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War, Uncertainty & Weak Demand

April 1, 2003
So much uncertainty exists because of the war in Iraq. No doubt the uncertainty has led consumers and businesses to hold back on spending until they see

So much uncertainty exists because of the war in Iraq. No doubt the uncertainty has led consumers and businesses to hold back on spending until they see which way the wind is blowing. But today's question is: Will the war in Iraq make much of a difference to the electrical distribution industry this year and next year?

While the war has created a more uncertain environment, it's by far much less of a factor in determining what electrical distributor performance will be for 2003 and 2004.

We are talking about spending for big-ticket items — durables — more directly related to distributor industry performance. In my view, holding back on expenditures because of the war is temporary, and the war is not the only reason spending is weak.

Popular commentary is that with a quick and favorable ending to the war, the economy is poised to take off. Frankly, I couldn't disagree more. The economy is growing less than its potential not because of war, but because we have too much excess capacity. As a result, electrical-distributor-industry performance will barely exceed zero growth this year.

Of course, it's true we are getting a lot of help from the federal government. It's pumping liquidity into the economy with expenditures on the war, homeland security and tax cuts. These expenditures are very positive, considering the weak demand in other sectors of the economy.

Nevertheless, it's the private sector that drives electrical-distributor- industry sales. War or no war, electrical distributors do not thrive unless the fundamentals are in place for growth.

The excess in commercial construction — offices and shopping centers — is still being worked off and will continue for the rest of this year. From 2001 through this year, commercial construction will have fallen a whopping 35 percent. That's the price we now pay for the dot-com excesses. By next year, I expect a turnaround with growth of more than 5 percent.

In the meantime, another important construction sector — factory construction — has been tumbling since 1998, with a cumulative loss through this year of better than 85 percent. That is huge! However, in 2004 I expect a reversal in this trend and to see a solid double-digit recovery.

When I talk with manufacturers, reps and distributors, they say the residential end of industry sales is going gangbusters. While the residential sector is one area that has helped overall industry performance, don't expect it to last forever.

Many reasons exist why I don't think this performance will be maintained. This market has been helped by low mortgage rates and the perception that housing is a good long-term investment. But expect long-term rates to go up, and increasing resistance to higher prices.

Putting this all together, I believe in 2003 industry sales will end up at about the same place as 2002. Even that forecast could be a tad optimistic. Sales in 2002 were $67.3 billion. The risks are on the downside and no forecast has zero error unless it's by pure chance.

Simply put, a better chance exists that industry sales will be off by a percentage point than it will be up by a percentage point. My forecast at this time is for fractionally negative growth. However, I'll try to put on an optimistic face and call it zero growth.

The one thing to keep in mind is that a zero growth forecast does not mean zero opportunities. Industry growth is an average for the whole industry — it's not a forecast for your specific company. Some companies are outpacing the industry, and others are not keeping pace.

From a macro view, there will be very few opportunities in nonresidential construction and increasingly fewer opportunities in residential construction. But you can expect increasing opportunities in the industrial sector as businesses invest to maintain efficiency in their operating equipment. This is a plus for electrical distributors serving the industrial segment.

One word about 2004 — my company's models show that next year the electrical wholesaling industry should see positive growth in all four major sectors of the market beginning in the first half of the year. In the meantime, we are only one-quarter through this year, so there is still tough sledding ahead. Stay tuned.

The author is president of DISC Corp., Orange, Conn. He can be reached at (203) 799-03673 or [email protected]