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.
U.S. economy, as measured by U.S. Industrial Production, grew at an accelerating pace throughout 2014. Overall, numbers in the year were extremely positive.
Wholesale Trade in 2014
Total Wholesale Trade Sales for 2014 were up 5.1% from 2013, totaling $5.40 trillion. Nearly all segments of Wholesale Trade are up on the year, with the exceptions of Raw Farm Products and Sporting Goods, Games, Toys, and Jewelry. Additionally, there is weakness developing in Petroleum and Petroleum Products Trade, stemming from the decline in oil prices. The softness in Petroleum Trade will likely extend through the third quarter of 2015 as we anticipate oil prices to remain soft through hat period as well. Durable Goods ended the year up 5.8% and Nondurable Goods grew 4.5%. Wholesaler-distributors were able to capitalize on the growing U.S. economy to expand business.
A growing labor market helped support U.S. economic growth in 2014, and the Wholesale Distribution Industry did its part. Wholesale Trade Employment averaged 5.826 million workers in 2014, a 1.6% gain from 2013. The economy as a whole added jobs at a 1.7% clip.
Improvement in Wholesale Trade is indicative of gains in the overall economy as shown in Figure 1. The Wholesale Trade Industry itself accounts for about 6.0% of the overall economy. Additionally, wholesaler-distributors are an integral part of the supply chain in other larger sectors of the economy such as manufacturing, retail trade, and health care.
Retail Sales (adjusted for inflation) totaled a record $2.8 trillion, 3.9% above 2013. The early numbers from 2015 are just as positive. Coupled with steadily rising employment and disposable income rising at the fastest pace in nearly two years, these numbers indicate a strong U.S. consumer. Other major industries, such as Construction, Mining, and Manufacturing, all climbed in 2014 as well. All this growth was in spite of a generally softer global economy. Let’s take a look at how the United States and other economies performed against our expectations this time last year (Figure 2).
The United States in 2015
Unlike most of the rest of the world, the North American economy is growing with more rise indicated as illustrated in Figure 3. The primary engine for that growth is the United States. There are three U.S. trends that really stand out, two positively and one negatively:
- Employment in the private sector is rising at an accelerating pace.
- Retail Sales in 2014 and early 2015 were very good
- The Nondefense Capital Goods New Orders excluding aircraft) trend is weakening.
There are other trends worth talking about that tie in to these three, but combined, these trends indicate the consumer is doing well and is going to keep the U.S. economy rising in 2015, while the industrial side of the economy will likely slow in its rate of rise in 2015.
Employment in the private sector is up 2.3% from one year ago. Looking at just the first two months of 2015, the numbers are even better with a 2.7% and 2.8% increase from last January and February, respectively. Wholesale Trade expanded at a slower pace, gaining 1.9% and 2.0% in January and February, respectively. The rates-of-change are signaling that the rising trend is accelerating. We are projecting that the acceleration will continue into the third quarter of this year before slower growth sets in. We are projecting employment will not turn downward until either late 2018 or in 2019. Government employment is also rising, up 0.4% from January 2014.
Tying in with the positive employment trends is the rise occurring in after-tax income for people aged 18 to 65 (adjusted for inflation and excluding transfer payments). We generally have more money to spend than we did a year ago with the latest monthly data showing a 3.8% year-over-year increase. The increase is partly a function of lower energy prices since these figure into the inflation adjustment, but also signifies underlying economic strength. The drop in oil and natural gas prices also increases our pool of discretionary income after deducting for such necessities as heat/air conditioning and transportation.
A less-than-encouraging trend is developing for Nondefense Capital Goods New Orders. While 2014 as a whole was positive (up 4.9% over 2013), some weakness was evident in the end of the year. The fourth quarter as a whole is down by 2.2% from the third quarter. The only other times the fourth quarter was lower than the third quarter in the last 25 years were recession years; the fourth-quarter 2014 result is worrisome. We think the trend is going to come under further downside pressure in 2015 as low oil prices create a ripple of capital expenditure reduction in the oil patch and beyond. However, we also expect that the weakness in the New Orders trend will not develop to full-blown recession trend status because the consumer trends are so strong. What is happening is the rotation within the economy from industrial strength carrying the overall business cycle to consumer strength doing the heavy lifting for 2015.
Wholesaler-distributors should plan on economic expansion in 2015, though generally at a milder pace than was evident in 2014. Wholesaler-distributors closer to the consumer side of the economy will likely see stronger growth than those in the business-to-business market. A faster rate of growth in the U.S. economy, and thus a great demand on wholesaler-distributors, should be anticipated for 2016.
President of ITR
and NAW Senior Economic Advisor
Economist at ITR Economics