The U.S. economy has endured a lot during the past several years. First, there was COVID-19 and 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 weakening the U.S. dollar are causing record inflation. The Russian invasion of Ukraine has still unknown repercussions on 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 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 eight 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 as 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 two 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 three more similar increases expected the remainder of 2022 to curb rising inflation. Driving this inflation is 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 by 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 include the following:
- 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 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, and 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 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 economic stability, the U.S. dollar, international trade, and interest rates.
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 that 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:
Given federal spending in 2021 ($6.6 trillion) and into this year, burgeoning U.S. debt load and money supply growth, and forced federal curtailment of U.S. energy production (-11 percent in 2021), it is no wonder the U.S. is experiencing record inflation. The federal debt has risen by $5.4 trillion in the last two years and now stands at $30 trillion, an increase of 36 percent over the last two years. The money supply has expanded 41 percent (+$6.2 trillion) over the same two-year period as the U.S. Treasury continues to print money to pay for government spending (known as monetization, the treasury does not literally print dollars; instead, it digitally creates funds that are then deposited into individual bank’s accounts). Inflation is a serious headwind for the U.S. economy, and none of the aforementioned actions bode well for the U.S. economy.
On the positive side, the foundations of the U.S. economy remain strong and will see growth into the latter part of the forecast period. Key economic assumptions of this forecast include the following:
- Employment is growing, albeit at a slowing rate.
- Consumer spending and retail sales continue to grow (consumer spending is 70 percent of U.S. GDP).
- Business profits and investments continue to increase.
- Inflation-adjusted (real) disposable personal income is rising.
- Housing starts are proceeding at a moderate pace, despite rising interest rates, rising home prices, affordability issues, and investors buying single-family homes as rental investments.
- Financial institutions remain strong and show no signs of weakness or stress.
- Although existing-home sales will rise to 5.92 million units in 2022, it is forecast they will remain above or near 6 million units sold annually throughout the forecast period. Existing home sales bode well for residential remodeling as consumers refit homes just prior to selling and just after buying an existing home.
- The AIA Billings Index indicates commercial building and renovation are positive.
- Non-residential building rehabilitation will begin to see growth in 2022 as corporate profits revive and as firms evaluate what their true requirements will be for space, workers, and enhanced productivity. Of course, this situation will vary by building type, with health care and education buildings moving faster to upgrade their facilities.
- Non-residential building construction will find similar market dynamics as non-residential building rehabilitation.
- The U.S.-China trade war and the subsequent tariffs on Chinese imports to the U.S. (plus U.S. exports to China) are forecasted to continue at least through 2022 and likely throughout the forecast period.
- More foreign firms will establish flooring manufacturing operations in the U.S., given domestic production and inventory advantages, tariff avoidance, an expected weak U.S. dollar, and rising labor costs abroad.
There are many downside risks related to this forecast. The risks are related mostly to the federal government’s reaction to a pandemic and inflation and its root causes.
- States or the federal government will not reinstate mitigation policies, slowing or thwarting economic growth.
- No new taxes that could hamper consumer spending significantly or corporate investment are expected, and no major shifts in tax policy, industry nationalization, wealth redistribution, or other significant changes to the structure of current U.S. business or social policies are foreseen.
- The federal government will not continue expanding the debt and the money supply, weakening the U.S. dollar.
- The U.S. stock market, although having dipped recently, is rebounding and is expected to remain relatively positive. Should a major market correction occur, it would jeopardize the economy, especially firms with endowments, pensions, etc. If the market remains strong, a risk to this analysis is that a major downturn in the market could trigger a major decline in the U.S. economy.
- It is expected that prior to the November 2022 election, the Biden Administration will reopen federal lands for drilling, which will reduce energy costs and aid in inflation curtailment. If this or a similar energy reduction strategy does not occur, inflation will remain a serious threat to this forecast.
- It is not expected that the war in Ukraine or any other global war or terrorist threat will occur that threatens the U.S. economic growth.
- There are not expected to be any significant logistical interruptions during the course of this forecast.
Figure 1.2 above, shows Real Gross Domestic Product (GDP), which represents the inflation-adjusted, constant dollar value of all goods and services produced in the U.S. per year, and the number of total annual housing starts per year. Given that housing and the industries related to it are the second most pervasive in the U.S. (behind automobile production), it is no wonder that it tracks closely with the movement of GDP.
Risks to the Forecast
The main threat to this forecast and the U.S. economy, in general, is the uncertainty and unprecedented nature of COVID-19 and policies instituted to preclude its spread. The virus has been used as a pretext for Congress to spend huge amounts of borrowed funds to finance both COVID-related and mostly non-COVID projects. This, coupled with other policies, has created inflation and slowed economic growth. Government attempts to tame inflation could end up making matters worse.
A significant risk is the nature and duration of the punitive tariffs currently in force against Chinese imports. It is assumed these tariffs will be in place through the remainder of 2022 and into 2023. If this is incorrect, or if the impact on competitive pricing and consumer spending is different than current assumptions, this forecast could suffer.
Another major risk to the forecast is derived from the threat posed by the federal budget deficits, which have caused severe inflation and are creating a decline in the U.S. dollar exchange rate. Related to this risk is whether the November elections usher in a change in the political party power structures bringing on new radical economic and social changes, along with new taxes, or if the elections usher in a reversal or slowing of the trend.
The possibility of another stock market correction becomes a reality and ends up being more like a crash than a correction. This could also threaten this forecast dramatically as wealth is drained from investors of all types. If this occurs, it could create a global economic recession, and the assumptions in this forecast will no longer hold.
If global economies, especially those in Europe, China, and Japan fall into recession, this situation could stunt U.S. growth and, depending on the severity of the foreign economic situations, have repercussions for the U.S.
The threat of a catastrophic terrorist attack on the U.S. or its institutions is a possibility that could threaten this forecast. The war against terrorism could also turn into a quagmire that will cause the U.S. government to reorient its spending activities in a way that could seriously threaten economic growth.
A widening of the war in Ukraine, or if the U.S. is pulled in as a direct combatant into the war, presents a serious risk to this forecast.
The key risk in this entire forecast hinges on whether the U.S. Federal Reserve and the current administration will institute harsh measures to curb the current high inflation. The last time the U.S. faced a similar situation was in the early 1980s when the consumer price index was running at low double-digits (13.5 percent in 1980 based on the current index). It took very strong and persistent interest rate hikes and a second recession in 1982 to bring inflation under control. Following these efforts, for the next 40 years, inflation ceased to be a major issue. Given that today’s inflation rate is only half the rate from 1980, it should be relatively easier to control inflation, and it is assumed that this will be accomplished during the next two years with a moderate downturn in 2023 (no recession). The 1980-effort to tame inflation took four years and a recession to get under control. A major risk and a large gamble given the current situation.
The recent spread of the Environmental, Social, and Governance (ESG) agenda will likely present a cost burden to all U.S. firms covered by ESG versus firms that are not. Briefly, ESG’s environmental component will measure how well a firm recycles product and complies with zero-emission production processes. Its social component measures a firm’s relations with its stakeholders (shareholders, employees, local communities, etc.). The corporate governance part of ESG will evaluate a firm’s accounting transparency, its integrity and diversity in pursuing company leadership, and its accountability to shareholders. ESG is being pushed by major investors like BlackRock, Vanguard, JP Morgan Chase, and activist investors. Currently, ESG reporting is not mandatory, nor does the Securities and Exchange Commission (SEC) or any other body require firms to follow ESG protocols. However, on
April 11, 2022, the SEC created an Enforcement Task Force focused on climate and ESG issues. How quickly the government moves to enforcement of ESG potentially could affect
this forecast.
These many risks are significant in their magnitude and uncertainty as they could significantly impact U.S. construction, consumption, and economic viability.
Santo Torcivia is president of Market Insights LLC in Reading, Pennsylvania. He can be reached at 610.927.2299 or storcivia@marketinsightsllc.com.
This is a summary of the June 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.
