Strong Dollar Sinks Electroindustry Equipment Shipments in 2016

Strong Dollar Sinks Electroindustry Equipment Shipments in 2016

This piece was originally published in the March 2017 issue of electroindustry.

Donald R. Leavens, PhD, Vice President and Chief Economist, NEMA/BIS

Electroindustry equipment shipments, broadly measured and seasonally adjusted, grew 0.9 percent in December after sliding one percent in November. A strong 2.2 percent gain in battery shipments in December was sufficient to offset a 0.4 percent decline in electric lighting equipment shipments and a 0.7 percent drop in core electrical equipment shipments, which include transformers, motors, generators, switchgear, industrial controls, and low-voltage distribution equipment.

For the year, the value of electroindustry equipment shipments was 5.6 percent below the 2015 level. The December gain helped to keep the change in shipments slightly above the expected decline of 6.1 percent. Core electrical and battery shipments in 2016 saw steeper 8.0 percent and 6.4 percent declines respectively compared to 2015. A 2.4 percent 2016 gain in the value of lighting equipment shipments helped to moderate the larger declines elsewhere in the electroindustry.

Orders were also down in December, slipping 0.7 percent at the aggregate industry level, partially reversing a 1.8 percent increase in November. Electrical equipment orders, which included core electrical and batteries orders, fell 1.3 percent in December after rising 2.6 percent in November. Lighting equipment orders declined by 0.4 percent in December following a 1.6 percent gain the previous month.

Electroindustry orders overall dipped 3.3 percent in 2016. The overall decline represents a 9.5 percent drop in electrical equipment orders and a 2.7 percent slide in lighting equipment orders.

The December data confirmed that the electroindustry suffered a stronger pullback in 2016 than in the preceding year, when shipments fell 1.9 percent. An extended period of wholesale inventory correction, an increasingly adverse exchange rate, the lingering impact of the recent plunge in oil prices, and weak global trade demand were the primary factors leading to the negative 2016 market. The strengthening value of the dollar constrained exports and helped to lift import penetration substantially.

Looking forward, improving economic growth globally is expected to offset some of the adverse impact of the strong dollar value. The extended period of inventory correction is also winding down and will be less of a factor as the U.S. economy picks up steam. An increase in infrastructure spending, to the extent that it materializes and includes electricity grid improvements and renewable energy investment, will help to sustain the industry longer term.

Although the baseline forecast calls for the electroindustry to break into positive territory in 2017 and gain momentum in 2018, several potentially unfavorable factors are in play. The Federal Reserve has signaled plans to raise interest rates several times in 2017 and 2018, which could increase the divergence in the interest rate paths pursued by the Fed versus the other leading central banks.

This divergence will likely cause the dollar to strengthen further, exacerbating the industry’s trade woes. Another uncertainty is the extent to which U.S. trade policy changes, which may lead trading partners to retaliate in ways that constrain demand for U.S. exports or disrupt intricate international supply chain arrangements.

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