A Closer Look: The Effect on Distributors As The Economy Sputters Along

The stock market was humming along earlier this year, setting records on many days. Housing starts are climbing and industrial production is increasing, but beneath all that good news there still is uncertainty in the industrial and construction sectors.

This article first appeared in Industrial Distribution's May/June 2013 Issue. To view it in it's original format, please click here.

The stock market was humming along earlier this year, setting records on many days. Housing starts are climbing and industrial production is increasing, but beneath all that good news there still is uncertainty in the industrial and construction sectors.  

Let’s take the good news first: The housing market has bounced back from its lows. The Commerce Department reported recently that housing starts in February reached 917,000 homes at an annual rate, up 0.8 percent from a revised 910,000 pace in January that was higher than initially estimated. Building permits increased 4.6 percent to 946,000, the strongest number since June of 2008.

Single-family home construction increased to an annual rate of 618,000, the most in 4 ½ years. But builder confidence in the market for newly built, single-family homes paused for a third consecutive month in March, with a two-point reduction to 44 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

“Following eight consecutive months of improvement, builder confidence leveled off in January and has since edged down several points,” noted NAHB Chairman Rick Judson, a home builder from Charlotte, N.C. “Although many of our members are reporting increased demand for new homes in their markets, their enthusiasm is being tempered by frustrating bottlenecks in the supply chain for developed lots along with rising costs for building materials and labor. At the same time, problems with appraisals and credit availability remain considerable obstacles to completing deals.”

Even if the housing market keeps recovering, it will take years before it returns to the high levels of building and employment before the recession hit.

Economic activity in the manufacturing sector expanded in March for the fourth consecutive month but at a much slower rate, according to the Institute for Supply Management (For more detail on this report, see page 10).

And in the bad news scenario, Caterpillar is reporting a sharp drop-off in sales through its worldwide dealer organization and its stock is in negative territory as of late March. That is not good news.

So What’s Wrong?
If you were to review comments made by several distributors in the last quarter, you would find organic sales are flat to negative. Most growth came from acquisitions and at least one large distributor is planning to consolidate facilities and institute layoffs because of slow organic growth.

Airgas, one of the nation’s leading suppliers of industrial, medical, and specialty gases as well as welding and safety products, said that its organic sales dropped in February and the company has lowered its earnings per share guidance by four percent for the 4th quarter ending March 31.  

“Organic sales growth in our Distribution segment has been disappointing this quarter,” said Executive Chairman Peter McCausland earlier this year. “Although organic sales growth in January was in-line with the low-single-digit growth assumption in our fourth quarter guidance, organic sales growth for the month of February was negative two percent. As a result, quarter-to-date organic sales growth through February was flat compared to the prior year and roughly two to three percent behind our guidance assumptions, with the shortfalls being volume-related and in both gases and hardgoods.

“Sales to-date in the month of March have not improved appreciably over February, and absent a strong finish in the next ten days, these weaker-than-expected sales suggest that we may miss the low end of our adjusted EPS guidance of $1.18 by approximately four percent,” McCausland continued.

Lack of Optimism Tempers Progress
Airgas is not alone in its thinking. Other distributors report that buyers were purchasing products from hand to mouth.

In fact, almost every manufacturer and distributor that recently reported earnings are basing much of their optimism on the latter part of the year.

It’s almost as if distributors are holding their breath and hoping to wait out the slow economy until July — waiting for the increased business. Only time will tell if they were right.

Some studies indicate optimism still exists on the economic outlook, but no major study indicates overall confidence. Some indicate cautious optimism at best.

U.S. small and mid-sized business owners, for example, plan to delay hiring new employees or seek new loans amid cautious optimism, according to the latest findings of the PNC Economic Outlook survey.
The spring findings of PNC’s biannual survey, which began in 2003, reveals that only about one in four are highly optimistic about their own company’s prospects during the next six months, up from 23 percent last fall. Nearly half expect sales to increase during the next six months — on par with the previous 46 percent.

“The powerful engine of the U.S. economy is not firing on all cylinders, but there are sparks of optimism related to sales, profits, and housing prices,” said Stuart Hoffman, chief economist at PNC. “These findings support our baseline forecast that the moderate U.S. economic and jobs expansion will persist in 2013.”

Hoffman added that three factors are holding back the economy: Continued uncertainty about federal spending, tax, and deficit actions; hiring freezes and ongoing layoffs, particularly at the federal level; and continued limits on U.S. exports to Europe.

Three out of four small and mid-sized businesses expect their staffing to remain unchanged for the next six months. Asked for reasons, nearly one out of three say they will choose to do more work with fewer employees. Only 41 percent think the federal government could take actions that would positively influence their hiring plans, with many citing fewer business regulations.

The PNC Economic Outlook survey was conducted between Jan. 23 to Feb. 15, 2013, by telephone within the United States among 1,718 owners or senior decision-makers of small and mid-sized businesses with annual revenues of $100,000 to $250 million.

On April 5th the government reported a very disappointing jobs report showing that only 88,000 jobs were created in March. A decline was also recorded in the labor participation rate, which shows how many people in good health actually have jobs. The data showed the rate dropped to 63.3 percent, the lowest level in 36 years.  

Manufacturing lost 3,000 jobs in March while the construction sector added 18,000 jobs, according to the report from the Bureau of Labor Statistics.

Based on those numbers as well as other data, some economists are predicting that the nation’s GDP will grow less than two percent this year. And that is not good news.

The next two quarters will show whether the case for a stronger second half of the year was justified.

Jack Keough is contributing editor of Industrial Distribution. You can reach him at john.keough@comcast.net.

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