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Indices Show Manufacturing Industry Gains

Despite some weak spots, the numbers point to near-term resiliency for the economy, and for the industrial sector.

The National Electrical Manufacturers Association’s (NEMA) Primary Industrial Controls Index jumped nearly 8 percent between the third and fourth quarters of 2006, its largest quarter-to-quarter increase since 1992. On a year-over-year basis, the index rose 3 percent.  

By comparison, the Primary Industrial Controls and Adjustable Speed Drives index, a broader measure of demand for industrial controls, increased 5.6 percent during the fourth quarter of 2006. In addition, the index posted its thirteenth consecutive quarter of year-over-year growth, recording a 4 percent gain versus the fourth quarter of 2005. 

U.S. economic growth accelerated during the fourth quarter of 2006, as real gross domestic product (GDP) increased at a stronger-than-expected 3.5 percent annualized rate. Although the slumping housing market continued to weigh on economic growth, other factors, namely consumer spending and export demand, saw healthy gains to close out the year.  

Inventory correction 

Recent industrial sector indicators have been mixed, but still point to some firming in manufacturing activity, at least during the first half of this year. For example, the January reading for the Institute for Supply Management (ISM) index dipped, showing the manufacturing sector contracted for the second time in three months. However, an inventory correction cycle explains the sector’s recent weakness to some degree, as production of manufactured goods has tapered off as businesses sell off stockpiles. Once this inventory cycle works itself out, manufacturing activity is expected to regain some momentum.  

Segments of the manufacturing sector, including the electroindustry (comprised of electrical and electronic producers), continue to perform well. Although NEMA’s Electroindustry Business Confidence Index shows the electroindustry currently slumping somewhat from its erstwhile strong performance, industrial production of core electrical equipment (including industrial controls) surged 13 percent between December 2005 and 2006. In addition, the capacity utilization rate within the broader electrical equipment manufacturing sector came in at 85 percent during the fourth quarter.  

Though down from its peak from earlier in the year, the electroindustry’s capacity utilization rate remains well above its historical average of 82 percent. Both of these indicators likely suggest that demand for industrial controls and adjustable speed drives should remain at a relatively high level over the near term. 

Credit Manager’s Index 

Meanwhile, the seasonally adjusted Credit Manager’s Index (CMI) rose 2.5 percent from 54.7 in December to 57.2 in January, erasing all losses from the previous four months. All 10 of the combined index components rose, indicating economic expansion.  

“The service sector led the way in January, rising 3.4 percent, while the manufacturing sector rose 1.6 percent,” said Dan North, chief economist with credit insurer Euler Hermes ACI, in Owings Mills, Md.. “The CMI gives a similar impression to much of the other better-than-expected economic news, painting a picture of a resilient economy that has so far weathered the headwinds of a tightening monetary policy and a decimated housing market,” he continued. “It is quite likely, however, that the unusually warm weather in the densely populated East gave an extra boost to most recent economic indicators, including the CMI.” 

On a year-over-year basis, the total CMI was flat, as five components rose and five fell. The manufacturing sector rose 1.2 percent, outperforming the service sector, which fell 1.2 percent. “Perhaps most importantly, the two sectors and the combined index are all well above the 50 level, showing an economy which seems to be progressing quite well despite the weight of a tightening Fed and a frozen housing market,” North said.

National Association of Credit Managers

National Electrical Manufacturers Association

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