Companies involved in the electrical equipment industry are seemingly doing well. The annual (12/12) rate-of-change for US Electrical Equipment Production (excluding appliances) indicates year-over-year growth of 3.4% as of March. However, the quarterly (3/12) growth rate is currently at 2.4%, indicating that further upside momentum for the 12/12 may be hard to come by in the near term, which means a decelerating rate of rise in production in the latter half of 2019.
Electrical Equipment New Orders are also signaling signs of a likely slowdown in the second half of 2019. Although New Orders are up 5.2% for the 12 months through March, the 1/12, which compares March of this year to March of last year, is at 1.5%. In fact, with the exception of a spike in January, the 1/12 hasn’t been above 1.6% since last September. The fact that the monthly growth rates have been lower than the annual growth rates (again, with the exception of January) for the past few months foretells of downside pressure on the 12/12 in the near future, and thus a high probability of a slowing rate of rise for New Orders as we head into the second half of 2019.
Furthermore, the US Electrical Equipment, Appliance, and Component Capacity Utilization Rate is declining. In fact, March’s reading of the Utilization Rate, 74.5%, is the lowest in more than a year. It highlights the reality that electrical equipment makers are using less and less of their capacity to meet market demand.
Considering the signs of an emerging slowdown, companies involved in this sector should look for ways to lock in longer-term business now, while their customers are still optimistic and spending money. Perhaps favorable pricing or extended payment terms could entice clients to favor 12- to 24-month contracts over the normal practice of buying for a near-term window.
At the same time, electrical equipment manufacturers should not be committing to any long-term expenses, as cyclical pressure on prices will be gradually easing (Phase C, Slowing Growth, of the business cycle, also known as "disinflation") as we move through 2019 and into early 2020. Facility rent, capital equipment, and some materials may be priced more favorably during that time.
If you are involved in this market, develop a rigorous analytical process that includes tracking your own 1/12, 3/12, and 12/12 rates-of-change. That way you’ll know where you are in your own business cycle. Then, take it one step further and identify your leading indicators, which will help you predict when the next cyclical low for your business will occur. Leading indicators will also predict the next cyclical rising trend in the overall electrical equipment sector, allowing you to take full advantage of the upside potential, internally and in the marketplace.
Based on the latest data inputs, it’s clear that businesses in the electrical equipment industry need to prepare for the impending market slowdown. If you would like to discuss some additional ways for your company to remain ahead of the curve, please reach out to us at ITR Economics. We are here to help!
