Phillies win!! Economy doomed?

Woo-hoooo!!!

The Philadelphia Phillies, the hometown team of your friendly neighborhood blogger, are World Series champions for the first time since 1980! There were loud celebrations in the streets of Philadelphia last night, but few overturned cars and no mass arrests.

Gosh, Adam, what could this mean for the U.S. economic outlook? Funny you should ask!

Two smart-aleck economists at Economy.com put together a sobering analysis called A World Series of Irrational Exuberance, concluding: “The data strongly suggest that a Philadelphia Phillies victory in the current World Series spells bad news for the economic cycle.” Check out this chart from their article:

Oh well. The parade is tomorrow afternoon right outside my office. Stop by if you are in the neighborhood.

Commodity Deflation is Closing the Growth Gap

POP!

That’s the sound of the commodity price bubble popping. The implications for wholesaler-distributor’s revenue and profit growth will be significant in 2009.

If you have Facing the Forces of Change®: Lead the Way in the Supply Chain, now is the time to reread the section in Chapter Five on the risks of a slowdown in commodity prices.

I have been pointing out the distorting effect of the rapid rise in commodity prices for some time. In October 2006, Lawson Software published my initial research into the “growth gap” – the difference between actual revenue growth and inflation-adjusted revenue growth. (You can still download the paper Closing the Growth Gap in Wholesale Distribution from Lawson’s web site.) The 2008 Industry Growth Update shows the growth gap in the 19 major wholesale distribution sectors.

The chart below illustrates how high we went and how far we have already fallen. I have indexed the spot price for three common commodities: oil, copper, and corn.

• Oil prices closed below $64 per barrel yesterday, a 17 month low. This drop will be good news for most wholesaler-distributors given the direct impact on transportation costs. However, distributors of oil-based products – such as plastics, chemical, or industrial lubricants – will find their revenues deflating quickly.

• Copper closed at $1.675 per pound, a far cry from the nearly $4 per pound prices earlier this year. As I note in the 2008 Wholesale Distribution Economic Report on Hardware, Plumbing, and Heating Equipment and Supplies Wholesale Distributors, wholesalers of plumbing and HVAC/R products have seen their top-line revenues grow as upstream commodity prices flowed down the channel. The process of deflation for this sector will be especially painful.

Keep in mind that the dollar’s recent strength is also affecting commodity prices because most major commodities are denominated in dollars. As the dollar gets stronger versus other currencies, the local currency price of dollar-denominated commodities increases for foreign buyers. Demand for these commodities will further hurt demand and push down prices.

Tune in for my 2009 Economic Forecast for Wholesale Distribution live webcast on November 13. I'll explain the outlook for commodity and currency prices and discuss how wholesaler-distributors and their suppliers can get ready for a deflationary environment. Please feel free to email me any specific questions that you would like me to address during the webcast.

P.S. David Gordon and Allen Ray at Electrical Trends have some comments for electrical distributors here: The Impact of the Cliff-Diving Prices of Commodities.

How Economists See 2009

The Wall Street Journal’s latest survey of 52 economists projects weak economic growth over the next few quarters. (See Economists Expect Crisis to Deepen.) Most economists expect GDP growth to be negative through the middle of next year followed by a slow recovery in the second-half of 2009. Inflation pressures will ease as the economy slows and the commodity bubble bursts. (I’ll have more to say about commodity prices next week.)

The survey was conducted in the first week of October, so the results are very timely. Here is the average annual forecast in graphical form.

(Note that these data are computed as the percentage growth in GDP from Q4 to Q4, which is equivalent to the average of the annualized quarter-to-quarter growth rate for each of the quarters throughout a year.)

We are exiting what may turn out to be the largest credit and asset bubble in history. Securitization allowed the housing bubble to spread throughout the financial system and ultimately infect the entire economy. This housing-led slowdown has now created unprecedented financial/credit market volatility, reducing prospects for a quick turnaround. Several dangerous worst-case scenarios are now apparent.

The residential construction boom will take years – not months – to unwind. You may recall that I highlighted the economy-wide dangers of the housing market last December (in Why You Should Care About the Mortgage Crisis). But few people, including me, imagined that our financial system would be teetering on the brink of chaos today. In fact, nearly all economists surveyed by the WSJ were expecting positive 2008:Q4 growth until the latest October survey.

Not all wholesale distribution sectors will suffer equally, as I pointed out last week in Get ready for a volatile 2009. So join me on November 13 for my 2009 Economic Forecast for Wholesale Distribution webcast and I’ll help you relate the macroeconomic forecast to your own wholesale distribution sector.

In the meantime, here's our bonus political question of the week: What supply house does Joe the Plumber use?

Get ready for a volatile 2009

Given the news headlines, you might assume that business has been uniformly weak for wholesaler-distributors.

But in reality, revenue growth is varying more among the 19 major wholesale distribution sectors than anytime in recent memory. Check out annual growth rates below during the first eight months of 2008, ranked from best to worst. (See the 2008 Wholesale Distribution Economic Reports for a definition of each sector.)

Three major factors influence whether a wholesaler-distributor is operating in a faster or slower growing industry:

• Higher commodity price inflation;
• Sales to customers that are exporting from the U.S.; and
• Limited direct or indirect exposure to residential housing.

So what will influence 2009's growth rate?

Tune in on November 13 for my 2009 Economic Forecast for Wholesale Distribution webcast. I’ll help you to understand today’s uncertain economy and get ready for 2009. I’ll also provide a specific, quantitative growth forecast for each of the 19 sectors listed above based on some proprietary econometric models that I've been developing.

This event is being underwritten in part by IBM Corporation and produced by Modern Distribution Management. An archived recording of the event will be available through the end of 2008 at http://www.mdm.com/2009forecast.

In the meantime, feel free to email me any questions about the current economic situation. I'll address them in a future post or during the webcast.