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State of the Wholesale Distribution Industry

This article is written by Alan Beaulieu, President of ITR Economics, and Ben Thompson, an Economist at ITR Economics. Alan serves as an NAW Senior Economic Adviser.

Wholesale Trade in 2016

Total U.S. Wholesale Trade during the 12 months through November 2016 totaled $5.3 trillion, down 0.9% compared to the level one year ago. Low com-modity prices in 2016 created headwinds for many wholesaler-distributors as they felt the pain of declines in the dollar value of revenues related to Wholesale Trade of Petroleum, and Wholesale Trade of Metals and Minerals, down 14.7% and 12.8%, respectively. However, not all wholesaler-distributors shared the same experience. Total U.S. Wholesale Trade excluding Petroleum, Metals, and Minerals (up 1.2% year-over-year) avoided a recession altogether, supported by the growth in consumer-facing segments. Such segments include Wholesale Trade of Lumber and Other Construction Materials (up 6.5% year-over-year), Wholesale Trade of Furniture and Home Furnishings (up 6.2%), and Wholesale Trade of Hardware, Plumbing, and Heating Equipment and Supplies (up 4.3%). U.S. Wholesale Trade Employment averaged 5.9 million workers in 2016 as a whole, up 0.9% from the 2015 level. However, the pace of growth is slowing.

U.S. wholesale trade of durable goods is 0.3% above the year-ago level. The pace of growth is expected to pick up throughout 2017, supported by generally rising commodity prices and increasing business-to-business (B2B) activity. Annual U.S. Wholesale Trade of Nondurable Goods is rising, but remains 1.9% below the year-ago level. Expected rise in Oil Prices and increasing consumer spending will support Nondurable Goods in 2017.

As shown in Figure 1, declining commodity prices have caused contraction in Wholesale Trade and Mining, reducing their respective share in the economy, while industries such as Finance, Construction, and Health Care gained share. The Wholesale Trade industry itself accounts for about 5.9% of the overall economy
(Source: Bureau of Economic Analysis). Additionally, wholesaler-distributors are an integral part of the supply chain in other, larger sectors of the economy such as Manufacturing and Health Care.  

A Stronger U.S. Economy in 2017

2016 was not a strong year for many components of the U.S. industrial economy. Average annual U.S. Mining Production, down 9.0% since last year, was depressed by low Oil Prices that stemmed from a supply glut and slower growth in World Industrial Production. Average annual U.S. Electric and Gas Utilities Production, currently down 0.7%, struggled due to unusually warm El Niño weather and slower growth in U.S. Manufacturing Production. This limited growth for many businesses related to the energy and utilities industries. However, consumer strength kept average U.S. Manufacturing Production above the year-ago level throughout 2016; Manufacturing Production for 2016 is up 0.3% from last year. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, kept U.S. Real GDP expanding throughout 2016. GDP is rising at a seasonally adjusted annualized rate of 1.9% despite the negative pressures from U.S. Industrial Production and U.S. Nondefense Capital Goods New Orders, a measure of B2B activity.  

The leading indicator evidence is pointing toward a stronger U.S. macroeconomy in 2017. The ITR Leading Indicator rose for the 11th consecutive month in December, signaling that positive business cycle momentum for U.S. Industrial Production is likely to extend into at least the third quarter of 2017. Expect consumer strength to persist throughout 2017, driven by a strong labor market and consumer savings. U.S. Total Retail Sales (deflated) is one way to analyze consumer strength. Retail Sales during the 12 months through December rose 2.0% compared to the previ-ous year. Although the pace of growth in U.S. Total Retail Sales is currently slowing, expect Retail Sales to grow at an accelerating pace from mid 2017 into early 2018. Consumers are benefitting from rising U.S.

Private Sector Employment (up 1.9% from the level one year ago) and increasing U.S. Real Disposable Personal Income (up 2.8%). The rate of U.S. Overall Wage Growth is at 3.5%, which outpaces inflation of 2.1%. Inflation is virtually identical to the Federal Bank’s target level of 2.0%. Low inflation, low interest rates, high levels of employment, and general upward momentum in wages suggest increased consumer spending in 2017. In addition, annual U.S. Personal Savings as a Percentage of Disposable Income rose from a December 2013 low to August 2016 thanks in part to a strong labor market and low inflation over that time period. The Savings Percentage leads U.S. Retail Sales by two years, thus the previous period of upward momentum in the Savings Percentage bodes well for U.S. Retail Sales in the coming years. All of this suggests that wholesaler-distributors should be prepared to capitalize on the accelerating growth trend in consumer spending in the majority of 2017 and into early 2018.

Wholesaler-distributors should also prepare for rise in B2B activity and business investment. The Corporate Profits trend is positive and additional rise is probable, which means the potential for ongoing expansion in the U.S. economy is high and more opportunities for those businesses that are positively correlated to Corporate Profits. The profit level is 2.1% higher than this time last year and 8.7% above the December 2015 business cycle low. The rise in quarterly growth rate is not over, which means the cyclical momentum for Profits is positive. Further quarterly growth is probable based on the track record for this data series as well as other leading indicators pointing toward improving business conditions. Good things happen within the U.S. economy when Corporate Profits are in a cyclical rising trend. We have been waiting for the U.S. Nondefense Capital Goods New Orders trend (excluding aircraft) to turn definitively upward. Figure 2 shows that the general cyclical rise in the New Orders rate-of-change since a July 2016 low is likely to continue given the rising Profits trend. Annual rise for New Orders is consistent with our forecast that Nondefense Capital Goods New Orders (excluding aircraft) in 2017 will come in 4.6% higher than during 2016. Additional rise in the New Orders data is projected for the first half of 2018.

Increased consumer spending will support growth in U.S. Total Industrial Production in 2017 and 2018. Rising U.S. Corporate Profits will alleviate negative pressures for B2B activity, allowing for capital investments to rise imminently, ahead of interest rates. Businesses need to be ready to accommodate increased activity to prevent losing market share; monitor your inventory levels and communicate your needs to your suppliers. Hiring, training, and retaining employees will be especially important in the upcoming business cycle as a tight labor market makes it difficult for firms to find and keep qualified employees. Opportunities for market expansion across both consumer and industrial segments of the economy are not always present at the same time. Plan accordingly to catch the windfalls of accelerating growth across most sectors of the U.S. economy in 2017.  

Alan Beaulieu
President, ITR Economics
Ben Thompson
Economist, ITR Economics