Electrical distributor industry sales are on track to continue the positive growth pattern of 2004. Industry sales in 2004 were up better than 6 percent, led by an 8.5 percent increase in sales to the distributor- served industrial market. This year, DISC Corp. expects total distributor sales to advance 7.6 percent over the 2004 level. Again, it will be the industrial market leading the way.

Although the overall industry performance is a relief from the harsh recession of 2001 through 2003, don't expect much help from the distributor-served contractor market until later this year. The residential sector is still booming and distributors serving the residential market are thriving, but the overall distributor contractor market is impacted more by nonresidential construction than by residential construction.

The distributor-served contractor market — after a cumulative decrease of 22 percent from 2001 through 2003 — finally was in the plus column in 2004 with a 4.5 percent increase last year. However, when combined with a 6 percent inflation rate last year, distributors serving the overall contractor market were left with negative growth of about 1.5 percent in terms of physical volume.

If electrical distributors make the expected forecast contractor growth of 6.5 percent this year, distributor sales to the contractor market will still fall about 12 percent short of its level in 2001. The actual distributor contractor numbers were $33 billion in 2001 compared with $29 billion in 2005, according to DISC data.

The just-released gross domestic product (GDP) report for first-quarter 2005 shows the economy is still strong in terms of overall growth. Residential and nonresidential construction indicators showed that DISC's forecast of these construction segments was on target for the first quarter. And the investment-in-capital-equipment component of GDP reinforced DISC's forecast as well.

In combination, the performance of these three indicators, residential construction, nonresidential construction and investment in capital equipment, determines how much business distributors will do. The display of these indicators is meant to give you a sense that there is solid justification to project continuing industry sales growth throughout 2006. With a less stellar performance in these indicators, the electrical industry would suffer commensurately.

For first-quarter 2005, as the GDP report indicated, we saw a rather anemic 1.3 percent increase in nonresidential construction. Nonetheless, DISC forecasts it to grow 6.8 percent by fourth quarter. We see the distributor contractor market increasing 4.8 percent in the first quarter of 2005 and 10.2 percent by the fourth quarter compared with year-ago levels.

Basically, this means we are very much on track with our forecast for this year.

Moreover, based on the April construction-put-in-place numbers, we are beginning to see some interesting changes in commercial construction, up a solid 12 percent from a year earlier. After a long and deep downturn, factory construction is finally booming with a 39 percent increase over the April 2004 level.

Because we are mid-way through the year, I wanted to briefly recap DISC's forecast last October and make any adjustments for this year and next.

Compared with the October 2004 forecast (our benchmark in measuring our accuracy for the coming year), we are still on target for a solid performance this year. In total, expect 2005 industry growth of 7.6 percent compared with 8.2 percent projected in the October 2004 forecast. That's not much of a difference.

Last October as you buttoned up your plans for 2005, DISC told you that distributor sales to the contractor market would be 7.9 percent above the 2004 level. We are now saying that it will be 6.5 percent higher or a shortfall of about a point and a half. Furthermore, in October 2004 we were saying that the distributor contractor market in 2006 would grow 4 percent. I now expect much stronger growth, to the tune of 10.5 percent for next year.

Note, though, that today's 2005 forecast is back loaded. Expect stronger growth as we move through this year. In the first quarter of next year, expect the distributor-served contractor market to increase around 12 percent, with the rate of growth advancing to around 10 percent by the third quarter and then slipping to a 6.5 percent growth rate by the fourth quarter.

The industrial market is less problematic compared with our October 2004 benchmark. Last October, we expected the distributor-served industrial market to advance 9.5 percent in 2005 and 4.8 percent in 2006. On an annual basis, DISC is still very close to its benchmark forecast and currently expects the distributor-served industrial market to increase 9.5 percent this year and 5.3 percent in 2006.

For the industrial market, 2005 will be the peak growth year. For the contractor market, 2006 will be the peak growth year.

Bottom line: I expect at least a couple more good years of industry sales before this cycle weakens.


Herm Isenstein is president of DISC Corp., Orange, Conn., a leading industry market analysis and forecasting company. He can be reached at (203) 799-3673 or herm@disccorp.com.