State of the Wholesale Distribution Industry
This article is written by Alan Beaulieu, President of ITR Economics, and Jon Murphy, an economist at ITR Economics. Alan serves as an NAW Senior Economic Advisor.
2012 was one of the more uncertain years in recent memory. Government budget debates, the legal battles on the Patient Protection and Affordable Care Act (aka Obama Care), national elections, and the fiscal cliff all made long-term and short-term planning difficult. Despite this uncertainty, wholesaler-distributors who regularly follow ITR Economics and our business cycle theory knew to expect 2012 to be a growth year, and that is exactly what it was. Figure 1 compares actual results to our forecasts.
Wholesaler-Distributors in 2012
Total Wholesale Trade is up 5.8% from the year-ago level at the time of publication with sales for the last 12 months reaching $4.9 trillion. Gains occurred in most of the wholesale distribution lines of trade; Sporting Goods & Toys and Farm Product Raw Materials were the exceptions. Durable Goods ended up 6.6% year-over-year and Nondurable Goods finished the year 5.1% above 2011. The year was not without challenges, but it was a profitable year for adequately prepared wholesaler-distributors.
Employment gains were an integral part of the ongoing growth in the U.S. economy. Our industry did its part to ensure the health and well-being of the United States. Wholesale Trade Employment averaged 5.7 million workers in 2012, a gain of 1.8% from 2011. Private sector employment throughout the United States increased 1.8% from 2011 to 2012.
The gains in Wholesale Trade are good for the entire nation. As shown in Figure 2, Wholesale Trade itself accounts for about 5.6% of U.S. GDP and is an integral part of other larger sectors of the economy—retail trade and manufacturing.
The United States in 2013
The evidence of a growing economy is straightforward. The consumer is spending money, and on the business-to-business front, New Orders for Durable Goods over the last three months have picked back up to above year-earlier levels. Housing and autos are good examples of the consumer impetus. Housing Starts ended the year 28.1% higher than the year before. We are projecting an 8.9% year-over-year gain in this key industry in 2013. This is great news, and it is consistent with the ongoing solid performance evident in the Light Vehicle Retail Sales trend for 2012, which came in 13.4% higher than the previous year. Additional gains for 2013 are expected here as well (3.3% for the year) with the first half of the year coming in stronger than the second half.
Perusing the leading indicators reveals that many of these forward lookers are faltering in their ascent. One of the most forward-looking indicators, Corporate Bond Prices (Figure 3), is exhibiting 3/12 rate-of-change decline off a September 2012 high, and there is accompanying 3MMA descent. The ITR Leading Indicator has tentatively established an October 2012 peak. The trend input from the S&P 500 is ambiguous. The U.S. Leading Indicator’s monthly year-over-year comparison has also begun to edge downward. The parade of upside-leading indicator news in 2012 is turning into a warning klaxon for the second half of 2013 and into 2014.
Our concern for 2014 is supported by the onset of deterioration in some of the leading indicators as well as changes to government tax and spending policies. The U.S. Congress’ solution to the spending problem was to raise taxes. Raising taxes has the consequence of slowing the rising trend in Total After-Tax Income, which means there is less to spend on just about anything and everything. Wholesaler-distributors who are closest to the retail consumer will experience a slowdown as consumers have less after-tax income. When you couple the higher taxes with higher energy costs and mild inflationary pressures on basic goods, you have the makings of a mild consumer-led downturn in the economy later this year.
No doubt the federal spending cuts slated to begin in 2014 will be headline news as we go through the latter half of 2013. Layer in the potential for having to come off our addiction to stimulative monetary policy (QE3 ending), and it is easy to see that business uncertainty will be ramping up later this year. This uncertainty will manifest itself in a slowdown in business-to-business activity.
Wholesaler-distributors can look forward to another growth year in 2013. Why not use the next three to four quarters of growth to plan for 2014? Evaluate product lines for profitability, explore counter-cyclical industries to expand into, and consider saving cash to help manage the leaner times. Both 2013 and 2014 will also provide aggressive firms with the time to implement efficiency gains in advance of the mild downturn in 2014. A mild downturn means a manageable downturn.
President of ITR
and NAW Senior Economic Advisor
|Economist at ITR Economics|
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