A strong finish but cautious 2008 outlook

March 1, 2008
Although 2007 saw strong growth, the weakening housing market and signs that business confidence is becoming increasingly fragile are causing prospects

Although 2007 saw strong growth, the weakening housing market and signs that business confidence is becoming increasingly fragile are causing prospects for the manufacturing sector to erode and may result in declines in shipments of industrial controls in 2008.

NEMA's Primary Industrial Controls Index surged 8.3% in the fourth quarter of 2007 relative to the third quarter. On a year-over-year basis, the index increased 10.6%, its largest gain since the beginning of 2006. Full calendar year, the index registered 6.2% growth, the best year since 2004, and climbed to its highest level since 1997.

NEMA's Primary Industrial Controls and Adjustable Speed Drives index, which measures broader demand for industrial controls, also expanded at a healthy pace, increasing 6.7% from the prior quarter and 11.4% on a year-over-year basis. For all of 2007, the index climbed 7.9%.

Despite strong demand for industrial control equipment during the fourth quarter, U.S. economic growth has slowed considerably in recent months. After real GDP growth jumped nearly 5% on an annualized basis during the third quarter, it almost stalled completely at the end of 2007, posting an annualized gain of only 0.6%.

Consumer spending expanded at its slowest pace in years, residential investment continued to decline precipitously, inventories contracted, and the balance of trade was not as strong despite a slumping dollar. On a positive note, business investment expanded at a solid pace, most notably for spending on nonresidential structures.

In terms of the manufacturing sector, the most direct driver of industrial controls demand, indicators have remained largely positive but show growth has moderated over the past 12 months. For example, the ISM manufacturing index has hovered around the expansion/contraction threshold of 50 for the better part of five months, even coming in below 50 during December.

The production component of the ISM index recently rose to its highest level since last summer, but other components have been less impressive and more indicative of weakening demand. Reports on durable goods orders indicate capital spending by businesses remains elevated and should support manufacturing activity over the near term, as should strong export demand due to the weak dollar.

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