The year has barely begun, but from a forecasting point-of-view it's less interesting than 2005. That's because DISC Corp. doesn't see much chance that 2004 will be very different from the subtle-growth forecasts, but we do see a high probability that 2005 will be a solid growth year. After so many down years, we are excited to finally be dealing with an outlook scenario that projects industry growth in the high single digits.

The adjacent chart shows what DISC envisions the distributor cycle to be over the next few years, along with a comparison of what it looked like in the past few years. Clearly, 2004 is a turning point.

In 2004, it looks like the worst is finally behind us. Distributors can plan on adding the resources as the year goes on to adequately serve their customer base.

To recap where we are now, electrical industry sales for 2003 will show a negative growth of 3.5 percent from the 2002 level. For the most part that's history, but our fourth-quarter number is still preliminary, so the results for the year could change some.

Keep in mind that this is a total industry growth rate composed of several important segments and sub-segments that behave differently from each other. So if you have not experienced negative 3-percent to 4-percent growth, remember that DISC isn't modeling your business; it's modeling the entire industry.

Over the past few years, electrical distributors were seeing tunnel at the end of the light, but now we are finally seeing light at the end of the tunnel. The only major market segment or customer type still showing negative growth is the contractor market. That's unfortunate for the electrical wholesaling industry because this important part of the economy has the most impact on electrical distributors. The good news is that by the second half of 2004, contractor sales will improve and industry sales will be firing on all cylinders.

Some areas and segments are outperforming the overall industry, particularly the distributor-served residential market. But the residential market, as critical as it is to many businesses, is not the most important driver in electrical distribution. In terms of actual total dollars spent in the overall economy, twice as much is spent in the residential sector as in nonresidential construction.

Nevertheless, nonresidential construction is a stronger driver of industry sales for many reasons, including the heavier electrical content of nonresidential structures and how the key electrical industry segments interact with each other.

That said, I am still comfortable with an industry outlook for 2004 that puts performance in the 2-percent to 3-percent-growth range. Our point forecast is 2.8 percent. This is consistent with our analysis going back as far as last July when DISC projected industry sales to advance 2.7 percent in 2004.

Several forecasts on electrical industry sales are available for 2004, and they range from 3-percent to 6-percent growth. DISC is probably the most conservative. In the November Annual Market Planning Guide, Electrical Wholesaling projected an increase in industry sales to 5.2 percent, or a difference of 2.4 percentage points versus DISC's forecast.

The National Association of Wholesaler-Distributors projected 2004 electrical sales to increase 6.2 percent in 2004.

Why the differences? The NAW forecast includes more than electrical distributor sales. It factors in sales from a combination of wholesalers, including not only electrical supplies and apparatus but also electrical appliances, radios and televisions. That means we are not talking apples and apples in comparing the NAW outlook with forecasts of the electrical distribution industry alone.

Electrical Wholesaling surveys a sample of distributors each July. The sample provides percent sales increases for the previous, current and upcoming year. But if EW surveyed a different sample of distributors, it would likely get a different outlook. That difference is sampling variability, which depends on the size of the sample, among other things. A different sample would report an outlook showing higher (or lower) industry performance.

DISC comes at it in an entirely different way. We use forecasts of key economic indicators that are then plugged into our models to “solve” for industry sales. In order to obtain greater accuracy, we model individual segments to arrive at total sales. By modeling the segments we gain a better understanding of what's driving overall industry performance. And because we forecast at least four times during the year to account for changes in a dynamic economy, it allows users to adjust business plans and resources as they move through the year.

The bottom line is that a difference of 2.4 percentage points overlaps the margin of error of the DISC and EW forecasts. However, based on our analysis of what is currently happening in the American economy and what we expect to see happen in the near term, we don't think industry sales will grow as much as 5 percent in 2004. The most important concern in our outlook is to give you a reasonable guide to add or not add resources to your business. If we can protect you from a significant error in resource allocations, we are doing our job.

The author is president of DISC Corp., Orange, Conn., a leading provider of market forecast information for the electrical industry.

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