Investing Essentials: Industrial Electrical Equipment

ISM Purchasing Managers Index Chart

In a sector where leaders can achieve levels of scale that put them far ahead of peers, the industrial electrical equipment industry could potentially serve up some lucrative and long-term investing opportunities. But before investors begin their search for winners in this segment, they should understand the basics. Here is what you need to know.

What is the industrial electrical equipment industry?

The electrical equipment industry is typically recognized as a subsector of the manufacturing sector. The industry produces electrical products that generate, distribute, and use electrical power. Major products include electrical motors, generators, lighting fixtures, switchboard tools, switchgear, distribution transformers, industrial controls, relays, and heating, ventilation, and air-conditioning systems and components.

ISM Purchasing Managers Index Chart

ISM Purchasing Managers Index data by YCharts .

Other metrics indicate potential drivers for this sector include durable goods orders released by the U.S. Census Bureau, and capacity utilization figures released by the Federal Reserve Board. When monthly durable goods orders trend upward, it's a solid indication that the economy will produce positive growth catalysts for the industrial electrical equipment sector, and vice versa when the month-to-month trend heads downward. As for the capacity utilization ratio, a rate of 80% or higher indicates that spending in the sector will rise, according to Value Line.

Specific to the electrical equipment sector, companies are often highly reliant on copper, aluminum, and steel. As essential raw materials for electrical equipment, these are used in many products in this sector. Fluctuations in related commodity prices, therefore, can also affect the results of businesses in this sector.

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