2016 Mid-Year Economic Update

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1 2016 Mid-Year Economic Update Featuring: Brian Lewandowski, University of Colorado Boulder Jenel Stelton-Holtmeier, Modern Distribution Management Sponsored by: June 14, 2016

2 Introduction Macroeconomic Overview 2016 Economic Benchmarks for Wholesale Distribution Q&A Agenda

3 Speakers Brian Lewandowski Associate Director, Business Research Division Leeds School of Business, University of Colorado Boulder Jenel Stelton-Holtmeier Editor Modern Distribution Management

4 Speakers Brian Lewandowski Associate Director, Business Research Division Leeds School of Business, University of Colorado Boulder Jenel Stelton-Holtmeier Editor Modern Distribution Management

5 The 2016 Mid-Year Economic Update: Economic Headwinds or Tailwinds? Place cover image here Brian Lewandowski Associate Director, Business Research Division June 14, 2016

6 Economic Benchmarks for Wholesale Distribution and the Economic Outlook Today s Discussion Economic outlook Sales and inventory trends Specific industries Highlights from the 2016 Economic Benchmarks report About the Economic Benchmarks for Wholesale Distribution report data Foundational data from U.S. Census Bureau, Bureau of Labor Statistics and Bureau of Economic Analysis Based on latest Wholesale Trade Survey and Economic Census Include revenue growth forecasts

7 Core Wholesale Distribution Revenue Growth YoY Percent Change 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% Note: Core excludes the agriculture and the oil and gas sectors.

8 Revisions to Wholesale Trade 2015 and 2016 Estimates for the Year 2014 $Millions Change in Sales Estimates -100,000-50, , ,000 Electrical & Electronic Goods Petroleum & Petroleum Products Drugs & Druggists' Sundries Miscellaneous Durable Goods Metals & Minerals, Except Petroleum Furniture & Home Furnishings Farm Product Raw Materials Apparel, Piece Goods, & Notions Motor Vehicle & Motor Vehicle Parts & Hardware, & Plumbing & Heating Beer, Wine, & Distilled Alcoholic Beverages Miscellaneous Nondurable Goods Paper & Paper Products Chemicals & Allied Products Lumber & Other Construction Materials Grocery & Related Products Professional & Commercial Equipment &.Computer & Computer Peripheral Machinery, Equipment, & Supplies Percentage Change -20%-15%-10%-5% 0% 5% 10% 15% 20% 25%

9 Summary of 2015 Performance by Sector Major Sector (Largest to Smallest Sector Revenues) Actual Revenues (2015) Real Revenues* (2015) Revenue Gap (Actual - Real) Pharmaceutical Wholesalers 13.2% 8.0% 5.2% Grocery and Foodservice Wholesale Distributors 0.3% 1.3% -1.0% Electrical and Electronics Wholesalers 3.9% 4.3% -0.4% Oil and Gas Products Wholesale Distributors -34.8% 7.3% -42.1% Motor Vehicles and Motor Vehicle Parts Wholesale Distributors 5.2% 4.1% 1.1% Industrial Distributors -2.4% -2.8% 0.4% Other Consumer Products Wholesale Distributors 3.6% 5.8% -2.2% Computer Equipment and Software Wholesale Distributors -1.2% 1.6% -2.8% Agricultural Products Wholesale Distributors -13.5% 1.0% -14.5% Miscellaneous Durable Goods Wholesale Distributors -11.2% -4.4% -6.8% Commercial Equipment and Supplies Wholesale Distributors 1.9% 3.3% -1.3% Apparel and Piece Goods Wholesale Distributors 2.5% 2.2% 0.2% Metal Service Centers -15.4% -2.3% -13.1% Beer, Wine and Liquor Wholesalers 4.0% 3.7% 0.3% Hardware, Plumbing, and Heating Equipment/Supplies Wholesalers 5.2% 4.2% 1.1% Chemicals and Plastics Wholesale Distributors -3.5% 6.1% -9.6% Building Material and Construction Wholesale Distributors 3.4% 5.8% -2.4% Office Product Wholesalers and Paper Merchants 3.1% 4.2% -1.2% Furniture and Home Furnishing Wholesale Distributors 7.5% 6.2% 1.4% Total -0.7% 2.6% -3.3%

10 Inventory $Millions Core Wholesale Distribution Nominal Inventory Value 3-Mo. Moving Ave Core Wholesale Distribution Inventory-to-Sales Ratio 600, , , , , ,

11 Real GDP Growth Quarterly and Annualized Real GDP Percent Annualized GDP Annualized GDP Annualized GDP Present Quarterly GDP Sources: Bureau of Economic Analysis and June 2015 NABE Forecast.

12 Real GDP and Potential GDP Trillions, USD 22 Actual Projected Recession 8 Months Recession 18 Months Potential GDP 14 Real GDP Source: Congressional Budget Office, Budget and Economic Outlook, Fiscal Years 2015 to 2025.

13 National Employment Thousands, Month-over- Month Recession 8 Months Recession 18 Months 3-Month Moving Average Sources: Bureau of Labor Statistics (Seasonally Adjusted), National Bureau of Economic Research, Moody s Analytics, and the BRD.

14 Employment Recovery Pre-Recession Peak to April 2016 Source: Bureau of Labor Statistics (Seasonally Adjusted).

15 Employment Losses and Recovery 3-Year Growth Professional and Business Services Trade, Transportation, and Utilities Education and Health Services Leisure and Hospitality Construction Financial Activities Manufacturing Other Services Government Information Mining and Logging -1,000, , ,000 1,000,000 1,500,000 2,000,000 Sources: Bureau of Labor Statistics (Seasonally Adjusted).

16 Job Gains by Wholesale Distribution Sector June 2010 April 2016 Metal Service Centers Chemicals and Plastics Distributors Electrical and Electronics Wholesalers Sporting Goods, Toys/Hobby and Jewelry Wholesaler-Distributors Other Consumer Products (periodicals, tobacco + florist) Wholesalers Oil and Gas Products Wholesalers Computer, Commercial and Medical Equipment Wholesalers and Distributors Pharmaceutical Wholesalers Agricultural Products Wholesalers Office Product Wholesalers and Paper Merchants Industrial Distributors Beer, Wine and Liquor Wholesaler-Distributors Building Material Wholesalers and Distributors Apparel Wholesalers Plumbing and HVAC Wholesalers Furniture and Home Furnishings Wholesalers Motor Vehicle Aftermarket Parts and Supplies Wholesalers Grocery and Foodservice Wholesaler- Distributors Computer and Computer Peripheral Equipment and Software -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Percent Change Source: Bureau of Labor Statistics (Seasonally Adjusted).

17 Jobs Deficit by Wholesale Distribution Sector From Pre-recession Peak Office Product Wholesalers and Paper Merchants Other Consumer Products (periodicals, tobacco + florist) Wholesalers Electrical and Electronics Wholesalers Building Material Wholesalers and Distributors Furniture and Home Furnishings Wholesalers Motor Vehicle Aftermarket Parts and Supplies Wholesalers Sporting Goods, Toys/Hobby and Jewelry Wholesaler-Distributors Computer and Computer Peripheral Equipment and Software Computer, Commercial and Medical Equipment Wholesalers and Distributors Pharmaceutical Wholesalers Beer, Wine and Liquor Wholesaler-Distributors Grocery and Foodservice Wholesaler- Distributors Apparel Wholesalers Chemicals and Plastics Distributors Plumbing and HVAC Wholesalers Metal Service Centers Industrial Distributors Oil and Gas Products Wholesalers Agricultural Products Wholesalers Thousands Source: Bureau of Labor Statistics (Seasonally Adjusted).

18 Labor Underutilization Percentage of Labor Force Average U-6 U-6 9.7% 8.0 U Average U-3 5.7% 4.0 U-3 4.7% Source: Bureau of Labor Statistics (Seasonally Adjusted).

19 Initial and Continuing Claims Continuing Claims 7,000,000 Initial Claims 700,000 6,000,000 5,000,000 Initial Claims (Right Axis) Continuing Claims (Left Axis) 600, ,000 4,000, ,000 3,000,000 Average Initial Claims 300,000 2,000, ,000 1,000, , Source: Bureau of Labor Statistics.

20 Interest Rates (Forecast) Percent Year Treasury Month Treasury Source: Moody s Analytics.

21 Household Debt Growth $ Billions 1,500 1, Home Mortgage Debt Consumer Credit Debt Source: U.S. Flow of Funds Account, Z.1 data release.

22 Household Debt Growth Financial Obligations Ratio 19 Debt Service Ratio Financial Obligations Ratio (Left Axis) Debt Service Ratio (Right Axis) Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Source: Federal Reserve Board.

23 Percent of Balance 90+ Days Delinquent by Loan Type Percent 16% 14% 12% Credit Card 10% Student Loan 8% 6% Auto All 4% 2% Mortgage Home Equity Line 0% 2003 Q Q Q Q Q Q Q Q Q4

24 Household Wealth $ Trillions Other Assets Mutual Funds Corporate Equities Real Estate Total Liabilities Source: Federal Reserve Board, Balance Sheet of Households and Nonprofit Organizations (B.101) (Not Seasonally Adjusted).

25 Real Disposable Personal Income U.S. Total $ Billions, SAAR Per Capita 13,000 40,000 12,000 38,000 11,000 36,000 10,000 34,000 9,000 32,000 8,000 30,000 7, ,000 Source: Bureau of Economic Analysis, Personal Income and Its Disposition, SAAR (Chained 2009 dollars).

26 Index of Consumer Confidence 1985= Recession 8 months Recession 8 months Recession 18 months Sources: The Conference Board and National Bureau of Economic Research.

27 Vehicle Sales and Retail Sales Thousands, SAAR 25,000 Vehicle Sales Retail and Food Services Sales Annual Percent Change , ,000 10,000 5, Sources: Autodata Corp., Motor Intelligence, U.S. Census Bureau (Seasonally Adjusted Annual Rate).

28 U.S. Income and Consumption Percent Change 4.0 Disposable Personal Income Percent Change 4.0 Personal Consumption % 2.4% % 2.5% Sources: Bureau of Economic Analysis and Blue Chip Economic Indicators.

29 National FHFA Home Price Growth Year-over-Year 2016 Source: Federal Housing Finance Agency Home Price Index, All Transactions Index.

30 Housing Affordability Index Composite Source: National Association of Realtors, Composite Index.

31 Houses For Sale and Months' Supply New SF Home Inventory (thousands) 700 Months of Supply SF Homes for Sale Housing Supply Source: New Houses Sold and For Sale, U.S. Census Bureau.

32 U.S. Building Permits Seasonally Adjusted Annual Rate Thousands 2, % 2,000 Multifamily MF Share (Right Axis) 50.0% 1,500 1, Single Family 40.0% 30.0% 20.0% 10.0% % Source : U.S. Census Bureau, New Privately Owned Housing Units Authorized by Building Permits in Permit-Issuing Places (SAAR).

33 National Housing Starts Millions Sources: U.S. Census Bureau and Consensus Forecasts.

34 ISM Indices 70 ISM Manufacturing Index 70 ISM Non-Manufacturing Index Source: Institute for Supply Management (ISM).

35 The FED QE 1 QE 2 Fed promises near zero interest rates until mid-2013, 2014, 2015?, 2016? Operation Twist Swaps Tapering Ends $ Millions 5,000,000 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 Other Assets Mortgage Backed Securities Federal Agency Debt Securities Treasury Securities Interest Rate Hike(s) Source: Federal Reserve Balance Sheet.

36 Commercial Crude Oil Storage Millions of Barrels June 3, 2016: Average Source: Energy Information Association (EIA), Weekly U.S. Ending Stocks excluding SPR of Crude Oil.

37 WTI Oil Price Dollars per Barrel $ $ $ July 3, 2008: $ June 6, 2014: $ $ $80.00 $60.00 $40.00 Average June 5, 2015: $59.11 $20.00 June 6, 2016: $49.71 $ Source: Energy Information Association (EIA), Cushing, OK WTI Spot Price FOB.

38 WTI Oil Price Forecast June 2016 Dollars per Barrel $ $ $80.00 $60.00 $40.00 $20.00 Historical Price EIA Forecast Lower CI Upper CI Moody's Baseline Forecast $ Source: Energy Information Association (EIA), SPEO, Cushing, OK WTI; Moody s Analytics.

39 Henry Hub Natural Gas Spot Price Dollars per Million BTU $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 July 4, 2008: $13.20 June 6, 2014: $4.66 June 5, 2015: $2.60 $4.00 Average $2.00 Average June 6, 2016: $0.00 $ Source: Energy Information Association (EIA), Weekly Henry Hub Natural Gas Spot Price (Dollars per Million Btu).

40 Business Cycles

41 Business Cycle End of WWII Peace Time End of Korean War Steel Strike Monetary Policy Monetary Policy OPEC Oil Embargo Interest Rates Savings and Loan Tech Financial Sources: National Bureau of Economic Research and the Business Research Division.

42 Employment Losses and Recovery Peak to Trough Months to Recovery % -6% -4% -2% 0% Percentage Change Number of Months Sources: Bureau of Labor Statistics (Seasonally Adjusted), National Bureau of Economic Research, and the Business Research Division.

43 S&P 500 End of WWII 2,500 End of Korean War Steel Strike OPEC Monetary Policy Monetary Policy Peace Time Oil Interest Embargo Rates Savings and Loan Tech Financial 2,000 S&P 500 1,500 1, Sources: Bloomberg and the National Bureau of Economic Research.

44 Economic Growth and Recessions Percent Change 8 Personal Consumption Expenditures 6 4 Year-over-Year SAAR SAAR Government Spending Year-over-Year SAAR Percent Change Fixed Business Investment Year-over-Year SAAR Sources: Bureau of Economic Analysis, the National Bureau of Economic Research, and the Business Research Division. SAAR Goods Exports

45 The Underlying Cause??? SAAR 135 Broad Dollar Index Rig Count 2,500 2,000 1,500 1, Gas Wells Oil Wells Baker Hughes Rig Count SAAR 16 China Real GDP Percent Interest Rates 30-Year Fixed Mortgage 10-Year Treasury 3-Month Treasury Sources: Bureau of Economic Analysis, International Monetary Fund, Baker-Hughes, BofA Merrill Lynch, BofA Merrill Lynch US High Yield Option-Adjusted Spread, National Bureau of Economic Research.

46 Thank You

47 Misc. Durable Goods Subsectors (defined by primary products) Metal Scrap Diamonds, Jewelry, and Precious Stones/Metals Sporting and Recreational Goods and Supplies Toy and Hobby Goods and Supplies Pre-recorded Media (CDs, DVDs, & Videotapes) Misc. Other Durable Goods Misc. Home Furnishings and Wood Millwork Non-Lumber Forest Products Musical Instruments and Supplies Source: 2016 Economic Benchmarks for Wholesale Distribution 2016 Gale Media, Inc. All Rights Reserved.

48 Industrial Subsectors (defined by primary products) General Purpose Industrial Machinery and Equipment Construction Machinery and Equipment Farm and Garden Machinery and Equipment Materials Handling Machinery, Equipment, and Parts Aircraft and Aeronautical Equipment and Supplies Service Establishment Equipment and Supplies Other Industrial Machinery and Equipment Metalworking Machinery, Equipment, and Parts General Line Industrial MRO Supplies Industrial Containers and Supplies Oil Well, Refinery, and Pipeline Equipment and Supplies Food Processing Machinery, Equipment, and Parts Fluid Power Machinery, Equipment, and Parts Other Transportation Equipment and Supplies Mechanical Power Transmission (Bearings) Supplies Marine Machinery, Equipment, and Supplies Industrial Valves and Fittings (except Fluid Power) Custodial and Janitorial Equipment and Supplies Welding Supplies Source: 2016 Economic Benchmarks for Wholesale Distribution 2016 Gale Media, Inc. All Rights Reserved.

49 Industrial Subsectors (defined by primary products) Average Revenue per Employee General Purpose Industrial Machinery and Equipment $515,300 Farm and Garden Machinery and Equipment $631,300 Aircraft and Aeronautical Equipment and Supplies $1,404,200 Other Industrial Machinery and Equipment $651,600 General Line Industrial MRO Supplies $727,700 Oil Well, Refinery, and Pipeline Equipment and Supplies $737,700 Fluid Power Machinery, Equipment, and Parts $439,800 Mechanical Power Transmission (Bearings) Supplies $793,000 Industrial Valves and Fittings (except Fluid Power) $609,700 Custodial and Janitorial Equipment and Supplies $313,300 Welding Supplies $474,500 Weighted Average (all 19 subsectors) $604,800 Source: 2016 Economic Benchmarks for Wholesale Distribution 2016 Gale Media, Inc. All Rights Reserved.

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55 Questions? 2016 Mid-Year Economic Update Sponsored by: June 14, 2016

The 2015 Mid-Year Economic Update

Download slides here at www.mdm.com/slides or email info@mdm.com The 2015 Mid-Year Economic Update Brian Lewandowski and Thomas P. Gale June 18, 2015 Produced by: Sponsored by: Download slides here at