Demand for industrial controls weakened further during the second quarter of 2009


Aug 12, 2009

Shipments of industrial control equipment contracted yet again during the second quarter of 2009, as NEMA’s Primary Industrial Controls Index fell 6.5% versus the first three months of this year. Although this represents a much slower rate of decline than the first quarter’s 23% drop, shipments have declined nearly 40% from their cyclical peak and are at their lowest level in 18 years. On a year-over-year basis, the index posted its second consecutive record drop as it shed 35.4% versus the second quarter of 2008. The Primary Industrial Controls and Adjustable Speed Drives Index, a broader measure of demand for industrial controls, registered a 4.9% decline compared to the first three months of 2009, while shrinking more than one third versus the same period a year ago.

The rate of economic decline slowed considerably during the second quarter, as it appears the worst of the financial crisis is now in the rear-view mirror. Indeed, real GDP declined 1% on an annualized basis during the second quarter of 2009, an improvement over the roughly 6% average decline in the previous two quarters. However, with positive contributions coming only from net trade and government spending, aggregate economic activity can be called anything but robust. Given the weak level of final demand, many companies have little appetite for risk and have pulled back on capital spending for machinery and equipment such as industrial controls, instead opting to cut costs and save revenues to restore profitability and rebuild damaged balance sheets.

Manufacturers have struggled mightily during the economic downturn, as total industrial output has plummeted more than 17% since the recession began at the close of calendar year 2007. In fact, this represents the sector’s worst stretch since the Great Depression. With businesses continuing to aggressively liquidate inventories into the second quarter, manufacturers have idled more than one third of operable production capacity — yet another record. On a positive note, manufacturing activity may see a modest jump higher during the second half of the year. First, numerous auto manufacturing facilities that have been idled due to lackluster sales are scheduled to re-start production in the coming weeks. At the same time, new orders for durable goods (excluding aircraft and defense equipment) have trended higher in recent months.

Nonetheless, even once the recovery in manufacturing activity takes hold, it will likely evolve slowly. Businesses are holding large-scale capital spending outlays constant at best as they try to restore profitability, thereby keeping a lid on new equipment purchases. Replacement demand for industrial controls and other similar types of equipment will be weak even once production activity resumes since a record share of operable capacity is not in use at this time.

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