Fourth Quarter Off to Rocky Start - Modern Distribution Management

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Fourth Quarter Off to Rocky Start

The news of out the White House that President Trump tested positive for COVID-19 — on the first day of the fourth quarter, no less — rattled the market and served as a potential blow to the rebounding economy. What else is in store for the last three months of 2020?
Last year’s momentum carried over into a strong first half of 2022 for many distributors. But a mishmash of headwinds and tailwinds reveal uncertainties for the rest of the year and into 2023, economist Brian Lewandowski and MDM’s Tom Gale discuss in a new webcast.

What a way to begin the final quarter of an already bizarre year.

On Oct. 1, the first day of 4Q, President Trump announced that he tested positive for COVID-19. The news sent shockwaves throughout the world, and the market reacted negatively Friday with the Dow, Nasdaq and S&P 500 all dropping.

The question now is how the economy will handle this potential disruption — which could fuel fears of a resurgent pandemic — on top of a still-sluggish job market, a looming presidential election, a delayed second stimulus bill and only a glimmer hope for a reliable coronavirus vaccine before 2020 hobbles to a close.

Perhaps my blog from last week about business being “back to normal” was premature? Not necessarily, says Paul Donovan, chief economist at UBS Global Wealth Management.

“After an initial reaction, the news is only likely to have a lasting market impact if it’s seen as influencing the election outcome or public health,” he wrote in a note to clients.

In other words, it’s too soon to tell.

What we do know is that the last few economic reports continue to paint a picture of an improving landscape. Yes, the job recovery lost some momentum based on the latest figures. And yes, real GDP declined significantly in the second quarter (everyone knew that would be the case based on the number of lockdowns and layoffs around the country from April to June).

But economic activity in the manufacturing sector expanded in September, and the overall economy grew for the fifth consecutive month — after dipping significantly due to the coronavirus — according to the nation’s supply executives in the latest Manufacturing ISM Report on Business.

And on the distributor front, Heating, Air-conditioning & Refrigeration Distributors International (HARDI), just released its monthly TRENDS report, showing the average sales performance by HARDI distributors was an increase of 4.5% during August. The average annual sales growth for the 12 months through August is 2.5%.

HARDI Market Research & Benchmarking Analyst Brian Loftus said the numbers are even better than they appear in the report. “August 2020 had about the same number of cooling degree days, but one less billing day than August 2019,” he said. “We estimate sales growth with the same number of billing days was more than 9%.”

What’s Next?

Now comes the tricky part — understanding what might happen for the remainder of 4Q and the start of 2021. We’ll know a lot more by Oct. 25; that’s when we’ll publish the next installment of MDM’s Markets Forecast, a new quarterly report compiled by the editorial staff of Modern Distribution Management in conjunction with the Leeds School of Business at the University of Colorado Boulder.

This new report offers quarterly revenue projections for the wholesale distribution industry, plus breakouts for select categories, for the current calendar quarter and the next fiscal year. Taking a host of variables into account, MDM Markets Forecast creates three “alternative scenarios” for the annual and quarterly projections over the coming years — baseline, optimistic and pessimistic.

Based on the Markets Forecast from our July 25 issue of MDM Premium, here are the projections for the recently completed 3Q and the current 4Q:

  • 3Q 2020: The baseline, or expected, scenario for wholesale distribution revenue is -14.1%, but if things break the right way — for example, if the coronavirus curve flattens more rapidly than expected because a vaccine comes to market — then an optimistic outcome would be -12.5%. However, the converse could also occur — shelter-in-place orders are extended and cases worsen — so the pessimistic forecast for wholesale distribution revenue in 3Q is -17.4%.
  • 4Q 2020: The baseline scenario for wholesale distribution revenue is -12%, while the optimistic scenario is -8.9% and the pessimistic scenario is -18.2%.
  • FY 2020: The baseline scenario for wholesale distribution revenue is -11.1%, while the optimistic scenario is -9.9% and the pessimistic scenario is -13.5%.
  • FY 2021: This marks the first full year of industry-wide growth, at least for the baseline and optimistic scenarios. The baseline scenario for wholesale distribution revenue is 2.6%, while the optimistic scenario is 7.1% and the pessimistic scenario is -8.5%.

Did 3Q meet, exceed or fall shy of expectations? How much, if any, will the 4Q, 2020 and 2021 forecasts change? Will 2020 ever end?

The answers to those questions and more (maybe not that last one) will be included in our next Markets Forecast, available only to MDM Premium subscribers, in the Oct. 25 issue of Premium. Subscribe now so you can benchmark your company’s performance and be prepared for the next disruption — and opportunity.

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