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.
The U.S. economy was unfazed in 2013, a year marked with a number of dubious distinctions, including a “fiscal cliff” to begin the year, a government shutdown that lasted just over two weeks, a terrorist attack in Boston, and multiple other political and economic battles. Real GDP grew 2.7% for the year as a whole, the stock market hit record highs (although there have been pull-backs), and U.S. Industrial Production (our benchmark for the overall economy) rose 2.6% in 2013. Overall, it was a growth year for the U.S. economy, on target with what we told NAW Direct Members last year. Let’s take a look at how the yearly results matched our forecasts in Figure 1.
Wholesaler-Distributors in 2013
Total Wholesale Trade for the most recent 12 months as of first quarter of 2013 was up 4.2% from 2012, totaling $5.13 trillion. Nearly all segments of Wholesale Trade are up on the year, with the exceptions of Metals and Minerals and Sporting Goods, Games, Toys, and Jewelry. Additionally, there is weakness developing in Raw Farm Products, which will likely persist in the first half of 2014. Durable Goods ended the year up 4.4% and Nondurable Goods grew 4.1%. NAW Direct Members were able to grow and be profitable despite the uncertainties and headwinds.
A growing labor market helped support U.S. economic growth in 2013, and the Wholesale Distribution Industry did its part. Wholesale Trade Employment averaged 5.8 million workers in 2013, a 1.6% gain from 2012. The economy as a whole added jobs at a 1.0% clip. Wholesale Trade Employment rising at a faster pace than the overall economy suggests the industry is improving.
Improvement in Wholesale Trade is indicative of gains in the overall economy as shown in Figure 2. The Wholesale Trade Industry itself accounts for about 5.6% of the overall economy. Additionally, wholesaler-distributors are a crucial part of the supply chain in other larger sectors of the economy such as manufacturing, retail trade, and health care, meaning that Wholesale Trade’s contributions to the overall economy are much larger than the 5.6% figure would indicate.
The United States in 2014
Although results for U.S. Industrial Production (our benchmark for the overall economy) were on target with our forecast for 2013, we opted to push the forecast for 2014 higher, based on stronger-than-expected activity in some of the leading indicators, specifically the Purchasing Managers Index and U.S. Leading Indicator.
We are still calling for rate-of-change decline in 2014 extending into 2015, and the economy’s rate of growth in 2014, at 1.9%, is expected to be below that posted 2.6% growth rate for 2013. We are still calling for a period of seasonal softness in late 2014 and early 2015, but the annual trend will not decline. The quantitative difference between the previous forecast and the revised forecast is illustrated by Figure 3. What this means for wholesaler-distributors is your seasonal activity in late 2014/early 2015 will be milder than previous years. Use the next three quarters of growth to prepare for this soft spot. Create new efficiencies to protect margins or expand into new regions, for example. There will be no need for any dramatic business shifts in late 2014. We continue to expect 2015 to 2017 to be growth years.
2014 will likely be another year of political battles. The President expressed his desire to circumvent Congress to accomplish aspects of his agenda (an action which will surely draw the ire of Republicans). This is an election year, with control of the Senate at stake. Debt ceilings have not gone away nor hot-button issues like minimum wage and income inequality. This has been par for the course for much of the past six years and the U.S. economy has chugged along, largely uncaring of the political machinations of Washington. 2014 will be no different.
Washington will have its political theater, and you ignore it at your peril; but don’t lose focus on the opportunities that are ahead of you. This is a time to carefully manage your cash flow given the projection of softness later this year, while implementing a longer-term growth plan that will require capital expenditure. Hunkering down and waiting for the clouds to pass will cost you in terms of opportunity and market position. Aggressively move out in anticipation of solid growth opportunities.
There are a number of factors that could weigh on the economy as we proceed through 2014 and may cause results to deviate from our new forecast. Some of these factors are:
- Concerns about the sustainability of the stock market’s rise persist into the second quarter of the year.
- The encouraging fourth quarter results in Housing Starts do not persist; home prices stall; investors become skittish.
- Rising health care costs (insurance and actual care) sap the strength out of the consumer.
- Europe and China slip back into recession as the U.S. consumer spends less.
- QE tapering impacts more than just the government rate of interest.
President of ITR
and NAW Senior Economic Advisor
|Economist at ITR Economics|
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