NEMA’s Primary Industrial Controls Index slipped 0.3% in the third quarter of 2010 versus the second quarter. This represents the first quarter-to-quarter decline in the index since 2009Q2, but it remains nearly 23% above its year-ago level. Even with this upward trend in demand, inflation- and seasonally adjusted shipments remain more than 18% below their cyclical peak. The Primary Industrial Controls and Adjustable Speed Drives Index, a broader measure of demand for industrial controls products, posted a 1.5% quarter-to-quarter rate of growth during 2010Q3 and shows a 25% improvement versus the same period a year ago.
Following four solid quarters of average annualized growth in output (~9%), the manufacturing sector’s recovery has tapered off in recent months, slowing to an annualized increase of 4% during the third quarter of 2010. Indicators such as the ISM and regional surveys indicate the manufacturing sector is still expanding, but the sector’s performance has been less robust as of late; moreover, the winding down of the inventory rebuilding cycle could hamper the industry’s prospects for growth going forward given that consumer demand remains lackluster and the rebound in capital spending activity is still in its early stages. Exports will likely play a significant role in boosting manufacturing output, but the shaky condition of the global economy poses a downside risk to the sector’s growth.
Over the near term, NEMA’s industrial controls indices will likely register moderate gains at best. The initial burst in demand for industrial controls caused by companies restarting idled factory capacity is waning. Corporate profits have staged a solid recovery and should support spending by businesses on industrial controls and other related types of industrial equipment over the long term. Moreover, low interest rates and improved business balance sheets augur well for capital spending plans. Unfortunately, lingering economic uncertainty and a still-high share of idled factory capacity will weigh on business investment, as companies remain focused on replacing worn-out equipment rather than undertaking any major expansion plans.