The year is just about half over and many in the electrical industry are already looking ahead to 2013. For some, this year is already in the bag, but I wouldn't bet the ranch on doubling your sales simply because we are close to the half way mark.
At this point, we have enough economic information to feel reasonably confident that our 2012 electrical industry forecast showing sales at plus 6% is going to be on target. But we are also confident that the strongest performance has already occurred in the first half of this year. We expect much weaker growth in the coming six months.
To get more perspective on where we are going it's helpful to understand where we have been. In the last 10 years, since 2002, we have gone through a complete business cycle in the electrical industry and are now embarking on a new cycle. We pick up the previous cycle at the low point in 2002 when electrical industry sales were $58 billion. From the trough in 2002 to the peak in 2008, electrical industry sales grew a whopping 65% cumulatively, or an average annual rate of 8.7%. That defines only the upturn, and it was a good recovery. It just didn't last long enough and it was a hard landing.
But the other side of the coin is measuring the industry from trough to trough. Measuring the cycle from the trough in 2002 when sales were $58 billion to the trough in 2009 when sales were $72 billion defines a complete cycle. During that seven-year period industry sales grew 25% cumulatively, or less than 3.5% on an average annual rate. That kind of cyclicality is unprecedented. An upturn ending that sharply is like the 100-year flood. In recorded history of this industry it simply has never happened, at least not in the last 45 years.
The Great Recession downturn in the electrical industry is a special case, so let's take a look at what we consider to be a “normal” industry business cycle, the 1991 to 2002 cycle. The upturn in the earlier cycle, from 1991 to the peak in 2000, almost doubled the industry size. The actual cumulative growth was 96%, or an average annual rate of 7.8%, or about a percentage point less than the average annual rate in the 2002-2008 upturn. (See chart 1, page 40.)
The last cyclical upturn beginning in 2003 was more robust in the first six years, but nosedived in the seventh year. The previous cycle's upturn beginning in 1992 was more stable over the first six years, but had “legs” so it lasted over 10 years. But the revenue generated from 2003-2008 was about 15% greater than the revenue generated from 1992 to 2000. We are comparing the upturns, not the complete cycle. One of the key differences between the two cycles is the hard landing in 2009 compared with the softer landing in 2002.
Clearly, this is not a function of the electrical industry specifically, but the health of the overall economy in general and the economic environment of the electrical industry in particular.
The simple truth is that distributors, reps and manufacturers can work as hard as they can but will never influence the course or length of the industry's business cycle. That's determined by the nation's economic policies and in turn, the economic behavior of the private sector.
Now we are only two years into a new cycle and up 13% from the low point in 2009. However, two years into the previous recovery the industry was up 16% from its low point. But as history tells us (chart 1), its not how fast you go up that counts, it's how fast you go down.
We can play with lots of numbers. The record shows that over the last 20 years a “good” business cycle will last as much as 10 years while a “bad” cycle can last as few as six years.
We cannot predict a turning point, but if recent history is any guide, we can expect another four years of electrical industry recovery and possibly more. It all depends on who has their hand on the wheel and how well they manage the ship.
Industry Sales Outlook
Meanwhile, we want to update you on what we see coming down the pike in the short run, this year, next year and through 2014. As we mentioned, we are confident that 2012 will show industry sales advancing about 6%.
Next year, in line with a continuing weak overall economic recovery, we are projecting industry sales to increase at the same growth rate as this year — 6%, led by a 7.5% increase in the distributor-served contractor market. By 2014 we are off to the races with double-digit gains in total industry sales. (See chart 2.)
We expect the distributor-served contractor market to increase more than 15% in 2014, led by strong residential construction spending and high single digit real growth in the nonresidential construction market.
Our outlook for the distributor -served industrial market is for solid growth, up more than 12% from the 2013 level.
The current industry business cycle is expected to continue in the recovery phase until 2016. That would provide us with industry sales of over $120 billion by the end of our forecast horizon, and a cyclical growth rate of more than 7.5% on an annual average basis. That's very much in line with our long term historical industry performance. Business cycles are a fact of life, so we are looking forward to a normal cycle, with a soft landing, in the distant future, not in the near future.
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.