Shrinking Margins in a Slowing Market

Companies involved in the electrical equipment industry are seemingly doing well. The annual rate-of-change (12/12) for US Electrical Equipment Production (excluding appliances) indicates growth of 2.7% on a year-over-year basis as of January. Furthermore, the quarterly growth rate (3/12) is currently at 3.1%, implying further upside momentum in store for the 12/12 in the near term.

However, Electrical Equipment New Orders are sending a more pessimistic signal. Although New Orders were up 3.4% for the 12 months through December of last year, the 3/12 is at 0.2%. The fact that the 3/12 has downward-passed the 12/12 is an ominous sign. It represents a negative ITR Checking Point™ that foretells of downside pressure on the 12/12 in the coming months, and thus a slowing rate of rise in New Orders as we head into the future.

Furthermore, the US Electrical Equipment, Appliance, and Component Capacity Utilization Rate is declining. In fact, January’s 74.4 reading of the Utilization Rate is its lowest value in more than eight years. It highlights the reality that electrical equipment makers are using less and less of their overall capacity to meet slowing levels of market demand.

With this emerging slowdown, companies involved in this sector will find it more difficult to maintain profitability. This is not an easy task given labor cost pressures, the need to continue to invest in technology and automation, and uncertainty related to the current trade disputes between the US and many of its top trading partners. It is precisely the issue of trade, and the protectionist policy pursued by the current US administration, that is causing prices for the most commonly used electrical equipment inputs – Steel and Copper, namely – to diverge right now.

The cost of Steel, imports of which are currently subject to a 25% tariff, is up 14.5% over the three months ending in January versus the same three-month period from one year ago. This is according to the latest reading of the Iron and Steel Producer Price Index. Copper, on the other hand, is not subject to tariffs at this time; its price is down 12.6% for the three months through February when compared to the same three months from last year.

Diverging materials prices require a highly proactive approach for both purchasing and price-setting, as a cruise-control mindset will invariably result in missed opportunities for achieving better profitability. If you haven’t already done so, develop a rigorous analytical process to track month-to-month (perhaps even week-to-week or day-to-day) changes in your input costs and, with that information in hand, determine the price levels that maintain your profitability targets. Finally, take the critical step of identifying and notifying those clients who will require pricing adjustments for future orders.

Based on the latest data inputs, it’s clear that businesses in the electrical equipment industry need to remain highly vigilant toward their margins, particularly in light of the impending market slowdown. If you’d like to discuss some additional ways for your company to remain ahead of the curve on profitability, please reach out to ITR Economics. We’d love to help!

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