The United States economy will grow at a slower pace this year than it did in 2006, according to economists, with the national GDP growing by roughly 2.5 percent compared with nearly 3.5 percent growth during the first three quarters of last year.

For distributors, that should mean a decent year, albeit one with less growth than last year, said Adam Fein, president of Pembroke Consulting.

“We're forecasting another year of growth for distributors, although we do expect growth to moderate a bit due to a slowdown in parts of the economy, as well as a slowdown in the rate of commodities price inflation,” Fein said. “Revenue [growth] for distributors should be coming in in the low single digits next year.”

As of the middle of 2006, revenues in the industrial distribution sector had already grown by nearly 10 percent, largely fueled by high commodities prices. As those prices adjust, distributors' revenue growth will slow somewhat, Fein said.

“Distributors have really been benefiting from relatively high commodity prices in the market, and that's been boosting revenue growth,” he said. “That commodity price bubble has inflated the revenues of a lot of distributors and boosted bottom-line profits. [The moderation in commodity prices is] going to make volume growth even more important going forward.”

The slowing housing market will continue to affect the economy, Fein said. Single-family home starts rose 60 percent between 1995 and 2005, hitting the 1.7 million mark, he noted. Since then, there's been a significant slowdown in residential housing starts.

However, an uptick in commercial construction should help ease the burden on distributors serving the construction industry.

“The slowdown in residential construction activity has been matched by a rebound in commercial construction activity,” Fein said. “They're counter-cyclical, [meaning] they tend to balance each other out. Distributors that have managed the transition into commercial construction should do fine [this year].”

On the manufacturing side, Fein said the rebound of the past few years should remain stable for most of this year, with any increases in capacity inventory and capacity utilization benefiting distributors.

That said, manufacturing continues to wrestle with dramatic changes in the global economy, Fein said, citing a net loss of 27,000 manufacturing plants between 1998 and 2004—and the 3 million domestic manufacturing jobs that went with them.

“Manufacturing employment in the U.S. has not rebounded following the recession,” he said. “The manufacturers that are surviving in the U.S. are using a variety of strategies to try and remain viable—flexible manufacturing, shorter production runs, [adding] more complex value at assembly. They're running fast to survive.”

One positive factor is a major surge in productivity—output per hour has nearly doubled in durable goods manufacturing, meaning more is being produced with less or equal amounts of labor, Fein said.

“That is maintaining [manufacturers'] viability, but also means they can produce the same amount with fewer inputs,” he said.

David Huether, chief economist for the National Assn. of Manufacturers, said he believes the productivity surge will abate somewhat this year, falling to about 2.4 percent from roughly 3 percent over the past three years.

“A lot of times when the recovery really gains a lot of steam, as the U.S. economy did in 2004 and 2005, there is a temporary, really strong upsurge in productivity growth,” Huether said. “The last couple of months, there's been a decline in manufacturing employment because productivity has been slowing rather dramatically.”

But for distributors, especially in the safety products arena, the increase in productivity can have a negative impact, Fein said, “because there are just fewer people to put safety products on.”

Another recent surge—the rapid-fire pace of mergers and acquisitions in the distribution sector—will continue for the segments that cannot be moved offshore, Fein said.

“Any distributor selling to office buildings, commercial facilities, professional contractors and domestic industries is going to see a lot more acquisition activity,” he said. “We're losing a lot of manufacturing plants to Southeast Asia, but we haven't lost many plumbers or electricians. … They remain regardless of where the product is manufactured.”

For manufacturers, Huether said companies will continue to cut costs wherever they can.

“If they can do that through mergers and acquisitions, I think they will,” he said. “The rest of the economy is pretty insulated from direct competition from the rest of the world, but manufacturers are not.”

Looking forward, Fein predicted a continued trend of distributors migrating into the commercial MRO business, supplying hospitals, large housing complexes and other non-industrial customers. That's because the non-industrial market is less cyclical than the industrial sector, he said.

“The traditional industrial distributor is going to be a smaller and smaller part of the distribution landscape. I think we're really going to be feeling that in 2007,” Fein said.