Many people have an uneasy feeling about next year, but from what I hear and read, business will not drop off a cliff in 2008. My gut tells me that business will slow down next year by a few percent, but that's down from several very strong years for the electrical market. The annual growth rate in the electrical wholesaling industry tends to be in the 4 percent-to-eight percent range, and after several years at the high end or past that growth band, I think business will swing down toward the low end. Admittedly, I am an optimist and tend to see the glass half full. But here's why I think business will be a bit better in 2008 than some distributors, reps and manufacturers may think.
If the cards fall right, the U.S. economy will be O.K. in 2008
Inflation and unemployment are expected to remain at manageable levels next year, and the Federal Reserve Bank is ready to trim rates if it sees any trouble in either area. I listened to seven economists at the recent 2008 construction forecasts sponsored by the National Association of Home Builders (NAHB), Washington, D.C., and McGraw-Hill Construction, New York, and only one of them put the chances of a recession in 2008 at 40 percent; the other economists all pegged the chances for recession next year at closer to one-in-three. Considering what's happening with the housing market and the price of oil, I think a 66 percent chance of no recession is pretty good. Some people may disagree. One economist at the conference was clearly troubled by even a one-in-three chance of recession, but I guess that's why economics is known as the dismal science.
Housing has a big but not overwhelming impact on the electrical wholesaling industry
The housing crash has spooked a lot of people in the electrical market, even though residential typically accounts for 24.7 percent of industry sales, and the commercial and industrial markets, which account for 56.7 percent of industry sales are still in decent shape. That being said, you can't overlook the wreckage from this economic tsumani now littering some markets. Most of the major markets on Florida's Gulf Coast have seen total housing starts tumble more than 50 percent since January, and the state's single-family housing permits have dropped 52 percent during that time period. And when you have 1 million homes for sale in the United States, you don't need to be a Harvard economist to know that has a ton of impact on the nation's economy in general and on all housing-related businesses in particular.
Anyone whose business life depends heavily on the fortunes of the homebuilding market should have been living the dream over the past three years. If they didn't take the time during the building binge to prepare their businesses for the inevitable decline, shame on them.
The commercial construction market is still strong
While the commercial construction market may slow down a bit in 2008, there's plenty of evidence that no steep decline is around the next bend. According to Robert Murray, vice president of economic affairs for McGraw-Hill Construction and author of its 2008 Construction Outlook, if single-family housing is excluded from the forecast, construction activity will only decline 2 percent. Additionally, office-vacancy rates remain low in most major markets, and the monthly U.S. Census Bureau Value of New Construction data continues to register double-digit increases year-to-year in several key construction categories, including the office, commercial and educational sectors.
Ditto for the industrial market
As long as you forget “the good old days” of Industrial America and focus on today's much smaller reality, you will see that the industrial market is in the middle of a surprisingly strong run. Capacity utilization rates (the amount of space in factories that's being used) remains at a historically strong 82.1 percent, according to the Federal Reserve Bank. While McGraw-Hill's 2008 forecast for the construction of manufactured buildings comes in at a troubling 11 percent decline (after mind-blowing increases of 40 percent in 2007 and 33 percent in 2006), the $16.5 billion it expects in 2008 industrial construction is the second-highest total in the past six years.
This slow-growth scenario could turn negative if oil prices go a heck of a lot higher than 90 dollars per barrel, the sub-prime loan mess affects more than just residential mortgages, or there is some unforeseen global incident. Let's hope for the best. The electrical market has been and will always been a cyclical business, and the successful companies know how to ride the cycle. Do what you do best and focus on your local business. Don't get freaked out by media hysteria over the housing crash and sub-prime mess, skyrocketing oil prices and other things you can't control.
Calling All Electrical Distributors… Prepare to be Counted by the U.S. Census Bureau
In December, 4.7 million U.S. businesses, including 450,000 wholesale-distributors of every conceivable type of construction, commercial, medical, industrial and retail supplies, will receive 2007 Economic Census forms from the U.S. Census Bureau. Federal Reserve Board Chairman Ben Bernanke has called this census “indispensable to understanding America's economy.” Taken every five years, the Economic Census is intended to provide accurate statistics that businesses rely on for successful business planning and the government needs for sound economic policy.
When you see that form come in the mail, please don't toss it in the trash. The electrical market needs an accurate count of how many electrical distributors operate in the United States. You can learn a lot from that data, which you can find at www.business.census.gov. Electrical Wholesaling needs that data, too. The magazine's editors have used it over the past 30 years to develop the sales forecasts you see each November in the annual EW Market Planning Guide.