The ASA biannual compensation study and the annual Operating Performance Report (OPR) now are available and as expected are showing favorable trends for the plumbing-supply, PVF, PHCP and HVAC industry. The biggest contributor for the positive trends has been the growth in economy. The real gross domestic product (GDP) has been trending positive with 2017 seeing growth of 2.3%. The U.S. dollar continues to be strong and interest rates remain historically low; however, it is expected that interest rates will continue to rise during 2018.
In 2018, companies across the United States are projecting salary budget increases with early projections indicating increases will be just over 3%. Inflation grew by 2.1% in 2017 and is expected to continue to grow by 2.4% in 2018. Forecasts for 2018 project an unemployment rate of 3.8% which, if it holds true, will be the lowest unemployment rate since 1969. Currently, the economy is experiencing both low unemployment rates and a surplus of job openings. When this occurs the competition for talent increases, resulting in higher employee turnover rates and increased compensation levels. The turnover rate for employees was 3.6% in 2017; the highest it has been in the past 10 years.
In the 2018 cross-industry compensation study, the top concern or issue was identified to be finding qualified employees, followed by costs of healthcare and maintaining profit levels. It makes sense that finding qualified employees is the top concern, as we continue to see a declining unemployment rate and higher turnover rates. The recruiting and retention rate, profit sharing, and incentive compensation for ASA companies was slightly higher cross-industry.
While the U.S. economy has experienced relatively slow but improving growth in 2017, U.S. wholesale sales increased 7.0% (in nominal dollars), following a 0.5% decline in 2016. The ASA OPR, which is an extremely comprehensive study that collects and analyzes data on an extensive list of performance measures, indicated that distributors experienced a 6.6% sales gain on an after-tax basis. Of the four industry segments surveyed (PVF, plumbing-supply firms, plumbing supply & PVF and lastly HVAC), PVF companies reported higher before-tax returns on net worth in comparison to 2016, while the other three segments reported lower before-tax return on net worth. However, on a before-tax basis, most companies averaged a return on net worth of 18.3% (vs. 14.3% in 2017).
Sustained economic growth stems from increases in worker/labor productivity, which can be measured as the value each employed worker creates per unit of his/her output. The first determinant of labor productivity is human capital, which is the accumulated knowledge from education, experience, skills and expertise. The second factor contributing to labor productivity is technological change, which is a combination of invention, advances in knowledge and innovation. The third contributing factor to sustained economic growth is cost advantages that industries obtain due to size. The only way GDP can continually grow is if the productivity of the average worker rises along with complementary increases in capital.
It is insightful how skilled labor and human capital work together to form an upward economic trend. However, an upward trend will only last until the government intervenes by putting in place a contractionary fiscal policy to slow down growth and keep it at a healthy level of 2-3 %. Anything beyond 3% would create negative consequences, such as higher inflation, asset bubbles due to increased investment and a below-normal unemployment rate. As a result, companies will struggle finding workers to meet market demand leading to a slowdown in production and potentially lead to a recession.
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