Posted June 14, 2023

Are 'black swans' circling? Read Industrial Supply's H2 outlook Q&A with Stellar Industrial Supply CEO John Wiborg

Industrial Supply Magazine: What is your general outlook for the economy for the second half 2023?

Wiborg: This economy presents a conundrum. In the broader macro environment, we've created a system that is so dependent on government leaders and bureaucrats to provide some level of stability, but oftentimes they appear as if they don't know what they're doing. Debt ceiling? Interest rates? Bank instability? There is too much uncertainty coming from the top down.

John Wiborg

Meanwhile, continuing inflation drives margin pressures, which means business earnings are going to struggle while multiples are contracting. Rate hikes have caused tightening credit and reduced investment and activity. Will an increased regulatory climate under this administration also dampen innovation and new projects? With a second (and possible third) Trump indictment, increasing China war hawking, and the ongoing Ukraine War, there's probably more of a risk of a Black Swan event now than there has been for quite some time. All these factors cause companies to consider pulling back.

To be fair, as of June 15, it looks like there may not be any additional rate hikes, the hiring frenzy appears to finally be slowing down, and with that, also signs that inflation is incrementally cooling. But we are not even close to being out of the woods. The yield curve remains inverted.

My bets moving forward are on a deceleration of growth in the second half of '23, and a mild recession in early '24. Not as mild as maybe we thought it was going to be even just three quarters ago. And it's coming a little later because there's still a lot of underlying strength in the economy as indicated by the still-strong job market. Albeit, we believe this will be a short recession, and heading into 2025, expect to be back into a strong growth mode across all sectors.

Industrial Supply Magazine: Can you talk specifically about the industrial supply sector?

Wiborg: Looking more closely at the industrial supply distribution market, we anticipate continued, steady growth over the next two years due to positive countermanding trends where activity is actually accelerating. For starters there’s a big push toward reshoring and/or nearshoring manufacturing supply chains, a direct result of COVID-era supply chain issues, and lessons learned about over-reliance on overseas partners. Rightfully so, companies are rethinking supply chain management, with the pendulum swinging from “finding the lowest piece-price source” to creating more appropriate, less brittle, and shall we say more reliable and resilient supply chains. Stellar Industrial Supply is well positioned to take advantage of these trends.

Industrial Supply Magazine: Why are you bullish about the aerospace/defense sector?

Bullishly speaking and despite the poor economic headwinds mentioned above, there's also multiple reasons to think that aerospace and defense have the potential to be quite robust, and we are projecting 10% growth sector-wide. Travel is back to pre-pandemic levels and summer travel is booming. Indeed, Boeing is looking at a 60% increase in production rate just in the 737 max program alone.

That brings up another point that augurs well for this sector: Going back to lessons learned, Boeing is trying to remove bottlenecks in its supplier system. For example, one of our large customers makes components for aircraft engines, and part of that involves sourcing a particular kind of casting. There’s only so many Boeing-certified vendors to get that part from, which means Boeing has basically locked themselves into a narrow list of vendors. For aircraft components like these that may be thought of as “fly away” components, there's a difficult and challenging process to certify as a Boeing qualified vendor. Boeing can't just snap their fingers and say “we're going to move to Brand X.”

Together with Boeing and our existing supply partners, Stellar Industrial Supply is helping discover ways to help them create a more nimble supply chain, and to remove the bottlenecks as best as possible. The question we grapple with and are seeking to solve is “what is in the way and how do we free this up?” There’s also a labor shortage for skilled manufacturing and plant employees. How can we help Boeing, with its large backlog of orders, ramp up production back to previous levels or new production levels that can meet increased demand?

A potential dark cloud is the airline industry’s inability to staff pilots; and the FAA’s inability to modernize air traffic control. What's the point in delivering new planes if they’re going to sit on the ground? In the midst of a staffing crunch, New York air control staffing heading into summer peak travel is at 54%, meaning there is a potential scenario where airlines need to scale back flight schedules in the midst of a huge summer demand. I am skeptical, and it remains to be seen whether this administration has an effective strategy to deal with the crisis we are seeing at the FAA right now.

Industrial Supply Magazine: Can you give us a final takeaway?

Something which I don’t think has received the attention it deserves is that, over the past three quarters, we are starting to see discussions not just about squashing demand, but what to do about supply? Opinions will differ on exactly how best to do that, but within our Boeing ecosystem, the goal remains how to generate a more efficient and streamlined supply chain that can free up and “remove the sand that's in the gears.”

In spite of bad economic headwinds in the industrial supply space where Stellar Industrial Supply operates, there are reasons to think that aerospace and defense will overcome those challenges and remain robust over the next 18-24 months