Industrial controls finish 2007 strong; optimism in 2008

NEMA reports strong growth in 2007; A separate Morningstar report suggests manufacturing optimism through 2008.

02/25/2008


Rosslyn, VA – The NEMA Primary Industrial Controls Index rose 8.3% in the fourth quarter of 2007 compared to the third quarter. On a year-over-year basis, the index increased 10.6%, the largest gain since the beginning of 2006, says the

National Electrical Manufacturers Association (NEMA)

. A separate

Morningstar report suggests manufacturing optimism through 2008

.

For the calendar year 2007 , the NEMA index registered 6.2% growth, the best year in terms of growth since 2004, and went to its highest level since 1997. NEMA’s Primary Industrial Controls and Adjustable Speed Drives index, which measures broader demand for industrial controls, expanded at a healthy rate, increasing 6.7% from the previous quarter, and 11.4% on a year-over-year basis. For the year 2007, the index increased 7.9%.

NEMA said, despite heavy demand for industrial control equipment over the fourth quarter, U.S. economic growth has recently slowed considerably. After real GDP growth jumped almost 5% on an annualized basis over the third quarter, it nearly stalled at the end of 2007, registering an annualized gain of 0.6%. Consumer spending expanded at the slowest pace in years, residential investment continued to decline, inventories contracted, and the balance of trade was not as strong in spite of a slumping dollar. But business investment expanded at a healthy pace, primarily for spending on nonresidential structures.

In the manufacturing sector, the most direct driver of industrial controls demand, indicators remained mainly positive but show that growth has moderated during the last 12 months, NEMA said. The ISM manufacturing index remained close to the expansion/contraction threshold of 50 for the best part of five months, and came in below 50 in December 2007. The production component of the ISM index recently rose to its highest level since the summer, while other components have been less impressive and more indicative of weakening final demand. Reports on durable goods orders show capital spending by businesses is up and should support manufacturing activity in the near term, as should strong export demand as a result of a weak dollar. However, with the suffering housing market and pointers that business confidence is becoming more fragile due to recession rumors, prospects for manufacturing have eroded and could cause declines in shipments of industrial controls this year.

In separate but related news, a recent Morningstar report noted that althougharticle’s author, Tom D'Amore, CFA, suppliers of these products will buck the trend of slowing sales growth among industrial companies and generate robust sales and earnings growth in 2008. It is estimated that industrial controls create a $200 billion per year global market in two parts -- process management and factory automation controls. The five largest global industrial controls producers generated 11% organic growth in 2007.

Despite signs of a weakening U.S. economy, Morningstar said, it is estimated that organic sales growth actually ticked up to 12% in the fourth quarteringle best predictor of future sales results. The largest producers of industrial controls reported growth in their orders ranging from 9% to 30% in the fourth quarter of 2007, pointing to solid support for future sales.

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