Half empty: INDUSTRIAL DISTRIBUTION's 58th Annual Survey of Distributor Operations was depressingly familiar reading. Respondents reported huge sales losses as a result of job migration to China, skyrocketing medical and workers compensation costs, and a shortage of quality salespeople. Almost 40 percent said they would welcome an acquisition offer—in effect, signaling a willingness to cash out of the game altogether.

Half full: But more than 80 percent of respondents expect sales increases in 2004, and nearly a quarter are prepared to increase their bet by making an acquisition. Many said they were investing in their businesses by purchasing software, installing warehouse automation and adding products.

So what's going on to generate these conflicting views? An e-alert (number E-295) from Daniel J. Meckstroth, chief economist at Manufacturers Alliance/MAPI shows that manufacturers' share of GDP fell from 15.4 percent in 1998 to 12.7 percent in 2003. Other shrinking industries of interest to industrial distributors included wholesale trade and agriculture. Growing were construction and mining.

This sounds familiar, but then Meckstroth explains by splitting the raw data into a volume component and a price component and points out that "one reason for the large decline in manufacturing percentage of the GDP was that manufacturing experienced deflation in an inflationary economy."

This translated into even more insistent demands from our manufacturing customers for lower prices/higher value added. In fact, prices in manufacturing fell 5.1 percent, while inflation-adjusted GDP grew 14.7 percent. High productivity growth in manufacturing offset cost increases—hence the substantial decline in manufacturing employment.

Typically, the industries which increased their share of GDP did so mainly with price increases. Mining saw an 84 percent increase in price, while quantity declined 9 percent. But here's the important part for industrial distributors supplying manufacturing customers: from 1977 to 2000, the quantity of manufacturing grew at the same rate as GDP—3.3 percent a year—then declined in 2001, and has begun rising again. Manufacturing volume grew in the United States, but was more than offset by the price reductions.

So what does this mean for industrial distributors? Growth has been hard to find, our customers are under severe cost pressure and are passing on the pain to us. For the future, we need to focus even more clearly on where to find profitable growth opportunities. Markets such as infrastructure (transportation, utilities, construction) outsource the protected industries (process industries, agriculture), and low labor content manufacturers (pharmaceuticals) are likely to be more attractive over the long term than labor intensive, lower value-added activities.

The good news is that these industries are not likely to migrate offshore; the bad news is that they will need to deal with their cost pressures in part by passing them on to us. It's also probable that competition for customers in these more attractive industries will intensify.

So what do you think, half full or half empty?