While the National Bureau of Economic Research, the organization that officially picks the beginning and ending of business cycles, has yet to pinpoint the end of the downturn, it seems clear that the Great Recession that began in December 2007 is finally over. The general economic recovery will eventually pull the electrical industry out of the doldrums and into its recovery. There can be no turnaround in the electrical industry without an upturn in the general economy. Historically speaking, that's a necessary and sufficient condition for a recovery in the electrical industry.
That said, the electrical market is fast approaching the mid-year point and all indications are that the worst of the downturn is behind us. We are still licking our wounds even as the largest sales decline in the industry's history already took place in 2009 — a 26 percent decrease in sales from the 2008 level.
Nevertheless, I expect total industry sales will continue to decline through the first half of this year. That would string together seven consecutive quarters of total sales declines beginning with 2008/Q4 and ending in 2010/Q2. In stark terms, from the peak in 2008/Q3 to the trough in 2010/Q2 fully one-third of industry sales was wiped out.
That's a huge number. But what cannot be easily measured is the loss of wage income, profits, jobs and resources idled never to be recaptured. On a year-over-year basis, the electrical industry is not expected to return to the sales level of the “good old days” until 2014. The “good old days” is defined as the last year of industry expansion — 2008. More precisely, we expect sales will not reach the 2008/Q3 peak quarterly sales level until 2014/Q3. Six years later, we will just be getting back to where we were as an industry in 2008.
Will the electrical market require the same number of people in 2014 as in 2008? I seriously doubt it. One reason is that with a forecasted industry inflation rate cumulatively from 2008 to 2014 of about seven percent, we will be selling about four percent less in physical volume in 2014 than in 2008. That number in itself gives us a sense of the magnitude of the damage caused by the Great Recession.
It's important to remember that these are aggregates, and we have only scratched the surface. Many vendors and distributors either thrive or struggle in the key segments that make up the total electrical industry. And when you drill into the segments you really begin to see the damage suffered by vendors, wholesalers and reps.
My DISC forecasts say total sales were down 26 percent last year and that distributor sales to contractors were down another 10 points to a 36-percent shortfall. The contraction in this segment was so sharp that we never get back to the 2008 dollar sales level throughout our forecast horizon, which extends through 2014.
The distributor-served industrial market offers a little more cover, because the decline is not as severe and recovers more quickly. The industrial segment beats the contractor segment by about 15 points, falling 21 percent compared to the 36-percent sales decrease in the contractor market (and 26 percent in total).
Moreover, we expect the industrial market to lead us out of our industry's downturn. The expansion in the distributor-served industrial market has already begun, with a year-over-year gain of nearly four percent in this year's second quarter and extending to an eight-percent gain in the final quarter of this year.
I don't want to get too microscopic, but there is a message in these numbers. First, distributors/vendors/reps serving the contractor market will continue to experience revenue decreases in every quarter this year. Second, some distributors/vendors/reps are already seeing sales gains in their business (but not in the commercial end of the industry). Distributors are beginning to lay in more inventory and some backlogs are growing as they relate to the industrial market. Third, I don't see the industry overall returning to solid growth until the second half of next year. Solid growth in my terms is at least high single digits. In the industrial market, I expect high single-digit growth by the fourth quarter of this year. And finally by the fourth quarter of next year we should see a return to double-digit growth overall in both the contractor and industrial markets.
Some industry observers may think a shakeout like the Great Recession is a good thing. I don't agree. The electrical industry is so highly competitive that by definition it's highly efficient. What shakeout could possibly be beneficial to this industry? We are not comparing this industry to other industries. The comparison is within this industry itself. Distributors who do not or cannot keep up with advances in technology and operational techniques focusing on resource management do not long survive regardless of where we are in the business cycle, up or down.
It's a given that the industry has contracted severely and will undoubtedly expand as the economy continues to recover. Moreover, we have seen that despite a disastrous downturn and with expert management you can minimize your losses and some can even operate close to profitable levels.
One nagging question is how many distributors closed their doors during this recession. Branches have been closed, but the most visible distributors seem to have survived. Now all companies should be preparing for the coming upturn and thinking about adding the resources necessary to compete in the recovery phase of the cycle.
Where do you begin? Where your company is positioned will determine when you should be physically adding resources. If your thrust is to serve large project construction (commercial and industrial construction) you will not see an upturn until the second half of 2011. But if your business primarily serves the residential market, then you are in luck (relatively speaking) because I believe it should show double-digit growth in the first quarter of next year. You are even more fortunate if you serve the industrial market, as you should already be seeing your revenues increasing in the 2010 second quarter over the second quarter of last year.
The bottom line is that now is the time to plan for the recovery in the electrical market that's certainly on the way. In the depths of the recession when everything seemed to be going to hell in a hand basket, you may have thought that you would never see daylight. But with the overall economy showing signs of strength and a double-dip recession becoming increasingly unlikely, we can be confident the electrical market's own recovery is on the way.
Herm Isenstein is president of DISC Corp., Orange, Conn., the leading forecasting company in the electrical industry. He can be reached by phone at (203) 799-3673 or by e-mail at [email protected]. Learn more about DISC Corp at www.disccorp.com.