Industry’s 2007 Sales Remain Solid, But DISC Forecasts Slowdown In 2008

The economic party is not quite over in the electrical market, but some executives may be checking their watches — and sales forecasts — to see how much longer the good times will continue to roll.

According to forecast data from DISC Corp., Orange, Conn., with the year’s first quarter complete and the end of 2007’s second quarter just a few weeks away, it’s clear distributor sales are not what they were just four quarters ago. Distributors and vendors were flying high early last year, with total sales in the first quarter up 13 percent. Of course, all the stars were aligned just right, as every single important economic indicator directly impacting sales in the electrical wholesaling industry was in plus territory.

In fact, the first half of 2006 was the peak growth period in the industry’s business cycle, up 13 percent compared with the first half of 2005. While 2006 was a very good year overall for the electrical industry, the growth curve was decelerating, and by the fourth quarter industry sales were advancing at barely 7 percent.

At the same time, the distributor-served contractor market was advancing at a strong 11 percent rate. The basis for the contractor growth was positive gains in the residential and nonresidential construction markets. However, by year-end, the residential and nonresidential construction markets were growing in opposite directions. The nonresidential market finally took off, with a solid gain of 11 percent. On the flip side, the residential market slumped to a negative growth of more than 12 percent in 2006’s last quarter.

Although distributor sales to the industrial market surged ahead by over 18 percent from the year-earlier quarter, the distributor-served industrial market was winding down as the electrical industry moved through 2006. From a growth of better than 18 percent in the first quarter, industrial market sales gained just 6 percent in the last quarter of the year.

We are now at the point in the electrical market’s business cycle when the key economic indicators begin to move in different directions. This means the cycle has peaked and slower industry growth is sure to follow. However, it’s important to recognize that although the key indicators are slowing, they are not all slowing at the same rate. Therefore, some distributors and vendors will feel very different about industry performance.

Contractors still quite busy. This is the year of the contractor market, residential construction notwithstanding. Here’s why. Overall, the distributor-served contractor market will increase about 9 percent this year because of strength in nonresidential construction.

That’s really fine growth, when you think about the huge downturn in the residential market. When you dig into what’s happening in the residential market, you will see that its impact on distributors is an eye opener. In the first quarter of this year residential construction was down 17 percent from the year-ago quarter.

However, the drag is in single-family homes, off nearly 30 percent from a year earlier. Meanwhile, multi-family construction is actually up one percent in the first quarter. The density of electric content in multi-family building is much greater than in single-family building. For this industry, the percentage change in single-family construction is not a good indicator of distributor sales to the overall residential market, unless a company doesn’t go after the multi-family residential construction market.

I believe 2007 is the bottom for distributors and vendors serving the residential market. According to DISC analysis of U.S. Census data, electrical contractors will increase their purchases of electrical supplies from electrical distributors in 2008 for residential applications by approximately five percent.

Nonresidential construction tells the tale. Let’s take a look at the performance in the nonresidential market, because that’s the most important driver of industry sales this year. Just about every one of the major components of nonresidential construction spending in the first quarter is pointing up at double-digit rates.

Total nonresidential construction increased 9.4 percent in the first quarter compared to a year earlier. Commercial/health care was up 12.3 percent. And multi-merchandise shopping was up 11.2 percent. Meanwhile, construction expenditures for manufacturing plants were up a solid 13 percent. However, some of these components will eventually be hit directly by the downturn in the residential construction market. Multi-merchandising shopping is one example. I expect the downturn in nonresidential construction to hit as we close out 2007.

I believe 2007 is the beginning of a slowdown in industry sales, coming off a very strong 2006. In DISC’s current forecast cycle, I don’t see any growth as high as 5 percent through 2011. I am not suggesting a recession in the electrical industry. But I do expect to start seeing low single-digit growth across the major segments served by distributors and vendors.