Distribution Sector Can Expect Slow Growth After Recession
October 18, 2010
Like the rest of the nation, many of the contractors and distributors in the HVACR industry find themselves looking at a new economic landscape that demands more of each business person than merely cleaning up and going back to business as usual. It is argued that business as usual no longer exists, but economists agree that as the economy improves, the likelihood of a double-dip recession lessens significantly.
Though not completely in the clear, it appears that the L-shaped recovery predicted is not going to be the economy’s final resting place. There is an uptick in consumer spending, industry numbers are on the rise, and talk of pent-up demand is pushing the bottomed out system to higher levels.
Despite the better news coming from the nation’s financial sector, overall confidence in the recovery seems to wax and wane with each evening news report. In a Modern Distribution Management webinar hosted by Dr. Adam Fein, Ph.D., president of Pembroke Consulting Inc., Fein told attendees that many of them could plan for growth in 2010, 2011, and beyond, but to keep expectations in check because growth talk is growth from a much lower base.
“The aftereffects of this recession are going to last for a number of years,” he said. “We are in recovery, but just keep in mind; this recession is going to have a very, very long, hard tail to it.”
DISTRIBUTION TERRAIN RESETTLINGThe construction industry was one of the hardest hit industries in this recession. Economists consider the popped housing bubble a prime factor contributing to the economic recession, and as participants in that industry sector, HVACR took a hit as well. In comparing the 2006 versus 2009 levels of revenue in the national wholesale distribution economy, Fein listed the top five sectors for loss, respectively, as building materials and construction; metal service centers, motor vehicles and motor vehicle parts; furniture and home furnishings; and hardware, plumbing, and heating equipment/supplies.
According to his research, the building materials and construction sector revenues were measured at $142.6 billion in 2006 and bottomed out at $86.3 billion in 2009. The sector is now operating at a $56.3 billion revenue loss. The 2006 revenue levels for the sector containing the HVACR industry were $108.4 billion. The numbers bottomed out at $90.2 billion in 2009 and the hardware, plumbing, and heating equipment/supplies sector is down $18.2 billion.
As 2010 progresses, the construction and HVACR industries are seeing a mild uptick. Ken Simonson, chief economist for the Associated General Contractors of America (AGC), reported construction spending up 0.4 percent in August, according to the Census Bureau. Public construction, although down 1 percent year over year, was up 2.5 percent for the month of August, reported Simonson.
The Heating Airconditioning and Refrigeration Distributors International (HARDI) announced North American HVACR median distributor sales for the month of August 2010 were up over 15 percent from last year in its monthly Targeted and Regional Economic News for Distribution Strategies (TRENDS) report. The report, available exclusively to HARDI’s participating distributor members and its subscribing supplier members, also reported that for the first time this year, the running 12-month sales were in the black, “albeit slightly.” Seven of HARDI’s U.S regions outperformed the same month last year and two of the region’s August growth numbers exceeded 20 percent.
“It appears that we are on track for some significant stability in 2010, certainly relative to 2009,” said Fein. “We are seeing some rebound, inventory rebuilding, and GDP growth starting to recover. We are on the right path, the numbers are coming in and things are starting to look good, but we are not out of the woods yet.”
ECONOMIC OVERHANGIn both the general and distribution economy, there are two significant overhang factors that economists are watching closely as the recovery progresses. The first factor is employment. According to Fein’s research, total employment in 2007, just before the recession began, was 138 million people. It is currently a little less than 130 million people, leaving approximately 8 million people still without jobs. Full restoration of these jobs to the 138 million level is not expected until sometime in 2013 or 2014. Some economists have predicted even later than that.
In the total distribution industry, Fein reported a 10 percent loss of its employment over the last two years.
“The largest percentage loss was in the building material and construction wholesale distributor sector at 26.3 percent, or 67,000 jobs,” he said. “The hardware, plumbing, and heating equipment/supplies wholesalers lost 13.7 percent or 35,000 jobs. Overall, wholesaler distributors lost approximately 518,000 jobs.”
Fein was encouraged, however, that although the overall recovery of jobs is at a low and slow level, it is being seen across the board, which is an indication that “things are starting to get on that self-sustaining path.”
The other overhang factor concerning economists in the overall distribution industry is the question of excess capacity.
“There are too many companies hanging around, waiting for the rebound, and so the rebound that is coming, the recovery that is coming, just may not be strong enough to support all the companies that have been hanging on waiting for it,” warned Fein. “Even though overall many of these sectors will be recovering, there is still the potential for a shakeout during the recovery period.”
STATE OF CONSTRUCTIONResidential construction is expected to grow some in 2010, but cynics are calling the slight rise predicted a “dead cat bounce.” Commercial construction is not expected to turn upward again until sometime in 2011.
Fein reported that housing starts in 2006 were around 2.1 million and for 2010, they are expected to be around 600,000 to 700,000.
“Residential housing has bottomed out, but construction and remodeling will remain depressed for years due to the overhang from the housing bubble. New home inventory is back to historic levels, but existing home inventory is about twice as big,” noted Fein. “The construction markets, the building materials market, at both the manufacturing level and distributor level, are going to be significantly depressed for many years. This is a big bubble, and it popped hard.”
KEEPING PERSPECTIVEIt was important to Fein that those listening to the webinar understood the context of the numbers and situations being reported. “Economic forecasters exist to make weather forecasters look accurate,” he said during the webinar, as he encouraged listeners to keep perspective in the midst of varying reports.
The recovery is here; but it is going to take time for pre-recession levels to be reached. Fein alluded strongly to the fact that pre-recession levels, however, weren’t realistic goals for any industry. The economy has changed, and although it is expected to be successful again, distributors waiting for the next bubble may find themselves ill-equipped to handle the new economic terrain. Fein encouraged distributors to keep an eye on key trends that would help them monitor the recovery process - consumer sentiment, consumer spending/saving, employment, revenue, and economic overhang.
“Start to think about how these trends are going to affect your sectors,” said Fein. “Where exactly is growth coming from? Which part of the market are you attached to, and where are those opportunities going to emerge? Not just the near-term opportunities and the customer you have always been selling to, in the event they are still around, but what are some of the new markets that are opening up? What are the new growth opportunities? We’re in a very dynamic period for the U.S. economy. It’s going to be very unsettling; it’s going to be what I call a choppy recovery; but it is definitely, without a doubt, a recovery.”
Publication date: 10/18/2010