This year distributors should focus on positioning for growth, according to Andrew Duguay, senior economist with the Institute for Trend Research. Duguay was featured in the recent MDM Webcast, The 2014 Distribution Industry Outlook. He advises distributors to leverage current conditions and invest in their companies. This article is an exclusive summary of Duguay’s presentation.
As businesses move on from 2013, a year of slow, uneven recovery, it is important to look toward the future and establish long-term growth plans, according to Andrew Duguay, senior economist with the Institute for Trend Research. Duguay was featured in the recent MDM Webcast, The 2014 Distribution Industry Outlook.
“We expect growth in 2014, but we expect better growth in 2015 and 2016,” Duguay says. “When you look out to 2014, 2015, ‘16, ‘17, really think about growth and opportunities. On the back side of 2015 we should see more growth, and so we really want to plan to ramp up capacity, see where your needs are, cross-train your key staff and really prepare for economic growth ahead.”
According to ITR, the U.S. economy will grow through 2017. While growth in 2014 will be slower, indicators currently show the economy will not slide back into a recession. Key indicators of this are the rebound of the construction market and retail sales increasing 3 percent year-over-year in 2013.
“2013 was a fantastic year for the consumer starting to feel more comfortable spending again,” Duguay says. “This is important for distributors because this is the end channel where demand is driven.”
Banks are also recovering and have started lending again, and interest rates are low, thanks to the actions of the Federal Reserve. In addition, unlike pre-recession times, businesses, consumers and banks are no longer over-leveraged. Delinquency rates are lower than at any time in recent history, according to Duguay. The low delinquency rates mean consumers will be better able to withstand outside shocks to the U.S. economy, helping to create a more sustainable recovery. It also means that banks, which planned for more loan defaults this year, now have more liquid capital than expected.
“Part of our outlook for a positive economy in 2014 and beyond is the fact that banks are lending today and that businesses are going out there and borrowing more today than they were before, because we need that in order to finance the future,” Duguay says.
Businesses have about $1.8 trillion in liquid assets, a record high, according to Duguay. Pre-recession levels were between $1.2 trillion and $1.3 trillion, meaning companies are better positioned now to withstand an economic downturn or shock.
Planning for the Future
In a poll of the Federal Reserve System Federal Open Market Committee board members, the group in charge of making decisions on interest rates, only three members believe short-term interest rates will stay between 0 percent 0.25 percent through 2015. In the long run, most of the board believes interest rates will hold around 4 percent, a 400 basis point rise from where they are now.
“We’re being lent a gift right here with the Federal Reserve keeping interest rates low, and it’s really a by-product of the fact that our economy is not growing at full capacity, that we don’t really have those inflationary pressures,” Duguay says.
“What we expect is that interest rates are going to slowly move up over time, and so that means that if you have borrowing needs, really consider where you want your business to be five years from now. Then really consider borrowing and locking in interest rates because the Federal Reserve certainly has been artificially keeping them low.”
Along with historically low interest rates, inflationary pressures have been mild. For his Consumer Price Index Forecast, Duguay projected price inflation for 2013 to be 2 percent to 3 percent, up from 1.7 percent in 2013. As the U.S. economy strengthens and other global markets (specifically China, Brazil and India) start to emerge from recession, inflationary pressures will become more of an issue.
“This is really where it comes down to what are the opportunities in this business cycle,” Duguay says. “And one of them is certainly interest rates. Don’t be afraid to borrow ahead of those rising interest rates and inflation.”
Priorities for 2014
In 2014, distributors are prioritizing growing revenue from existing customers, according to MDM’s 2014 Distribution Industry Outlook Survey. Two of the best ways to do this is through expanding product offerings and expanding sales teams, Duguay says.
“The focus in 2014 should be on your own company,” he says. “You really want to take advantage of low interest rates and finance your future in terms of investing in your own people, buying more efficient equipment, looking to upgrade your CRM system, whatever it takes to make sure that when economic times are stronger you are fully able to take advantage of that growth.”
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