Economic Update

We measure overall economic performance in terms of income, employment and prices. The overall performance of the electrical industry can be measured by growth in sales and inflation. This article will focus on how the balance of the business cycle has been shifting over the last few years and what it means for electrical industry performance.

Let's begin with the overall economy. This economic business cycle is in full swing — a solid recovery but not without red flags. The twin deficits (budget and trade) and the falling dollar are troubling, but they do not directly drive the performance of the electrical industry.

The domestic side of the economy is where it's at for this industry. In terms of overall income growth, the economy is humming. The latest revised growth in GDP (income) for the fourth quarter of 2004 was 3.8 percent. For the year as a whole, income (demand) in the overall economy was up 4.4 percent, higher than the long-term trend. These percent changes are calculated after inflation has been removed, so there is no price effect.

In the early phase of the current economic cycle, the consumer and the federal government segments were the strongest. But as we moved through 2004, business increased its contribution. It's continuing to do so in 2005 and will continue on this path in 2006. At the same time, both government and consumer demand are weakening. The employment picture still isn't great. In the most current employment statistics, the job picture was weaker than expected, with the economy generating 110,000 jobs in March, or about half of what we consider to be healthy. Approximately 26,000 jobs were added in the construction industry, but the manufacturing sector lost 8,000 jobs.

With gasoline now well over $2 a gallon, rising fuel prices are also a concern. We see other commodity prices rising, sharply in some cases, and we worry about inflation raising its ugly head again.

Smoother sailing

I believe the strongest growth took place in 2004 for this cycle in the overall economy. The outlook is brighter for this industry. The indicator most important to the distributor-served industrial market averaged better than 8 percent in the second half of 2004 and is expected to increase 10 percent this year. Look for the distributor-served industrial market to increase 11 percent in 2005 and about 5.5 percent next year.

Nonresidential construction spending was still weak as 2004 drew to a close. As we move forward through the first half of this year we continue to see single-digit growth, but by the second half of this year we expect nonresidential construction spending to reach higher single-digit growth, driving the overall distributor served contractor market up about 8.5 percent in 2005.

For the past few years, the indicator driving demand for residential products has been in the high single-digit growth range. But we expect residential spending to grow only fractionally this year and register negative growth in 2006.

DISC's outlook going back over the past nine months has been very consistent. The forecasts for 2005 and 2006 don't vary by much more than 2 percent. That doesn't guarantee a perfect forecast, but it does give a high degree of confidence that 2005 and 2006 should be good years for the industry. For 2006, DISC's most pessimistic forecast and most optimistic forecast are separated by only 2 percentage points. As forecasts go, that is an excellent scenario.

Herm Isenstein is president of DISC Corp., Orange, Conn., a provider of market forecast data for the electrical industry. Contact Isenstein at [email protected] or at (203) 799-3673.

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