The non-profit NAW Institute for Distribution Excellence just released the 2008 Wholesale Distribution Economic Reports, so it’s a good time to check up on the general economic situation for wholesale distribution industry, review the performance of building products and industrial distribution in 2007, and check in on the economic outlook.
The evidence of a slowdown is inescapable at this point. The residential construction boom will take at least a few years -not a few months -to unwind. Both home sales and residential construction activity are unlikely to rebound until mid-2009 and possibly later. Meanwhile, industrial distributors will face an overall slowing market, although some manufacturing sub-sectors will experience robust growth in 2008.
Wholesale Distribution Industry
Revenues of wholesaler-distributors grew by 8.6% in 2007, marking another year of strong overall performance. However, the performance of individual sub-sectors varied more than in previous years due to the distorting effects of price changes.
Total revenues of wholesale distributors grew by 8.6 percent to $4.2 trillion in 2008, marking another year of strong performance. Exhibit 1 (Scroll to bottom of article to view.) shows the final revenue growth figures for 2007 in the 19 major industry sectors.
However, the performance of individual sub-sectors varied more than in previous years as the ongoing surge in commodity prices continues to ripple through wholesale distribution. Some sectors actually shrank in 2007 after revenues are adjusted for price inflation.
Three sectors contributed more than one-half of the industry’s growth in 2007:
Grocery and Foodservice Wholesalers contributed 18 percent of the total revenue growth and represented 12 percent of total industry revenues;
Agricultural Products Wholesale Distributors contributed 16 percent of total revenue growth yet represented less than 5 percent of total industry revenues; and
Oil and Gas Products Wholesale Distributors contributed 22 percent of total revenue growth yet represented 12 percent of total industry revenues.
The growth in each of these sectors was driven largely by increases in underlying commodity prices, as the gap between Actual Revenues and Real (inflation-adjusted) Revenues indicates.
Wholesale distributors of building materials and construction supplies were hit hard by the residential real estate downturn. Quarterly revenue growth was negative throughout 2007 due in large part to residential construction. The value of residential construction put in place peaked in 2005 and has dropped by almost one-third since that time.
The housing correction will persist throughout 2008 as home prices continue to lose ground in many regional markets such as California and Florida. Moody’s Economy.com forecasts private residential construction put in place to decline by more than 20 percent in 2008.
Remodeling activity also began to slow down in mid-2006 and has been declining since mid-2007. Mortgage equity withdrawals –a measure of how much people are cashing in on the increased value of their homes to do remodeling work -peaked at about $900 million in 2006 but have now dropped to $550 million. The Leading Indicator for Remodeling Activity, which is published by the Joint Center for Housing Studies of Harvard University, predicts negative growth throughout 2008.
Private non-residential (industrial/commercial) construction remains in a counter-cyclical trend versus residential construction activity, although the non-residential sector will see slower growth in 2008.
Employment in non-residential construction began trending down in 2007, suggesting that the pace of commercial construction is starting to slow. Moody’s Economy.com forecasts nonresidential private construction put in place is expected to grow by about 3 percent in 2008. Public construction activity is beginning to show signs of strain.
Revenues by building materials and construction wholesale distributors are also being affected by the sharp decline in prices of many building materials. The revenue-boosting benefits of product price inflation led to the gap between actual and inflation-adjusted revenue growth. Some commodities, such as drywall and framing lumber, are either declining in price or experiencing price increases as demand slows. As a result, distributors in this sector face additional growth challenges.
Revenues of industrial distributors have remained positive (both before and after adjusting for inflation) due to strength in the U.S. manufacturing industry, especially the oil and gas industries. Revenue growth was an exceptionally strong 12.3 percent in the fourth quarter of 2007. Employment also grew in 2007.
Industrial distributors are tied more closely to the industrial manufacturing economy than any other wholesale distribution sector. Revenues of industrial distributors rise and fall with manufacturing activity. (See Exhibit 2 below.) However, the link has become slightly weaker in recent years as more traditional industrial distributors diversify into more general commercial facility supply.
2008 will turn out to be another positive year for industrial distributors, although growth will be slower and uneven across the industry. Manufacturing capacity utilization, which remained above 80 percent in 2007, started to trend downward in late 2007 and early 2008. However, utilization remains well above the twenty-year low of 72 percent hit in 2001.
Certain manufacturing sectors will experience robust growth in 2008. Demand for farm equipment will remain high as farmers and ranchers benefit from unusually high agricultural prices. U.S. Farm Income (revenues) jumped by 17 percent in 2007 to $341.7 billion, an all-time high, while total machinery assets of farms increased by $8 billion to $113.1 billion.
Purchases of machinery for exploration and refining of oil and gas will also remain strong as these markets face both supply and demand price increases.
In contrast, domestic demand for construction machinery will be weak, although export-led growth will boom. For example, exports of excavating machinery grew by 30 percent in 2007. Sectors more closely linked to domestic U.S. demand will decline in 2008, including building materials (forecast down 18.3 percent) and automobiles and trucks (forecast down 3.5 percent).
J.D. Power forecasts new vehicle sales to drop to only 14.95 million, down from 16.5 million units in 2006. U.S. automakers have already announced plans to reduce production capacity in 2008 in response to slowing sales.
© Pembroke Consulting, Inc. Adam J. Fein, Ph.D. is the founder and president of Pembroke Consulting, Inc. He can be reached at (215) 523-5700 or on the web at www.PembrokeConsulting.com. This article is adapted from his new 2008 Wholesale Distribution Economic Reports, which are available online from the National Association of Wholesaler-Distributors at http://www.naw.org/wder.
Exhibit 1: Wholesale Distribution Industry
Real revenues equal actual revenues adjusted for product inflation using sector-specific price deflators.
Source: 2008 Wholesale Distribution Economic Reports.