August 3, 2006-NEMA's Primary Industrial Controls Index dipped 0.4 percent from the first quarter to the second quarter of 2006. However, this quarter's lower reading for the index does not necessarily reflect significantly weaker market conditions; instead, it likely suggests demand for industrial controls has merely cooled from the torrid pace of growth observed over nearly the past two years. Indeed, the industrial controls index increased 6.5 percent compared to the same period a year ago and has risen 11 consecutive quarters on a year-over-year basis.
The broader market index, the Primary Industrial Controls and Adjustable Speed Drive Index, continued higher in the second quarter and reached the highest level in its five-year history. Nonetheless, the signs of a slowdown are apparent in this index as well, as it increased just 0.5 percent between the first and second quarter of 2006. Again, however, overall market conditions remain robust compared to a year ago as the index rose 9.3 percent on a year-over-year basis.
Demand for industrial controls and adjustable speed drives is expected to remain healthy over the near term, as record corporate profits provide the impetus for additional spending on capital equipment and a weak dollar and relatively healthy economic conditions abroad stimulate foreign demand for U.S. manufactured goods. Leading indicators of manufacturing activity, such as new orders of non-defense capital goods (for example, aircraft) have increased well above consensus expectations and point to a slight pick-up in activity during the second half of 2006. Many plants are running almost full tilt and resources are being stretched thin, as recent data show the aggregate capacity utilization rate for the manufacturing industry hit a six-year high of 81.1 percent, while 40 percent of producers are running factories in excess of 85 percent capacity. Businesses will likely have to invest in new capacity such as facilities, machinery, and equipment as well as replace any worn-out equipment in order to maintain current levels of productivity.
Industrial controls, as well as other manufactured goods, will continue to see solid demand, but the robust pace of growth that has prevailed for the last three years is expected to dissipate, reflecting the U.S. economy's progression to a slower pace of growth roughly in line with historical trends. There are risks to the outlook, most of which currently appear to be biased to the downside. First, energy prices remain close to nominal dollar record highs amid strong global demand. Additionally, production shortfalls for several major oil exporters have left a razor-thin margin of spare capacity. When combined with the potential that conflicts in the Middle East could spread and affect oil production, energy prices could skyrocket and seriously weigh on global economic growth.
Inflation is also a major concern. Even as the Federal Reserve has hiked interest rates on a piecemeal basis non-stop for the past two years, measures of core inflation have crept higher, surpassing what many consider the Fed's range of comfort. Should pressure on core prices continue to build and the Fed accepts a higher rate of inflation, it could precipitate an environment of accelerating inflation. On the other hand, further reigning in the money supply with higher interest rates, at a time when the economy already appears headed for a slowdown, courts the risk of recession.
The Industrial Control Business Indices are issued quarterly by NEMA. The Primary Industrial Control Index represents U.S. shipments for motor starters, contactors, terminal blocks, control circuit devices, motor control centers, sensors, programmable controllers, and other industrial control devices. Because these data have been collected for some time, the primary index illustrates the market's trend over several years. In 2001, the NEMA data collection program was expanded to include adjustable speed drives, a key energy-saving industrial component. The Primary Industrial Control and Adjustable Speed Drive Index provides a broader measure of the industrial control marketplace. Industrial control equipment, a $2.6 billion U.S. market, is primarily used in industrial applications for the control or regulation of power utilization apparatus, including motors.
This index represents monthly sales information collected by NEMA from its members, the major industrial control manufacturers in the U.S. market. Detailed information is only available to NEMA members. The data underlying these indices represent more than 90 percent of U.S. sales of this equipment. For more information, contact Walt Kozikowski, industry director, at (703) 841-3262. To view the indices, visit the NEMA website at http://www.nema.org/econ/icbi/.
NEMA is the trade association of choice for the electrical manufacturing industry. Founded in 1926 and headquartered near Washington, D.C., its 430 member companies manufacture products used in the generation, transmission and distribution, control, and end-use of electricity. These products are used in utility, medical imaging, industrial, commercial, institutional, and residential applications. Domestic production of electrical products sold worldwide exceeds $120 billion. In addition to its headquarters in Rosslyn, Virginia, NEMA also has offices in Beijing, Sao Paulo, and Mexico City.
