The American Supply Association is pleased to present this first in a series of articles designed to provide information and promote ongoing dialogue among all participants in the wholesale channel of distribution.

At the end of October, the government released preliminary estimates of U.S. Gross Domestic Product (GDP) for the third quarter of 2009. The economy grew by an unexpectedly strong 0.9% versus the second quarter, which translates into annualized growth of 3.5%.

Both consumer spending and business investment increased, providing further evidence that the green shoots are beginning to sprout for real. Although the recovery will remain uneven until unemployment starts to decline, there is some good news for wholesaler-distributors.

Trends of particular note:
 
  • Consumer spending grew for the first time since mid-2008. The cash-for-clunkers program added about one percentage point to growth.

     
  • Exports of goods were a bright spot for the U.S. economy, driven by a combination of the depreciating dollar and a faster recovery in other countries. Growth in exports are good news for distributors selling to export-oriented manufacturers.

     
  • Inventories declined again, subtracting from growth. However, inventories will add to growth in future quarters as businesses (includes wholesaler-distributors) begin restocking.

       
  • Residential investment increased for the first time in four years, although total residential investment is 54% below its peak of four years ago. The tax credit for first-time homebuyers contributed to the strong performance. The revenues of building materials distributors are closely tied to residential investment. Building materials and construction wholesale distributors can look forward to a somewhat brighter 2010. Construction activity is showing signs of life but will remain depressed during the next four to five years as the excesses of the housing bubble get slowly worked out. 

    Keep in mind that we are coming off a dramatically lower base level. Annualized revenues of building materials and construction wholesale distributors are now running at $98.4 billion compared to $145 billion in 2006, suggesting that substantial overcapacity remains in this sector. New housing starts should increase next year to about 750,000 units, and the easy credit terms that helped to inflate the bubble are unlikely to return for at least 10 years (if ever).

    Foreclosures and oversupply will continue to exert downward pressure on pricing. The remodeling market will also recover but remain below the bubble year levels. Cash-out refinancings, which support the remodeling market, totaled $1.1 trillion from 2003 to 2007. In contrast, less than $45 billion of equity was cashed out in the first half of 2009.

  • Business spending on equipment and software, which is about three-quarters of fixed nonresidential investment, also grew as credit conditions improved and business confidence improved. I am raising my forecasts for industrial distribution and now expect year-over-year growth to turn slightly positive in the first quarter of 2010.

    This forecast is driven by the recovering industrial economy. Manufacturing capacity utilization grew at a 7.7% annualized rate in Q3. Even if we exclude the cash-for-clunkers auto manufacturing boost, output rose by a still healthy 3.8% last quarter.

    U.S. exports should accelerate because the rest of the world is recovering faster than us, although the most recent trade data (from August) still shows tepid growth. Additionally, exports will be helped by the weakening dollar.  The increasingly perilous state of our nation’s finances will likely lead to more dollar weakness.


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