In the MDM Mid-year Economic Outlook webcast in June, our analyst outlined a scenario with the second quarter of 2018 shaping up to be the strongest of the year. That outlook appears to be on track based on the most recent Baird Industrial Distribution Survey results, conducted in partnership with MDM. And while pricing continues to strengthen in 2018, freight costs are becoming a bigger drag.
On average, respondents indicated aggregate revenue growth (excluding acquisitions) in the second quarter was +5.9 percent year to year – exceeding the +5.0-percent forecast from last quarter’s survey. Growth improved sequentially, reflecting broad-based strength with mid-single-digit or better revenue growth across the major categories.
Overall pricing continued to accelerate in the second quarter (+2.7 percent), reflecting a mix of traditional annual pricing actions as well as some initial tariff-related increases – marking the highest pricing in the survey since 2011. Outsized pricing gains were seen in several building products categories, while industrial pricing was in line to below the overall survey average.
Finally, respondents provided a 3Q18 revenue outlook of +5.2%, implying a slight moderation near term, as well as an outlook for 2018 revenue growth of +5.1%. The 2018 outlook was unchanged vs. last quarter’s forecast, despite better-than-expected 2Q18 results. The consensus outlook by participants in the survey aligns with MDM’s forecast for 2018 revenue growth of 5.2 percent. MDM forecasts 2019 revenue growth moderating significantly to 2.9 percent.
Freight Costs Rising
“Freight costs continue to run amuck in pricing, delivery and forecasting,” a survey respondent said. “Prices are fluctuating and it’s becoming increasingly difficult to forecast.” Freight is growing as a percent of invoice, with ranges from 5-percent to 25-percent overall increases.
“Freight costs have increased 5-7 percent in the UPS/FedEx realm,” another respondent noted. “They are no longer willing to negotiate rates. We are using a freight broker for LTL to dampen freight costs.” Cost of fuel and labor costs due to lack of drivers were cited, as well as difficulty in passing these costs through to customers.
Comments by survey participants reflect overall sentiment starting to shift to more uncertainty in the economic cycle based on a variety of factors – tariffs, continued labor shortages, freight cost increases, NAFTA renegotiation and more. Here are some of the comments distributors shared in our latest survey:
- Things ramped up for us in 2Q. May was a historic month for inbound orders.
- We are in really good shape right now. We were up pretty substantially. Comparisons are going to get tougher now (from here).
- We’ve had a ton of mid-year price increases. You try to pass it down the line, but you never react to it as quickly as you want to.
- We’re seeing the U.S. Federal Reserve waking up and saying we’re going to do our part to control inflation and rates are going to go up. At some point that’s going to start to bite.
- Don’t know that anything has been settled or answered (regarding tariffs). It could be a complication in everything we’re doing now. The problem is it creates caution in the marketplace.
The current issue of MDM Premium includes a detailed survey analysis that breaks out specific industrial distribution sectors including industrial (includes general industrial (MRO), safety, cutting tools, fasteners, mechanical/power transmission, hoses & accessories, facilities MRO & jansan), electrical, HVAC/plumbing, building products, and gases/welding products. Here’s how to subscribe to MDM Premium.
Baird and MDM have partnered on this quarterly Industrial Distribution Survey since 2010. The survey includes more than 500 respondents and represents more than $100 billion in aggregate annual revenue across the product categories covered here.