Quarterly United States Market Monitor Report for March 2020

A summary of the U.S. economy and Coronavirus threats
By Santo Torcivia
Market Insights LLC

Although currently faced with a major threat from Coronavirus, the U.S. economy, which has been on a positive but moderating growth path, the following is evidence indicating it will continue to absorb the shock of this threat and rebound and regain its forward momentum:

  • Index of leading economic indicators and consumer sentiment remain positive.
  • Consumer spending will be slowed by Coronavirus this year, but will rebound and continue as the engine of U.S. economic growth.
  • Energy costs remain positive.
  • Interest rates are falling, and inflation, although rising, remains manageable.
  • New home construction is increasing to near traditional levels.
  • Government spending in the near-term will be a boost to growth.

The following issues will restrain economic growth in the U.S. and pose a threat to the recovery continuing:

  • Coronavirus, if it spirals out of control creating a major pandemic, triggering supply chain disruptions, unemployment, and a world-wide recession.
  • Continued flow of undocumented aliens and refugees could threaten to balloon welfare spending, raise the already bloated deficit, and hold down wages.
  • Corporate profits are weak due to China tariff costs and weakening EU economies.
  • Tariff negotiations could devolve into a major trade war.
  • Consumer debt as a share of disposable personal income is rising.
  • The huge U.S. government deficit could have unintended consequences that threaten U.S. economic stability and interest rates.

Comparing the U.S. FLOOReport – 2020 Edition flooring forecast dollar value consumption percent change with the calculated 2019 results indicates that most U.S. flooring type sales are being cannibalized by LVT at a faster rate than originally forecast, as LVT continues to show explosive growth. Also, the economy was softer than originally assumed, which has slowed overall flooring market growth.

Special Coronavirus Assessment on the U.S. Flooring Market

The U.S. economy was moving along at a moderate growth rate before it hit the Coronavirus (COVID-19) bump in the road. The key question now that needs to be assessed is what the short- and long-term impact will be on the U.S. economy and flooring market. Will this virus pothole bend the wheel, or will it just jolt the car as the U.S. economy continues to drive down the road of growth? A couple of areas we can look at to better assess the situation are as follows:

Coronavirus Definition: The Coronavirus (COVID-19) is a virus that attacks the respiratory system and it is derived from a family of coronavirus’ that are very similar to the contagious SARS (Severe Acute Respiratory Syndrome) virus. It can be spread by airborne respiratory droplets (coughing or sneezing), touching a contaminated surface, via saliva, or by skin-to-skin contact. The fatality rate of SARS was very high, at 9.6 percent; however, the Coronavirus is currently indicating a rate of 3.9 percent, but more information will be needed to determine its rate more accurately.

Supply Chain Disruptions: Tariffs aside, China remains the most significant flooring supplier to the U.S. Shipments of all sorts from China have been helped by Chinese firms building inventories prior to the 2020 Chinese New Year holiday in January, which the Chinese government canceled due to the virus outbreak. China claims the number of new cases of the virus are receding and, if true, indicates the worst has passed for China.

Also, in a statement released March 12, the Italian ceramic tile manufacturers announced that the recently imposed restrictions by the Italian government will not affect tile production or the movement of vehicles used to transport goods. Still, the Institute for Supply Management states that 75 percent of manufacturers are experiencing varying degrees of supply chain issues regarding production inputs. Given that the U.S. imports mainly finished floorings from abroad, this situation should not affect U.S. production, and given the seasonal nature of most viruses, the impact should eventually diminish significantly.

Worker and Event Situations: In an effort to halt the spread of the Coronavirus, events are being cancelled and schools and companies are being closed, electing to have students and employees work from home and online. To the extent that these situations will cause production curtailments, lost wages, and lower revenues, a ripple effect could begin that diminishes downstream production and worker purchasing power that impedes economic growth.

The administration has proposed temporary tax cuts, targeted reimbursements to workers, financial stimuli, and small business loans to allow individuals and businesses to minimize any negative impact. Worker productivity will likely suffer as some individuals may not have the self-discipline required for working at home, and home internet systems, which are not as viable as those systems in a commercial environment, may slow work speed. Ultimately, the degree to which financial aids are implemented depends on Congress passing the appropriate legislation in a timely manner, but negative effects will occur in the short-term with the remedies impacting later.

Travel Ban: The current temporary travel bans between the U.S. and China, Europe, South Korea, Japan, Iran, and certain other nations are just that – temporary, and will be reassessed in 30 days. However, travel bans do not include the transiting of goods, so this issue should not be a major consequence for the flooring industry.

A secondary impact will be the curtailment of transportation and travel-related business revenues, and employment at airlines, hotels, restaurants, amusement firms, etc., will cause consumer spending curtailments by affected persons and firms. Also, the widening of bans on people congregating in groups increasingly will cause disruptions in workplaces and related businesses (theaters, concerts, factories, etc.), and school closings, which will create employee problems relative to child-care and child welfare issues.

Consumer Reaction: This is a major factor. Seventy percent of the U.S. economy derives from consumer spending. Should the U.S. consumer severely restrict purchasing activities because of the virus, the U.S. economy could experience long-term negative impacts that potentially could derail the current economic expansion.

In a recent survey of consumers’ purchasing plans, 10 percent stated they were considering postponing or cancelling planned home improvements this year, 20 percent stated they expect to reduce shopping at stores, and 30 percent were expecting to cancel travel (Source: Wedbush Securities). Our assessment and the recent Wedbush survey indicate consumers are expected to act in a more reasonable versus a sensational manner. It is our assessment that given the simultaneous influenza epidemic is baked into the current forecast and based on current preliminary evidence, the Coronavirus’ effect will subtract one percentage point from our original Real GDP forecast.

Disease Context: It should be noted that the current influenza virus (not COVID-19) raging around the globe since October 1, 2019, has infected one billion persons (30 million in the U.S.), with 500,000 deaths worldwide (more than 10,000 in the U.S.). Thus far, Coronavirus has infected approximately 185,000 persons globally (4,400 in the U.S.) with 7,300 deaths around the world (82 in the U.S. with none younger than 50 years of age).

Another important fact to understand is that the population most susceptible to this and any virus are those aged 50 or older with certain preexisting conditions (asthma and other respiratory disorders). Most viruses cannot exist in environments with a constant temperature of 75 degrees Fahrenheit or more. So, should Coronavirus, which was derived in the cold climate of China, act as many similar viruses (to be determined), then as we draw closer to warmer weather the virus should naturally subside and warmer geographic areas will be less affected by the virus

(Sources: U.S. Center for Disease Control and Johns Hopkins University).

All viruses are serious matters that require sober assessment, and there is much to learn about the nature and voracity of the Coronavirus. Context is important to soberly assess the situation, and how the consumer is influenced and ultimately reacts will largely determine the direction of the economy this year. Given the current circumstances, we will continue to monitor the situation prior to our next forecast.

This is a summary of the March 2020 Quarterly Market Monitor Report published by Market Insights LLC. NWFA members have exclusive access to the full report, which provides forecasts and analysis of economic, market, and industry conditions and trends affecting the North American flooring market. The report includes a historical and forecasted volume of dollar sales of total wood flooring (at mill sell price) per metro area and state. Separate reports are available for the United States and for Canada. The availability of the reports on a quarterly basis will provide NWFA members with current data that can help them develop business plans, prioritize inventory, and react to market conditions in a timely manner. NWFA members may download the full report here.

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