State of the Wholesale Distribution Industry

Editor’s Note: The following article appears in NAW’s recently released Annual Report. Click here to read it in its entirety https://www.naw.org/annual-report/.

Wholesaler-distributors, in general, are undoubtedly feeling good about business. Wholesale distribution came in at nearly $5.7 trillion over the last 12 months, up 7.6 percent from the year before. Employment in our industry has reached a record high of 5.9 million people (4.7 percent of the total private sector employment). Wages in wholesale distribution, on median, have ascended to a record high. Things are looking good for the industry and most participants. The trouble is that the tide will go out for this large segment of the U.S. economy (approximately 6 percent of U.S. GDP according to the Bureau of Economic Analysis). Make plans now for managing both cash and inventory levels in a slowing-growth environment in the latter half of 2018.

These industry segments are also posting solid year-over-year gains as shown in Figure 1:

Figure 1: Industry Segments

NAICS

Description

12/12

Phase

12-Month Moving Total in Billions of Dollars

4244

Grocery & Related Products

2.6%

B

$641.80

4236

Electrical & Electronic Goods

7.8%

B

$596.30

4234

Professional & Commercial Equipment

4.8%

B

$482.90

4231

Motor Vehicles, Parts & Supplies

10.2%

B

$471.20

4241

Paper & Paper Products

0.7%

B

$96.40

4235

Metals & Minerals (Ex. Petroleum)

16.7%

B

$164.10

4248

Beer, Wine, Distilled Alcoholic Beverages

2.3%

B

$142.40

4237

Machinery & Equipment & Supplies

2.9%

B

$138.20

4233

Lumber & Other Construction Materials

9.0%

B

$136.40

4246

Chemicals & Allied Products

7.9%

B

$123.50


The problem is that these growth rates won’t last. Did you feel sales sag in December? Both the durable and nondurable segments of the industry saw December sales come in below November for the first time since 2012. In and of itself that may be shrugged off as a one-month event, but there are indications that December was not a one-off event.

The first sign of a slowing rate of growth in the latter half of 2018 for this industry is seen in U.S. Exports. The rate of growth for Exports is going through a broad peak. The timing relationship between these series is such that Exports are signaling a lower rate of rise in Wholesale Trade in the latter half of 2018. Other leading indicators also suggest that the growth rate will diminish as we go through the second half of 2018 (Figure 2).

The Manufacturing Capacity Utilization Rate is also providing evidence of a slowing rate of rise in wholesale distribution later this year. The Utilization Rate leads this industry through peaks by seven months (correlation is a strong .80). The tentative November 2017 high in the Utilization Rate places the cyclical peak for wholesale distribution at mid-2018, signaling a slowing rate of rise for industry participants in the second half of the year (Figure 3).

The list of indicators in support of our forecast for the second half of the year is getting longer. Our proprietary ITR U.S. Consumer Activity Leading Indicator™ is signaling a slowing rate of growth for retail sales later this year. A slowing rate of rise in consumer activity, as indicated in Figure 4 and by the trend in the Savings Rate, can be expected to have an impact on the demand pull on wholesale distribution.



The August high in the Purchasing Managers Index rate-of- change is also signaling a slowing rate of growth in Industrial Production activity in the second half of 2018. The signs are there so now is the time to assess your cash needs in a slowing-growth economy.

It is important to watch your inventory levels and be prepared to reduce inventory levels in B and C items now with a wary eye on A items one to two quarters from now. Your inventory turns are bound to slow in the second half of this year if you don’t act soon. Use ITR’s rate-of-change methodology and implement your cash and inventory plans when your year-over-year growth rate on a quarterly basis moves below the annual growth rate (3/12 moves below the 12/12). That is a sure sign that the economy and your business have moved to the back side of the business cycle.

This article was written by Alan Beaulieu, NAW Senior Economic Advisor, and president of ITR Economics. For additional information call 603-796-2500 or visit https://www.itreconomics.com.