15 economic takeaways from ITR Economics

More evidence that things are not as bad out there as others might have you believe: The Abbey/ Floors to Go convention in Nashville last week drew near record attendance. My friend, Harold Traister, who is responsible for 100 Abbey/FTG dealers in the Northeast, said 81 of those dealers made the trip. In a typical year, that number is in the 60s.

This comes on the heels of an exceptionally strong Surfaces, which begs the question: Why? Maybe Nashville was a draw. I’m guessing a lot of Abbey/FTG dealers had never been. Maybe a bunch of dealers did not attend the 2021 and 2022 shows because of lingering COVID-19 fears? And maybe, just maybe, it’s because business for the first 10 weeks of 2023 has exceeded expectations.

Anyway, as part of general session, Connor Lokar, the baby-faced senior forecaster from ITR Economics, gave a presentation. Here are some takeaways:

1. As you all know, ITR is among the most accurate forecasters out there because they are non-biased and politically agnostic. Basically everything over the last 18 months was 98% accurate except single-family housing (85%). And that was because no one could have expected the Fed to over-aggressively raise interest rates as they have to combat inflation.
2. We are in a different phase of the economy than we were, say, 12 and 24 months ago. It’s not the end of the world, but it’s something we have to prepare for. It’s a market shift. We all have experienced this over the last two quarters as the economy slowed.
3. ITR is now forecasting a mild recession in 2024. For the entirety of 2023 ITR thought there would be a soft landing. Unlike the biased economists, it did not view a recession as a required outcome for this particular economic cycle. It changed its tune in December because of the Fed’s high degree of interest rate hikes.
4. The good news for the flooring industry, being tied into housing and residential remodel, is we are usually first in and first out. “You will look at 2023 less favorably than 2024.”
5. Supply chain, labor and inflation have been the pain points over the last two and half years. There was too much demand, not enough labor, not enough material. That has already changed in the last two or three quarters and will continue. Demand is softening.
6. The consumer is not dead, buried and gone—just losing some momentum. They’re just not where they were in terms of their 2021 position as it relates to savings, the stock market and income growth relative to inflation. “All the tailwinds that gave us those looney tunes numbers in the second half of 2020, 2021 and first half of 2022—we just don’t have that anymore. So we need to recalibrate expectations to a more normal level.”
7. The 2024 recession will be mild and brief. ITR is projecting a 0.3% contraction next year. At worst a 0.9% contraction in the third quarter.
8. Housing will begin to turn the corner in 2024 and bounce back in 2025. The advice: Don’t contract too much. “If you cut too much and get too lean you will miss the opportunity to capitalize. You will be overwhelmed by demand. So get your house in order in 2023 so you are ready for the growth on the backside of this. This is not a layoff cycle. In 12 months, when things are getting better, you would have to hire people at more expensive rates and train them.”
9. Single-family housing starts are down 13.1% year over year. Home builders started 30% fewer homes compared to the previous quarter. Why? Consumers can’t afford them right now because of mortgage rate increases. It’s happening across the country. “Construction will move into recovery mode in the second half of 2023 as builders begin to feel a little better.”
10. Higher interest rates are not productive for housing, the stock market, commercial real estate. This generally pulls energy out of the economy. “How far can the Fed take us before they break the economy and not bend it? We feel they hit that threshold in December.”
11. The Fed broke the housing market last year. Anything tied to housing is always first in and first out. Housing was first to recover in 2020. Housing moves two or three quarters ahead of the rest of the economy.
12. Mortgage rates will come down later this year. That will be an inflection point for home buyers.
13. The good demographic states are Florida, Tennessee, Georgia and Texas. Quarterly permit numbers are down, but home prices remain strong. Prices come down in weak demographic areas.
14. What happened with Silicon Valley Bank is the end game to higher rates. The Fed lifts rates until something breaks, until we start stripping inefficiency out of the economy. It’s the result of irresponsible 0% interest rate behavior getting punished.
15. The U.S. remains the largest economy in the world. Some people think China is the largest, but ITR said that will never happen. China is slowly compressing into a demographic pothole. Its population is peaking now and will be falling over the next 20-30 years. The country is feeling the effects of the “one-child” rule. The opposite is India, which is poised to succeed because they are young.