Blog: Sour ending for 2012 but some signs of optimism

By Jack Keough

As earnings reports for distributors and manufacturers come rolling in, it is readily apparent that 2012 ended on a sour note, particularly because of the fourth quarter. And 2013 hasn’t had a strong start.

Confirming those results, the U.S. Department of Commerce now reports that the U.S. economy shrank 0.1% from October through December after a 3.1% growth in July through September. It was the first economic contraction since the Great Recession officially ended.

MSC President and CEO Eric Gershwind put it best when he said customers were basically ordering “hand to mouth” in December.

Other CEOs seemed to agree.

In the latest McGladrey Manufacturing and Distribution Monitor, which was published just a few weeks ago, executives tempered their economic enthusiasm compared to one report it had conducted last spring.

This pulse survey, conducted by McGladrey LLP, a provider of assurance, tax and consulting services focused on the middle market, provides a post-election update on the state of manufacturers and distributors.

By the end of 2012, the number of respondents reporting that their businesses were thriving had dropped to 25%, down from 39% in the spring of 2012 and 45% in 2011. Even more troubling, the number of companies reporting they were in a state of decline more than doubled since the spring of 2012 – reaching its highest level (12%) since the darkest days of the economic crisis in 2009. The number of respondents expressing optimism about their own companies dropped from 83% to 70%, and those with pessimistic outlooks for their firms rose from 16% to 29%.

Many survey participants said uncertainty about the tax code and fiscal issues had a negative impact on their companies, consumer confidence and the business environment in general. Others identified more conventional business factors – such as limited capital, talent shortage, and volatile material and component prices – as contributing factors to the current trend of decline.

“Middle market manufacturers and distributors are approaching 2013 cautiously after a rough end to 2012,” said Karen Kurek, national manufacturing and distribution practice leader for McGladrey. “The results of this year-end survey make clear that these companies remain vulnerable to the volatility and uncertainty that have come to define the post-recession marketplace. While it is still possible that last year’s impasse will have a negative impact on both industries through the beginning of the year, the tax deal reached in early January may help restore confidence and spur investment in innovation; specifically related to the R&D tax credit renewal.”

Less than half of the respondents said they expect to add employees to the staffs. That is down from 67% in the spring. The percentage of participants expecting a decrease in workforce also rose significantly, from 11% in the spring to 21% at the end of the year. Also troubling was that distributors and manufacturers projected a significant drop in projected U.S. sales. The average projected change in U.S. sales fell from +8 percent in the spring 2012 to +2.5 percent at the end of the year.

Despite these dour projections, there is room for optimism. Alan Beaulieu, president of ITR Economics, told a group of distributors and trade groups in January that 2013 would be a strong one for distributors. A number of CEOs say they expect their sales to pick up in the latter part of 2013. And Grainger, one of the largest MRO distributors in the country, reported an 8% increase in sales during January, 2013 compared to the same month in 2012.

Part of that enthusiasm from CEO’s rests with the fact that many customers are working off their inventories and will be re-ordering as stock is depleted. Companies tied to the housing market are especially optimistic as housing starts increase.

For electrical distributors serving the wind market, there is also reason for good news. Wind projects are expected to increase dramatically because of the extension of tax credits for those started in 2013.

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