Chicago—“The bottom is not going to fall out of your business next year; you just have to reset your expectations.” That was the primary message that Connor Lokar, senior forecaster with ITR Economics, delivered to attendees at the North American Association of Floor Covering Distributors/North American Building Material Distribution Association (NAFCD+NBMDA) convention here earlier this month.
During his talk at the NAFCD+NBMDA convention, “Economic Trends in the Construction and Industrial Markets,” Lokar provided an encouraging outlook for the commercial construction industry despite the impact that record-high inflation has had on the residential building market and the U.S. economy overall. “The macroeconomy is going to be slower in 2023, as we are on the backside of the business cycle—things are slowing down. However, the good news is we’re on fire on the commercial side. We are cruising back toward normal.”
Lokar presented data showing virtually all nonresidential segments are in a recovery or growth mode—led by institutional, lodging, manufacturing and commercial. Moreover, the value of non-residential construction put in place as well as the Architectural Billings Index—key barometers of spending on commercial projects—are in positive territory. Lastly, the multi-family segment of the market (a sector many place in the commercial category) is showing signs of strengthening.
“Multi-family is up 22.7% versus last year and will continue to grow over the next few quarters,” Lokar said. “If the housing market is the locomotive, then the commercial market is the caboose. Commercial usually lags GDP by 12 to 16 months. What this means is you can look for some solid commercial market activity in 2023.”
The outlook for the residential construction market, however, is not as rosy. Research conducted by ITR Economics shows new home sales are down 18.2% from this time last year when the 2021 NAFCD conference was held. Other warning signs are evident in the rate of sales transactions at Home Depot (down 3%), although the volume decline is masked by slightly higher prices. But the biggest threat of all, Lokar noted, is the tightening by the Fed in the form of higher interest rates. Higher rates, he noted, make it more expensive to get a mortgage, refinance a home or purchase a vehicle.
“The Fed is exacting its pound of flesh from housing this year,” Lokar noted. “Homebuilders, who have PTSD from 15 years ago, are proactively pulling back; they are not writing blank checks. We will likely see a double-digit rate of contraction in the housing market before it’s all said and done.”
Amid all this, the key thing to remember, Lokar stressed, is to keep things in the proper perspective. “We had our moment in the sun in late 2020 to 2021—now consumers are spending money elsewhere,” he explained. “The stimulus-driven ascent the U.S. economy witnessed throughout the first 18 months of the COVID-19 pandemic is dissipating. If you were reliant on that never-ending growth trend, it’s not going to happen. It’s still trending healthy, but not big growth numbers. The pie is not getting smaller—it just isn’t getting bigger as fast as last year.”
What all this means for floor covering distributors, retailers, manufacturers and contractors, he noted, is we have to adjust accordingly. In other words, it’s not the end of the world. “Remember, we had an immense amount of pent-up demand, a bull stock market and high savings rates,” he said. “But the reality is this was not going to be sustainable over the long term. Literally overnight we put the largest consumer economy on ice. COVID-19 caused consumer behavioral changes, which for housing was euphoric. Now we’re back on trend where we otherwise would have been had we had a normal 2020-2021—at least on the residential side. The housing market is not likely to recover until the second half of next year. We’re already seeing that most overcooked markets—such as Texas and Florida—have come down.”
For the short to medium term, ITR Economics recommended flooring business interests continue to invest in their companies, expand their workforce and keep an eye out for growth opportunities organically or through acquisitions. “We see materials and component pricing pressure easing, and inflation is getting better—but not tangibly,” Lokar stated. “The market is not going to bring us robust growth in 2023—not through pricing or new business. You are going to have to go get it!”
Stay the course
Lokar may have set the stage, but ITR Economics president, Alan Beaulieu, put the finishing touches on the conference with his humorous yet informative keynote presentation on the last day of the NAFCD+NBMDA convention. A fixture at past NAFCD events, Alan and his twin brother, Brian, have been providing actionable advice for executives and business owners serving the floor covering industry for years. His latest presentation was no different.
Following are some of Beaulieu’s key takeaways:
On the potential impact of the midterm elections. “I’m not going to pick a party and say, ‘Hey, if this party wins the midterms then we’re going to have to change our forecast,’ because that’s just not true. It doesn’t matter who wins the midterms, it’s not going to change our forecast. Whether it’s a Republican or Democrat running the White House, or if one party or the other controls both chambers—it has no bearing on our forecast. We encourage you to go ahead and vote, but it does not make any difference whatsoever.”
Impact of inflation on consumer spending. “The reality is consumers are in great shape and businesses are in great shape, and you’re going to find that the economy’s going to continue to move forward. The U.S. economy is not collapsing, despite what you’re heard from Warren Buffett, Jamie Dimon, George Soros or Newsweek.”
The softening of the U.S. economy can be explained rationally. “When you look at the first quarter results in GDP, it slipped from the fourth quarter by 0.4%, which is really small. And it was on the basis of our trade imbalance with the rest of the world that grew to record proportions. When that happens, that’s a negative on GDP. The trade imbalance grew because exports slipped and imports went up. We had stuff coming in that we needed and that was causing GDP to go down. That, and the government spent a little less money, all weighed down on GDP. That’s hardly a crisis in business when those things happen. Second quarter GDP slipped by 0.2%, which is next to nothing.
“The Federal Reserve Board, in their relentless pursuit of bringing down energy prices and food prices—two things they cannot control—will not be successful. In the meantime, they’ll continue to raise interest rates. They are willing to bring us to a recession in their effort to end inflation.”
Outlook for business in 2023 and beyond. “The second half of 2023 is going to be strong, and 2024 is going to be even stronger. And when this economy of ours gets beyond COVID-19, we are going to get back to business. We are the world’s largest economy and combined with our friends in Canada and Mexico, the North American economy can’t be beat. The long-term study ITR Economics conducted shows the U.S. is going to be the world’s strongest economy through the year 2050.”
(Look for more coverage of the NAFCD convention in future editions of FCNews.)
