U.S. Economy Remains Resilient Despite Shocks

Money Disintegrating

The U.S. economy has endured a lot over the past several years. First, there was COVID-19 and the subsequent lockdowns in 2020. Next came the Biden Administration’s energy dislocations with the canceling of the Keystone pipeline and the canceling of all permits for oil and natural gas drilling offshore and on federal lands. The energy curtailment (transforming the U.S. from a net energy exporter to an energy importer), supply chain disruptions, and huge federal spending deficits that are weakening the U.S. dollar, are causing record inflation. The Russian invasion of Ukraine has still unknown repercussions to the global economy. If that was not enough, the U.S. also is struggling with the fact that fewer people are employed currently than in 2019, the year prior to COVID-19.

Given all the aforementioned shocks to the U.S. economy, it remains resilient, due to the firm foundation it previously had established. Key areas of U.S. economic strength in the near term are as follows:

  • Housing starts were up 8 percent in 2021 over 2020 to 1.58 million units, while the forecast for 2022 projects a slight decline of 1.7 percent to 1.55 million units. This decline is due to rising home prices and mortgage interest rates, which is the result of materials inflation and housing demand.
  • Existing home sales grew to 6.1 million units sold in 2021, an increase of 8.4 percent over last year. It is expected that 2022 will see home sales decline
    2 percent to 6.0 million units. Like housing starts, home sales are being curtailed by inflation-related home price increases and rising interest rates.
  • Interest rates, including mortgage rates, have been rising slowly with a significant increase in the federal deficit. Interest rates are anticipated to continue to rise in 2022 with an expected increase in the Federal Reserve discount rate of 25 basis points in May and with three more similar increases expected in the remainder of 2022 to curb rising inflation. Driving this inflation are demand-driven consumer consumption exacerbated by supply chain disruptions, significant federal deficit spending, and curtailments in U.S. energy production. The administration has stated publicly its refusal to alter its domestic energy policy and allow oil and natural gas drilling on federal land. Instead, the U.S. will continue to import expensive foreign energy. To date, the Federal Reserve has managed to slow the rise of interest rates.
  • Consumer spending has long been the engine of the U.S. economy accounting for two-thirds of U.S. GDP. In 2021, consumer spending grew 7.9 percent over 2020; however, slowed by inflation, spending in 2022 is forecasted to decline 2.8 percent.
  • Home remodeling has been enhanced by the increase in individuals working from home and the fact that rising fuel costs have made travel more expensive.
  • In 2021, home improvement spending rose 12.9 percent over the prior year, and it is forecasted to rise 8.4 percent in 2022 and 4.7 percent in 2023.
  • Real non-residential investment in structures, a measure of the inflation-adjusted investment in total new non-residential construction declined 8.2 percent in 2021, but is expected to rise 11 percent in 2022 and 10.7 percent in 2023. Also, the American Institute of Architects (AIA) Billings Index rose to 54.3 in 2021 and this statistic portends growth for commercial building and renovation later in 2022.
  • Corporate pre-tax profits rose significantly in 2021 by 21.7 percent over the prior year and are forecasted to rise slightly (+0.5 percent) in 2022 before rising 4.4 percent in 2023, indicating a comeback for commercial construction and renovation.

Factors threatening the U.S. economic situation:

  • Inflation could rise precipitously causing the dollar to decline, prices to rise (especially imports), personal income to fall, interest rates to soar greater than currently, and the economy may then slip into recession.
  • Federal government policies are imposing open borders and increasing government regulations that can impede economic growth and curtail company hirings while boosting labor costs.
  • Energy prices are rising as the federal government has canceled oil and gas drilling permits on federal land (be aware, having a lease does not allow drilling, but requires a permit for the lease before drilling can occur), turning the U.S. from energy independence to an energy importer while raising fuel and raw material prices and boosting inflation. Besides fuel and transportation, oil is a major raw material in pharmaceuticals, plastics, nylon, fertilizer, and many other products.
  • Continued undocumented immigrants and refugees entering the U.S. could threaten labor markets, expand welfare rolls and social costs, raise government spending and debt while thwarting wage growth. Without wage growth, it will be hard to grow consumer spending, the primary driver of the U.S. economy.
  • Global trade disruptions could result from an escalation of the trade war with China and the unintended result of sanctions on or by Russia for its invasion of Ukraine. Also, a widening conflict emanating out of the Ukraine-Russia war could have a severe impact on the global economy.
  • Remote working, given the large number of white-collar employees working remotely and largely unsupervised could have an impact. It remains to be seen if worker productivity and innovation can be sustained, which is required to slow the growth of inflation.
  • Another wave of Coronavirus, or a variant or another easily transmitted virulent disease, could re-emerge causing the re-imposition of restrictions and wreaking havoc on recovering economies.
  • The deficit resulting from all the stimulus spending by the U.S. government could threaten U.S. economic stability, the U.S. dollar, international trade, and interest rates.
Summary of March 2022 Quarterly Market Monitor Report
This is a summary of the March 2022 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 by visiting nwfa.org.

The major indicators thus far point to the U.S. economy experiencing continued growth through 2023. Uncertainty and workplace changes, conversely, are hampering commercial market growth. In the final analysis, it is expected that 2022 will continue to see good economic growth while it slows the result of inflation, which will hamper commodity prices and consumer spending, rising energy costs, and slowing wage growth.

Using two different methods to estimate the year-to-date calculated percent growth in dollar value consumption percent change for the first half of 2021 versus the same period last year for flooring types in the U.S., we see that the two methods are very much at odds. This is due to several reasons:

  • During the second quarter of 2020, the U.S. closed parts of its economy to thwart the spread of the COVID-19 virus; therefore, the two periods are not truly comparable due to the unique nature of conditions in the second quarter of 2020.
  • A significant portion of domestic shipments and imports during 2021 were for inventory building to minimize product cost increases due to anticipated tariffs and price increases.

Santo Torcivia is president of Market Insights LLC in Reading, Pennsylvania. He can be reached at 610.927.2299 or storcivia@marketinsightsllc.com.

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