MDM Webcasts recently featured Pembroke Consulting President and Facing the Forces of Change author Adam Fein in Wholesale Distribution Economic Outlook: Adam Fein’s First Look at 2008.”Fein told participants that he does not see an extreme downturn coming, but that they should watch key indicators -especially related to housing -as the year moves forward.
In the Webcast, Fein tackled high-level economic issues, including the key dynamics behind today’s economy, the economic outlook and implications for key distribution markets, and what participants should consider as they plan where their company will go in the next year.
The presentation centered on major markets that distributors sell into: construction, industrial and commercial, and retail consumer markets.
Survey of Forecasts
Fein looked at four other experts for forecasts on what will happen with U.S. economic activity for the next year. None is calling for a recession.
The Manufacturers Alliance/MAPI is calling for “very, very moderate growth”of 1.3 percent change in GDP in 2008. “They really expect the downturn in housing to spread very rapidly to manufacturing and trigger a cyclical downturn,”Fein said.
Moody’s Economy.com is slightly more positive, with a forecast 2.3 percent growth in the next year.
The Federal Reserve Board of Governors and Reserve Bank Presidents say growth will be slower, and provide a broad range (based on a survey of members) of 1.8 percent to 2.5 percent growth.
The Council of Economic Advisors from the Office of the President present the most optimistic forecast, suggesting that growth next year will be as strong as it was in 2007 and it foresees no slowdown.
The State of Distribution
The industry itself will come in a little slower for the end of 2007 than in 2006; in 2007, real growth in wholesale distribution was about 5 percent.
“That’s a little above the historical trend in terms of inflation-adjusted growth,”Fein said. “It looks like 2007 is going to be a pretty favorable year, and a lot of that is weighted to the first part of the year.”
About $4.2 trillion in revenue has gone through wholesale distributors in the past 12 months.
Actual revenue growth has been “fairly good”for nearly every sector, with the exception of building materials and construction wholesaler-distributors, Fein says, which year-on-year have seen a 13-percent decline in revenues.
However, it’s important to point out that actual revenue growth and “inflation-adjusted”growth are different, Fein says. “There are some very substantial differences between nominal growth and real growth.”
One sector that has seen great growth, in part due to inflation, is the agriculture products wholesaler-distributors.
Prices of core commodities such as corn and beans have been growing quickly; as a result, there has been a flow-through effect to the distributors.
Fein says the same has happened with metals service centers and storable goods distributors (who sell jewelry and other precious metal-based products).
“As a result, in some of these industries, we have seen large growth, but (considering product inflation) the growth is actually not so impressive,”Fein says.
Another sector, HVAC (heating, ventilation &air conditioning) and plumbing wholesalers, has seen flat revenue growth year-on-year, but adjusted for inflation, unit growth has been negative. Fein calls the difference the “growth gap.”
Fein provided an example that is affecting the plumbing sector: the price of copper. Between 2003 and 2006, the price of copper quadrupled due to high demand globally.
“What that means for a distributor is that as you’re looking at your growth year-on-year, you need to be really careful and understand how much growth is actual growth, and how much of it is simply just the benefit of inflation flowing through to the bottom line,”Fein says.
Another factor to consider in the new year: trends in construction markets, whether or not you serve them. The residential housing market is “no longer a lagging indicator of economic activity,”Fein said. “It has become a leading indicator.”
Because many mortgages during the recent housing boom were done with new instruments -such as adjustable rate mortgages -that were tied to international rates, and loans were made to people with bad credit and with no income verification, people bought houses they could not really afford.
In addition, the boom was driven by speculative buyers, who would buy a home, fix it up and flip it for a profit.
“It’s a recipe for disaster that frankly is going to take many years to unwind,”Fein said.
Spending on new residential construction was growing at a rate of 15 percent to 20 percent per year from 2003-2005, Fein said. But a downturn began in 2005, and “reality hit,”Fein said. New and existing home sales peaked in 2005, and now are running at a rate that’s a third below two years ago. Fein called it a “dramatic change.”
On the other hand, non-residential building has seen both increases in spending and employment.
“This has held up in the past few years and in the past few months,”Fein said.
But the pace of commercial construction is starting to slow and employment in non-residential construction is trending down, he said.
Employment is not keeping pace with growth in nonresidential construction activity.
“What that suggests to me is that there may be some projects in the pipeline that are going to continue to be built … but many forecasts I’m reading are suggesting that non-residential construction may be essentially flat next year or maybe even start to turn negative,”Fein said.
Other topics covered in this 90-minute Webcast:
- Commodity Price Trends
- Outlook for Major Distribution Markets
- Manufacturing Activity Trends
- Remodeling Market
- Decline of the U.S. Dollar
- Export Market Growth
- Distribution Gross Margins
- Credit Tightening
For more information on how to order the CD from this Webcast, held in December 2007, go to www.mdm.com/conferences or call 1-888-742-5060.
Adam J. Fein, Ph.D. is the founder and president of Philadelphia-based Pembroke Consulting, Inc. Fein advises manufacturers, distributors, and technology companies on business strategy; serves as an expert witness in legal cases involving wholesale distribution; and delivers presentations to executives around the world. His latest book, Facing the Forces of Change®: Lead the Way in the Supply Chain, was published in 2007 by the National Association of Wholesaler-Distributors (NAW). Purchase it at www.naw.org. He also writes two online Web logs devoted to distribution strategy: DistributionTrends.com and DrugChannels.net.