We're on a road we have never traveled — an economic “great recession” that plunged the electrical industry into its worst downturn in history. The overall economy has now begun its recovery, with the official recession declared over as of June 2009. Recovery for the overall economy, measured by GDP, means we have “turned the corner” and we are on a plus-growth path. For the electrical industry, however, our last actual data point, the first quarter 2010, showed distributor sales at -3% from the year-ago period.
While the overall economy has officially recovered, the electrical industry is still in a downturn, or was as of the first quarter of this year. The conclusion is that we lag the overall economy in recovery by at least nine months. Our calculations show that the electrical industry at the national level will not recover until the second quarter of 2010, and we do not yet have a final second-quarter number for the electrical industry. DISC's second-quarter data is still a forecast. From June 2009 through March 2010 is just about nine months.
The overall economy fell into a recession, officially, in December 2007 and the electrical industry began its downturn in the fourth quarter of 2008. For this cycle we followed the overall economy into the downturn. In general I would not draw the conclusion that the electrical industry will always lag the overall economy in business cycle recoveries or that we always lag it in a downturn. We could review the electrical industry patterns over the past 40 years but that is better left for another time. Regardless of the leads and lags, remember that the health of the overall economy dictates what happens in the electrical industry.
At this point we are much more confident the industry's recovery has already occurred, given the established fact that the overall economy has finally recovered. The issue now is how fast the industry is recovering.
We expect through the last three quarters of this year the industry will grow on average a little better than five percent from the same time last year. For the year overall we are looking for total industry growth to be about three percent, remembering that the final three quarters are weighed down by the first quarter's negative growth.
Unlike a year ago, there's now light at the end of the tunnel. But as an industry we still have a long way to go. The industry is the sum of a number of diverse parts, and what happens in your business — especially if you serve certain specific segments — could be very different from the behavior of the total industry.
I see continued weakness in the distributor-served contractor market, along with fractional negative growth in the distributor-served utility and institutional markets. The key market segment driving total industry growth this year is the distributor-served industrial market. It's a bright spot with expected growth of almost nine percent. I expect the MRO market to perform better than the OEM market but we should have a better handle on it later this month when DISC's MarketTrack database is released.
We have read so much about the weakness in the overall economy, particularly the possibility of a double-dip recession, and the now-remote possibility of a deflationary economy. While there are never guarantees, it is highly unlikely we are facing a situation where prices are falling.
I have not seen anyone scripting out what a deflationary economy would look like today. And it's not useful to spend energy on it. There is a possibility, about a 25 percent chance according to IHS Global Insight, that we could see a double-dip recession. We have scripted a scenario elsewhere of what that would look like for the electrical industry but it is not useful to redraw those lines at this point.
A slow recovery is the best we can hope for, with 2010 annual sales advancing about three percent. If the slow recovery continues, we expect growth in the distributor-contractor market to be just 0.4 percent this year increasing to 3.5 percent next year.
We expect total industry sales in 2011 to advance nearly five percent led by eight percent growth in the industrial market. However, following this scenario we do not expect any meaningful industry recovery until 2012. Total industry sales in 2012 could grow about 15 percent — led by a strong recovery in the distributor-served contractor market.
DISC and EW do have a slightly different forecast for this year and next. The DISC analysis is based on a forecast of key economic indicators driving industry sales, by customer type. These are not large differences, even though we come at the analysis from different methodologies. For users of DataSearch, you can plug in the EW forecast and develop a state/county forecast.
We see nonresidential construction this year and next year in the negative column. We also see residential construction finally showing positive growth next year — up 7.0 percent in 2011 after a string of five years of negative growth culminating in a 4 percent decrease this year. It means that 2011 will be a better year for the electrical industry, but we'll see no meaningful daylight until 2012. Meaningful is double-digit growth.