Wholesale trade is faring better than most industries during the COVID-19 pandemic, but the worst economic slowdown since the Great Recession is likely to linger across many distribution sectors for years to come.
That’s the overarching theme of the first 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. But to understand where the industry is heading first requires a look at where it’s been in the last quarter. And the picture isn’t pretty.
COVID-19 wreaked havoc throughout the U.S., and wholesale distribution wasn’t immune. At the onset of the pandemic, in March and April, wholesale trade sales decreased by 21.4%, though it increased by 5.4% in May. Seasonally adjusted May sales, however, remained down 16.2% compared to May 2019.
What’s on tap for the current quarter and the remainder of 2020? Wholesale distribution is projected to decline by 14.1% in the calendar third quarter (July through September) and decline by 11.1% in 2020 compared to 2019. Distribution should return to modest growth in 2021 (2.6%) and strong growth in 2022 (9.5%), but the recovery will be a slow climb and industry-wide sales growth won’t return until the second quarter of 2021.
These forecasts, which combine data from sources like Moody’s Analytics plus a host of federal sources, become harder to pinpoint further along due to uncertainty with the economy, the recovery efforts and even the political winds.
“There are so many moving parts that when we look out five years, 10 years, 40 years, some of the things will change and certainly won’t be accurate in the forecast,” says Brian Lewandowski, Markets Forecast lead researcher and executive director, business research division, University of Colorado Boulder’s Leeds School of Business. “But I think taking a look at the long-term forecast is still helpful from a stress-testing or a scenario-testing standpoint for your own company revenues.”
A Precipitous Decline
The U.S. economy hasn’t experienced anything like the current situation since the Great Recession, which began in December 2007 and lasted until June 2009. But that 18-month period saw a steady decline, not the precipitous fall of the last four months.
Another difference: The Great Recession rebounded rather quickly with a V-shape recovery. The consensus now is that the post-COVID-19 environment will slowly get back to pre-pandemic levels, creating a “checkmark” or “swoosh” (think, Nike’s logo) rather than the typical V, U or W recoveries associated with recessions.
How the recovery transpires, though, will depend on factors that even the most accurate economic barometers can’t measure. Taking a host of variables into account, MDM Markets Forecast has created three “alternative scenarios” for the annual and quarterly projections over the coming years — baseline, optimistic and pessimistic.
“Due to the unusual level of uncertainty in the economy, there are downside risks and upside opportunities to the forecast,” Lewandowski says.
Let’s look at each alternative scenario for wholesale distribution as a whole for the third quarter, the fourth quarter, full-year 2020 and full-year 2021.
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%.
The outlook for individual sectors varies greatly, usually based on how quickly their end markets are expected to recover. Likewise, how those markets performed during the height of the pandemic — amid everything from supply chain disruptions to shelter-in-place orders to reduced spending to slumping oil prices — had a dramatic impact on 2Q revenues.
For example, in March and April, the sectors with the greatest percentage decline in sales were Apparel (-73%), Petroleum (-62%), Motor Vehicle and Parts (47%), and Furniture and Home Furnishings (-37%). The only wholesale sector that showed gains was Computer and Computer Peripheral Equipment and Software (2.1%).
Only two sectors — Beer, Wine and Liquor Wholesale and Pharmaceutical Wholesale — are projected to post gains in 2020 at 2.1% and 1.7%, respectively. Three sectors are forecasted to see staggering losses this year: Metal Service Centers (-32.1%), Apparel and Piece Goods Wholesale Distributors (-32%) and Oil and Gas Products Wholesale (-31.7%).
Here are more details on how prominent key wholesale sectors — Industrial; Electrical and Electronics; Building Material and Construction; and Hardware, Plumbing, and Heating/Equipment Supply — are forecasted to perform over the next three years.
Industrial distributors, which posted only minor gains (1.3%) in 2019, have a revenue forecast of -6% in 2020, but their fortunes should turn around the following year (3.8%) and then further accelerate (7.4%) in 2022. According to Lewandowski, “For industrial distributors, the year-over-year decline began in Q1 2020 (-0.6%), and the decrease was projected to precipitate to 13.3% in Q2, coinciding with the manufacturing slowdown. The third and fourth quarters begin to recover, but year-over-year declines will persist. Year-over-year growth will likely not return until 2021.”
Electrical distributors, which ended 2019 in the red (-4.9%) are looking at a softer 2020 (-7.4%) before they moderate their losses in 2021 (-0.5%) and then finally see a significant bounce in 2022 (9.4%).
Building Material and Construction distributors, coming off a flattish 2019 (1.1%), are facing a long slog. They have a revenue forecast of -6.9% this year followed by an even worse 2021 (-7.5%) before the construction markets return with a vengeance in 2022 when they are projected to post 11.7% gains. According to Lewandowski, “The construction-related industries performed well early in the recession, and are expected to outperform, but remain negative when the Q2 data are released. The risk to the construction-related sectors is that future demand may fall with a decrease in fixed business investment, a slowdown in housing, and a disruption in retail and office real estate.”
And Hardware, Plumbing, and Heating Equipment/Supplies distributors, which are coming off moderate gains in 2019 (3.4%), are looking at negative performance in both 2020 (-3.6%) and 2021 (-5.6%) before improving to flat revenue growth (0.8%) in 2022.
Wholesale Trade Outperforms on Employment — Alongside the economic slowdown was a drastic decline in employment, not surprising given the number of jobless claims across the U.S. National employment decreased by 22.2 million jobs in March and April, combined, but regained 7.5 million jobs in May and June, combined. In June, national employment remained 14.7 million jobs (9.6%) below the January peak.
Wholesale trade employment decreased 6.7% in March and April but grew 1.4% in May and June combined, meaning its overall decline is just 5.4% from the cycle peak. “Wholesale employment has outperformed many other sectors of the economy,” Lewandowski says.
MDM Markets Forecast offers quarterly revenue projections for wholesale trade – plus breakouts of 19 categories – for the current calendar quarter and fiscal year using a trio of “alternative” scenarios – optimistic, baseline and pessimistic. The data is compiled by the Leeds School of Business at the University of Colorado Boulder exclusively for MDM, using data from Moody’s Analytics and a variety of federal data sources.
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