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When the Knives Finally Stop Falling

Aug. 1, 2010
Some economic indicators that measure the electrical market's health are turning positive. But the overall recovery has been painfully slow.

If you follow the stock market, you have probably heard some Wall Street sharpie on CNBC caution viewers, “Never try to catch a falling knife.” The idea is that when a stock's price is dropping like a rock, you can get cut up pretty bad if you try to peg the absolute bottom and rush in to buy it when you think it's cheapest.

It's tough to time the electrical market, too. In these uncertain economic times, if you start hiring, building up inventory or cranking up production too soon, you may have to wait way too long for a return on your investment. But if you miss the up-tick and don't make timely investments in your business, then you may not be able to properly service customer demand or may miss out on hiring a great employee.

While the worst of the recession does appear to be behind us, the recovery sure seems like it's taking much longer than expected. Indeed, this recovery reminds me of one of those documentaries of the earliest airplanes bumping along the runway as they struggle to gain altitude.

However, there are legitimate reasons for optimism when you study some of the key economic indicators that offer distributors, manufacturers and reps insight into future market conditions. For instance, the most recent Department of Commerce data for electrical manufacturers' new orders is on a healthy upward trend in recent months and is up solidly over last year. In May, manufacturers' new orders were $3.14 billion, up 2.5 percent over April 2010 and up 20.7 percent over May 2009. And another measure of market conditions, the Electroindustry Business Confidence Index (EBCI) for current North American conditions published monthly by the National Electrical Manufacturers Association (NEMA), Rosslyn, Va., has rebounded smartly from a seven-year low in Dec. 2008. While the EBCI has slid the past two months it still remains in positive territory.

Another economic indicator that may now be pointing toward a rebound is electrical contractor employment. According to Bureau of Labor Statistics data, for the first time in about a year the number of employees at electrical contracting firms increased for two consecutive months. While this is a step in the right direction, it's way too early to say contractor employment is anywhere near back to normal — particularly when May 2010's figure of 739,000 employees is off approximately 22 percent (more than 205,000 employees) from the recent high in July 2007 of 944,700 employees.

Sure, any increase in market data is up over some historically low figures. And cynics may think any growth at this stage of the game is what Wall Street calls a “dead cat bounce” — a brief recovery in a stock of declining value, or in this case a recessionary market. But it doesn't matter if you are swimming in the half-full or half-empty portion of the crystal ball — some key trends are moving in the right direction.

Different market segments and regions of the country are recovering at different rates, and you will feel the recovery more or less depending on where you live and the focus of your business. For instance, EW's Top 200 surveys and market data developed by Herm Isenstein, president, DISC Corp., Orange, Conn., point toward an earlier recovery for more industrially oriented electrical companies but a tough slog ahead for distributors, reps and manufacturers that focus on non-residential construction.

The residential market is a little tougher to get a handle on. The latest data on building permits (a reliable indicator of future homebuilding) shows that some of the markets that fell furthest in the recession — like Atlanta, Florida's Gulf Coast and Las Vegas — are registering huge increases in building permits through June. But home sales for the first half of 2010 were disappointing, and housing starts have yet to gain any real momentum.

All in all, it looks like you are going to really have to pick your spots with this economic recovery and dance between the raindrops and falling knives. EW's goal is to help you stay sharp and get the proper insight into the best early indicators of economic recovery and the most promising market segments.