From the President's Desk: Strong Growth in the Wholesale Trade Sectors Can’t – and Won't – Last Forever

  • by ITR Economics - Wed, 10/17/2018 - 13:57
Alan Beaulieu

Total Wholesale Trade is running at an impressive 8.5% above this time last year (12/12 basis). The good news is apparent in both Durable Goods and Nondurable Goods, which have posted year-over-year gains of 9.3% and 7.8%, respectively. Furthermore, their respective 12MMTs are at record-high levels. Industry participants no doubt feel good and are enjoying a busy and profitable year.

  • All good things come to an end. The 12/12 rise in Total Wholesale Trade has extended for 31 months. Anything beyond 17 months is considered abnormal; continued rise beyond December 2018 would be unprecedented.
  • The earlier-turning 3/12 rate-of-change has established a tentative July high. The one month of subsequent decline may be just noise, but it follows a significantly longer-than-normal rise, and the rate of decline is typical for the onset of a cyclical declining trend. The 3/12 typically leads the 12/12 through a high by five months, which would put the 12/12 high in December 2018. Using our ITR Checking Points System™, we are watching for the 3/12 to move below the 12/12, as this will confirm that the business cycle is shifting.
  • The ITR Leading Indicator™, the Purchasing Managers Index 1/12, the decline in the Copper Futures Prices 12/12, and the decline in the Small Business Optimism Index 12/12 all suggest that the Total Wholesale Trade rate of growth is going to slow noticeably in late 2018 or early 2019.

A near-term 12/12 high for Total Wholesale Trade places the corresponding 12MMT high in the second quarter of 2019. An essentially flat second half of 2019 seems likely, based on the above and our forecasts for Retail Sales and business-to-business activity.

What does it mean?

  • Inventory management, especially as it relates to C items, needs attention, as inventory turns are likely to slow.
  • Adjust your budget to fit the macro reality.
  • The wage pressures you are feeling are likely to ease slightly in 2019. The Durable Goods segment of the industry is paying a record-high $30.42 per hour with wages increasing 1.9% year-over-year. At $26.68 per hour, Nondurable Goods are paying less, but the growth rate is a more ominous 3.6% per year, the fastest rate of rise in over four years. There will be hiring pressure next year, but you won’t feel the same need to hire those that are less than marginally qualified. Furthermore, there will be more time to train those that are marginally qualified.
  • Use 2019 to implement the changes needed to meet the challenges of 2020 and beyond. Spend money on your website while simultaneously throwing capital at your labor problem. Addressing these will yield great dividends down the road as you enhance your market position and avoid the stress of an even tighter labor market in the future.

Readers of the ITR Trends Report™ should carefully track the progress of the above-cited leading indicators as well as Nondefense Capital Goods New Orders and Retail Sales. Making use of your monthly report will give you the confidence to plan for slowing growth in the Wholesale Trade industry in 2019.

Alan Beaulieu
President