Is the economy ready to rebound?
May's uptick in manufacturing is good news for distributors who experienced slow sales in the first quarter
By John R. Johnson -- Industrial Distribution, 7/1/1999
NEWTON, MASS.--Is the manufacturing sector of the economy about to give distributors a lift? Based on the mixed information received by the distribution industry last month, it's hard to tell. According to the latest National Assn. of Purchasing Management survey, U.S. manufacturing activity picked up considerably in May, to the point that some inflationary measures were even noted.On the other hand, construction spending, an important driver of the U.S. economy, fell 2.4 percent in April, its sharpest drop in five years. If talk about rising interest rates comes true, the construction segment would surely feel the impact. And the Conference Board said its leading economic indicators, which predict activity a few months into the future, fell slightly in April after six consecutive months of increases.
So what is a distributor to think? Based on interviews conducted by Industrial Distribution for our Top 100 published last month, distributors expect average sales gains of 12.3 percent in 1999. However, 11 members of the Top 100 club expect to post flat sales or sales declines. And in the most recent round of earnings reports, there were some not-so-fantastic first quarter numbers.
DXP Enterprises, for example, reported that sales for its first quarter ended March 31 declined slightly because of "softness due primarily to the decline in the oil and gas industry," said DXP chairman David Little in a release. DXP hopes to grow sales by nearly 50 percent in 1999.
Airgas also announced that its sales were off by one percent in the first three months of 1999. Peter McCausland, Airgas' chairman and chief executive officer, said, "In the fourth quarter [ended March 31], we continued to see weakness in many of our markets, though they appear to have bottomed. Higher same-store sales for gases and rent this quarter compared to last year were offset by lower hardgoods sales resulting in marginally lower same-store sales in our distribution segment."
Also in May, MSC Industrial Supply announced that a slowdown in manufacturing was hurting sales. "The slowdown in the manufacturing sector continues to impact our growth rate," said Mitch Jacobson, MSC's chief executive officer, who also noted that investments in technology and other initiatives would affect earnings.
That announcement was followed by a release on June 17, stating that the firm would miss its third quarter numbers by reporting that it would earn approximately 18 cents a share for the quarter.
"In April we saw what we thought was the beginning of a long anticipated upturn in demand and in sales growth," said Jacobson. "We expected that trend to continue and to grow in May. We were disappointed as the growth rate actually declined in May. Accordingly, we believe it necessary to adjust estimates at this time."
Wall Street reacted negatively to the news, punishing MSC's stock as it dived by $5 a share to a new all-time low of $11 per share. With 69 million shares outstanding, the reaction on Wall Street shaved nearly $350 million in market value from MSC.
Applied Industrial Technologies also saw its first quarter sales drop by just under two percent for the quarter ending March 31. Chairman Jack Dannemiller attributed the slowdown to the slumping manufacturing sector. "The MRO portion of industrial distribution has slowed in response to a continuing decline in the Manufacturing Capacity Utilization Index, which is currently at a 67-month low," he said. "Simply put, our customers are using less of their production capacity and therefore require less of the products we sell for repair. Additionally, industrial customers have curtailed their investments in plant upgrades and expansions, which also impacts product demand. It is, in short, a very sluggish marketplace.
"We have, however, seen some positive trends which could bode well for our fourth quarter. Our sales to automotive manufacturers have grown during the quarter and high technology customers are reporting improvements in their order booking rate."
"Additionally, we expect to launch multiple e-commerce initiatives in the fourth quarter. While sales growth for these Internet sites will likely be gradual, they represent a long-term commitment by Applied to what we believe will be a major growth market."
While the future of the manufacturing sector is uncertain, non-manufacturing growth should continue to be strong in 1999. According to the Non-Manufacturing Semiannual Economic Forecast produced by the National Assn. of Purchasing Management, 69 percent of purchasing agents expect total revenues for 1999 to be greater than last year.
"Non-manufacturing purchasing executives report a strong level of optimism for 1999 overall, with 51.3 percent expecting business in the first half of 1999 to be better than the second half of 1998, and 53.8 percent predicting business in the second half of 1999 to be better than in the first half," said NAPM's Ralph Kauffman.
Non-manufacturing purchasing executives expected increased levels of capital expenditures in 1999, compared to last year. The net average increase predicted by all members is 3.2 percent, compared to last December's predicted decrease of 7.1 percent.
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