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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.

Wholesale Trade in 2015

Total Wholesale Trade for 2015 totaled $5.35 trillion, a decline of 3.6% from 2014. Many wholesaler-distributors saw the nominal dollar value of their sales fall as lower commodity prices for oil, metals, minerals, and food lead to lower sale prices. Additionally, Wholesale Trade of Machinery, Equipment, and Supplies turned negative as raw material producers cut back on their capital expenditures this past year. Despite these headwinds, wholesaler-distributors added 61,000 new jobs in 2015. Average Wholesale Trade Employment was 5.9 million in 2015, up 1.1% from 2014.

The bad news was not universal across the wholesale trade industry. Construction-facing segments, such as Wholesale Trade of Construction Materials and Wholesale Trade of Hardware, Plumbing, and Heating Equipment, saw growth. Additionally, consumer-facing segments, such as Wholesale Trade of Motor Vehicles, Parts, and Supplies; Wholesale Trade of Furniture and Home Furnishings; and Wholesale Trade of Apparel all expanded over the past 12 months. The dichotomy within Wholesale Trade is representative of the trends we are seeing in the overall economy.

Wholesale Trade’s influence on the overall economy is shown in Figure 1. The Wholesale Trade Industry itself accounts for about 6.0% of the overall economy (source: BEA). 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.

The U.S. Economy in 2016

The U.S. economy is growing, although the gains are not coming from the industrial economy (Mining and Utilities), but from the broader GDP measure as demonstrated in Figure 2. That growth is thanks to U.S. consumers; consumers are why more businesses will be feeling the benefits of a stronger economy the deeper we go into 2016. Please note from the chart that it is normal for Total Industrial Production to overswing the GDP data through business cycle highs and lows. We will see Industrial Production overswing on the upside during the apex of the positive phases of the business cycle in 2017 as long as consumers stay on track and keep on buying as they have been.

Housing Starts data are a positive sign of things to come for GDP and Industrial Production. Starts in the 12-month period ending in March are up 13.0% from the same period last year. Consumers are in good shape and that should keep Housing Starts on the ascent. Wages are rising, as is employment, and consumers should feel confident to make long-term purchases like homes over the next two years.

The good health of U.S. consumers is evidenced by the rising trend in Disposable Personal Income (after-tax income). Data for the three months ending in February is up 2.7% year-over-year. The average Disposable Personal Income comparable growth rate in the post Great Recession period is 1.8% (2010 to date). As mentioned, employment is on the rise, as are wages. Average Hourly Earnings for Wholesale Trade Employees stood at $29.03/hour in February. This is a record high and 2.2% ahead of the year-ago level. Higher wages are great news when it comes to consumer spending, which is the workhorse of the U.S. economy. More people working, and more of them with higher incomes, portend a stronger economy later this year.

However, a stronger labor environment also comes with potential threats. It will become increasingly difficult to hire and retain the talent you need. HR departments will become increasingly important in efforts to grow profits. Higher wages will put pressures on profit margins. Inflationary pressures are building, which will likely presage price increases later this year or in 2017.

In addition, the rate of rise in the Federal Reserve’s money supply measurement, commonly referred to as M2, suggests an even stronger rising trend for Retail Sales in 2016. This is good news for wholesaler-distributors selling to retail. The year-over-year growth rate is 5.4%. This is above the 4.9% average the Fed has been running to bolster the economy from 2009 to date. The M2 money supply is the total supply of checking account balances, cash, coins, savings account balances, traveler’s checks, certificates of deposit, money market account balances in the United States, and U.S. dollars on deposit in foreign banks, deflated by the CPI. An increase in the money supply means more money typically finds its way into the hands of consumers and that leads to faster growth in retail sales.

The industrial economy is facing headwinds through the first half of 2016. While we do not expect a substantial recovery in commodity prices this year, we are projecting some rise, particularly in the latter half of the year. The strength of U.S. consumers, coupled with an accelerating manufacturing sector will help lift prices in the second half of this year.

The relative fortunes of wholesaler- distributors in 2016 will depend greatly on what industries they serve. Distributors more closely tied to consumer and construction activity should look to build inventory and increase labor force to handle increasing activity throughout the year and into 2017. Wholesaler-distributors more closely tied to commodities and mining will need to remain lean and efficient to prevent prices from squeezing margins. Consider investing in labor-saving technology to keep labor costs in check as we anticipate rising wages this year.

Alan Beaulieu
President, ITR Economics
Jon Murphy
Economist, ITR Economics