Here’s an exclusive summary of Adam Fein’s 2010 Economic Forecast for Wholesale Distribution, presented at an MDM Webcast in November and available for a limited time on CD at a 15% discount to PTDA members. Use the Promotional Code: PTDA.

Employment will be a key factor in recovery, according to wholesale distribution industry expert Adam Fein, who recently presented the 2010 Economic Forecast for Wholesale Distribution in an MDM Webcast.

He forecasts 6.6 percent growth in wholesale distribution for 2010; excluding oil and gas, and agricultural products, he expects growth of 5.6 percent. That compares with a decline of 11 percent in 2009.

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Growth expectations vary within the distribution sector, with a forecast of 0.3 percent for industrial distributors and more dramatic growth for the hardest hit sectors, including 17.8 percent growth in 2010 for motor vehicles and motor vehicle parts wholesalers and a 10.6 percent increase in building material and construction distribution. The only sector for which he forecast negative growth was agricultural products.

While the news seems good, Fein told participants we won’t see a self-sustaining recovery until employment growth returns. He does not anticipate that to happen until the end of 2010 and into 2011. \”The reality is we are dealing with an economy that went through a massive shock, and it’s going to take many years to absorb the large number of unemployed and discouraged workers,\” he said.

Employment Trends
Since December 2007 – the official start to the recession – the U.S. has lost 8 million jobs, or more than 5 percent of total employment. The number of hours worked per week is down to 33, the lowest since the government started collecting data at the end of World War II.

\”So the unemployment rate, while measuring at 10.2 percent, if you look at what’s called the broad unemployment measure – people who have given up looking for work – that is closer to about 17.5 percent,\” Fein said. \”That’s a substantial number of people out of work.\”

Where are we in the current cycle? Fein says that in a typical recession, when the economy starts coming back, productivity starts to grow. We’re seeing that now. Then the number of hours worked starts to grow, and new jobs are created.

\”Right now we’re in that first stage. We’re seeing productivity grow, and companies are very reluctant to hire. That is going to be a big drag on this recovery, and the employment issue is really going to dominate the political environment.\”

Where were most jobs lost? Not surprisingly, in financial, manufacturing and

construction industries. According to Fein, those industries accounted for 80 percent of job losses during this recession.

What’s different about this recession, he said, is that some won’t return as they did after the 1981 downturn.

Excess Capacity
This time around, these industries had significant excess capacity, or in the case of manufacturing, have moved jobs offshore.

On the residential construction front, for example, "we went from a $400 billion annualized residential investment up to almost $700 billion. Now we’re running about $250 billion." Commercial and nonresidential construction is starting along that same path. "The commercial real estate sector was very overbuilt, driven in part by the overheated economy and financial sector. … I don’t think it’s going to be as bad as the popping of the residential bubble, but it’s going to be very bad."

The good news: Fein expects an eventual return in the construction sector to what might have been normal in the 1980s and 90s – in other words, a more predictable business cycle. "What happened in the last five to eight years is not going to repeat itself."

Beyond just construction, the economic recovery won’t feel as "robust" as previous turnarounds, he said. Some industries that fell hard and fast will recover but "it’s not going to feel like much of a recovery." Indeed, some industries are still in the throes of struggle.

Inventory
Distributors have burned off a lot of inventory over the past year as they have tried to conserve cash.

Fein’s calculations showed that since September 2008, about $60 billion in inventories have been taken out of the distribution channel; 15 percent of wholesaler-distributor inventories have gone away in the past year. These numbers excluded the more volatile sectors of oil and gas, and agricultural products.

"That means the shelves are getting bare," Fein said. "So as demand starts to come back, this will be an accelerant. Right now, it’s been a decelerant to economic growth, … but as inventory levels start to come back to normal, you’re going to see that be an additive factor to growth."

Stimulus Impact
As Fein outlined in his mid-year MDM Webcast focused on opportunities for distributors in the American Recovery and Reinvestment Act (ARRA), direct spending from the economic stimulus package that will affect distributors comes to about $200 billion.

He said that this will start hitting in 2010 and 2011. That said,

the stimulus bill will likely not be as "stimulative as required," he said.

Government support has helped to prop up the economy over the past quarter – Fein cited the "Cash for Clunkers" program, as well as tax cuts, aid for unemployed workers and the home buyer tax credit.

With that in mind, the path back to self-sustaining growth is not likely to be a smooth one.

Planning for a ‘Choppy Recovery’
Fein sees a "fairly decent recovery" starting next year, but warned that there is a small chance of a "double dip recession," where an increase in interest rates or a failure of employment to pick up or other factors may cause the recovery to falter.

Fein encouraged executives to think realistically about the next half-decade: "The last five to eight years are not a good forecast for what the next five to eight years are going to look like. … We’re at a fundamentally different point in time."

Moving forward, according to Fein, distributors need the "skill to be strategic."

"Simply riding the tide is going to be harder," he said. "This time is going to require being more thoughtful and strategic about where the opportunities are going to emerge."

These uncertain times will also require the will to invest in where future growth will be (and time to determine where those areas are), he said. "How are you going to grow with the customers who are more likely to be successful as we’re coming out of this period?" Fein asked. "How are you going to target those opportunities?"