Get set to grow

The media and business analysts say the economy looks great. Why doesn't it feel that way?

In conversations with manufacturers and distributors, I hear a note of uncertainty creeping in. Things got a bit slow in spring. It's pretty good, but not great. Business isn't quite as good as last year. "What gives?" they ask. Exactly what you should expect, apparently, given that:

A. The economy is coming off a terrific year; so while 1998 will turn out "great" in general economic terms, it will not necessarily outstrip 1997, a really great year. Nor do the economists and policy makers wish the economy to grow that strongly. A cooling off of growth seems a much better course for the long run, less likely to trigger inflation and recession.

B. Any "great" economy sums up the performance of its various sectors, each with its own "great" or "not-so-great" performance and outlook. The general economy can sparkle while the business you depend on tanks.

Overall, the U.S. business and economic picture looks very positive right now, and everyone in the electrical industry should take heart at that news. At a recent meeting sponsored by the National Electrical Manufacturers Association (NEMA), Rosslyn, Va., I heard economists describe the U.S. economy in glowing terms. "The U.S. economy is the best it's been in a generation, since the 1960s," said David Wyss, chief economist, Standard & Poor's DRI, Lexington, Mass., one of the nation's most prominent economists.

Some of the outstanding benchmarks so far in 1998:

The lowest inflation in 30 years, in spite of the lowest unemployment rate in 28 years. Strong GDP growth-"ridiculously strong," according to Wyss. Housing that is the most affordable it's ever been. A government budget surplus for the first time since 1969. Even the Asian crisis may have a salutary effect on the U.S. because it will keep a lid on inflation here.

Economists expect a slowing of the economy in the second half of 1998, alleviating the need for the Federal Reserve to intervene to cool it down. The GM strike could contribute an additional drop in GDP growth of as much as a quarter-point. A "necessary" inventory correction is occurring.

In the long run, inflation poses the main threat to the economy, Wyss said. If the Federal Reserve raises rates too little or too late, it could result in a recession. He expects the move to come in 1999. In the near term, the two big risks would be if the Asian situation collapses or if inflation escalates at home, causing the Fed to crack down in 1999 and thereby triggering a recession in 2000.

But the thinking right now is that the economy will continue to grow in 1998, although at a slower rate than in the very strong 1997. It's then anticipated to step up growth for 1999 and to grow steadily at rates over 2% through 2002.

"We think this expansion will become the longest in history," says Wyss.

A big factor in the bright economic picture is housing. Starts in 1998 should come in at a high 1.5 million, buoyed by exuberant consumer confidence, high employment levels and low mortgage rates. The underlying demographic demand for housing stands around the 1.3 million level, however, which means housing starts at that 1.5 million rate will not be not sustainable in the long run. So distributors should enjoy the robust housing market while they can and plan for a scaling back ahead. About 9% of distributors' sales go into single-family residential new construction, another 3.5% into multi-family. The latter seems due for a modest increase in 1998, then a leveling off in 1999.

Forecasts for industrial goods show this sector on an even keel. Weak exports will slow equipment sales this year and next, but that drop should be offset by good domestic demand. Excess capacity in the rest of the world along with the Asian financial crisis will hold down inflation in the U.S., especially in raw materials. It equals out to a mediocre year in the industrial sector overall. Industrial MRO makes up electrical distributors' largest single market; over 18% of sales go there. Sales to original-equipment manufacturers (OEMs) for use in the products they make account for another 6%. Distributors will have to search for product or market segments running counter to the general trend.

With the foregoing situation apparently affecting plans, manufacturing construction looks to be slipping going into 1999. That affects 10% of distributors' business going into this new construction segment and another 7% going into industrial renovation and retrofit. Expect postponed projects in this area.

As for commercial markets, retail construction seems to be doing better than it should. While the numbers of new big-box stores and strip malls are dropping, there's huge growth in hotels and entertainment-based retail centers. Office construction is on an upswing as vacancy rates-both urban and suburban-hit single digits in some markets. Almost 17% of distributors' sales go into commercial new construction, renovation and maintenance markets. Distributors' prospects here will vary geographically.

Pent-up demand for utility new construction exists, and restructuring/deregulation will eventually require other equipment expenditures (such as new metering). But many utilities seem frozen in uncertainty as their business undergoes radical change. There's plenty of business ahead from this sector, but no one can call the timing. Around 6% of electrical distributors' sales go to utilities, and those serving this market will likely live with a good deal of uncertainty themselves over the next few years.

Overall, you can expect slower, yet good economic growth ahead. Prospects for your individual markets may not look as promising as the overall economic picture, true. But a period of economic growth allows more flexibility and opportunities than recession for anyone running a business. It's an environment where you need to pick your markets prudently.