PUBLISHER'S VIEWPOINT
May 2006
Fourth Quarter E&S Sales a Blip, Or a Warning?

A few months ago, as I was doing my forecasts of the equipment and supplies market for 2006, I warned you all to be careful. A “year for living cautiously,” I called it. The fourth-quarter ’05 manufacturer sales numbers from North American Association of Food Equipment Manufacturers and the big E&S public companies remind us there is a down to go with the up.

And the question becomes, was this just a blip related to the dislocation from last year’s storms and the rapid slowdown of the general economy? Or is this the harbinger of a slowdown in the E&S market?

According to data from NAFEM’s Industry Index program, overall North American sales fell 2% in the fourth quarter ’05 compared to the same quarter in ’04, and a whopping 12.4% from the third quarter ’05. That ended a seven-quarter run of quarterly year-over-year gains.

"For now, we'll stick with our forecast of 2% real growth in the E&S market."

And while it contradicts the fourth-quarter ’05 data from MAFSI’s Business Barometer, up 3.8% versus year before, it is in line with information from 10 public E&S companies tracked by my friend and forecasting helpmate John Muldowney. He has 10 equipment and supplies companies up only 1% in the quarter.

Now, anyone who reads the papers or “Economic Report” in our e-mail newsletter FER Fortnightly knows the broad economy also tanked in the fourth quarter. The economy managed only 1.6% real growth of gross domestic product according to the latest estimate, as the storms and high gas prices and other factors took their toll. And the economists polled by Blue Chip Economic Indicators expect a very robust rebound in the first quarter, with GDP growth soaring to 4.7% before dropping back toward the trend of 3% to 3.5% growth for the rest of the year.

So, will manufacturers’ E&S sales follow a similar pattern? Operator sales have shown some signs of softening, though many of the big folks continue to show same-store sales gains. This is actually quite remarkable, given that we are two and a half years into a very strong upturn in chain operator sales.

The specification market—most noncommercial segments, hotels and the like—continues to look decent. When we peer behind the broad public E&S company numbers, those focused on the spec markets did quite a bit better than the chain-oriented folks, who are often volatile depending on new rollouts The street market has been okay, or spotty, depending on where you are, dealer friends tell us.

So yes, I think the fourth quarter numbers are a blip. For now, until we see evidence to the contrary, we’ll stick with our forecast of 2% real growth in the E&S market.

Cheers,

Robin Ashton
Publisher