Despite a recent growth spurt in the U.S. economy, the U.S. flooring market is declining faster than the economy’s rate of slowing. Some of this is due to consumers retrenching in the face of a slowing economy. Additionally, inflation is causing all prices to rise and consumers are prioritizing spending.
Another issue stymieing flooring sales is the Uyghur Forced Labor Prevention Act (UFLPA). While well-meaning, the UFLPA’s administration had caused large volumes of flooring inventory from China (as well as from foreign nations using components from the Uyghur areas of China to produce flooring) to be delayed. Lacking an unambiguous set of procedures to clear products for U.S. entry, large volumes of inventories had languished in rented warehouses or return shipped. The UFLPA is causing flooring costs to rise as importers must certify that product is compliant with UFLPA stipulations and none of its products are derived from or contain components derived from the Uyghur areas of China. Supply chains also are being disrupted at a time when the U.S. economy is very vulnerable as firms must find new sources of compliant supply.
Some bright spots in the U.S. economy:
- Housing starts have slowed compared to the over-heated growth experienced in 2022 of 1.55 million units. This year is experiencing a sustainable 1.3 million units annually (1.2 million units traditionally is the annual household formation rate in the U.S.). Also, single-family starts remain substantial, averaging 63 percent of total starts year-to-date.
- Employment is growing, albeit at a slowing pace, as it has reached full employment, which economists define as an unemployment rate of around 3.5 percent, a 62.5 percent labor force participation rate, and a prime-age employment to population ratio in the range of 80 percent. The economy is at that level now.
- Consumer spending adjusted for inflation continues to grow, but at a slowing rate (2.3 percent YTD at 6/30/23), and it is being fueled by savings withdrawals and rising credit card debt as inflation-fueled prices take a bigger bite out of household income. Consumer credit outstanding is at record levels, $4.9 trillion at the end of May 2023. With inflation pushing interest rates higher and total debt now at 24.6 percent of disposable personal income, this situation cannot be sustained much longer.
- Homeowner improvement spending growth in 2023 is slowing in the face of economic headwinds.
- Interest rates, including mortgage rates, remain elevated, the result of increases in the federal deficit, Federal Reserve discount rate increases, tightening monetary policy by the Federal Reserve, and inflation. Interest rates are not anticipated to fall until the second half of 2024, by which time inflation (consumer price index (CPI)) will return to more normal rates of 2.5 percent. As such, consumers increasingly are turning to home equity loans to finance spending and home improvements as they take advantage of the rising value and equity of their homes.
- Commercial market, as measured by real non-residential investment in structures, a measure of the inflation-adjusted investment in total new non-residential construction, is rising and should continue to strengthen before weakening in 2024. Also, the A.I.A. Billings Index rose above 50 during the first half of 2023, indicating an increase in billings six to nine months in the future. Commercial construction is forecasted to grow through 2023, slowing during the second half of 2024 as higher interest rates and declining corporate profits take their toll.
Inflation remains the most serious threat to economic stability. It has caused the dollar to decline, prices to rise, consumer purchasing power to fall, and interest rates to increase, all of which threaten to push the economy into a major slowdown or recession if left unabated.
Factors threatening the U.S. economic situation include:
- Inflation remains the most serious threat to economic stability. It has caused the dollar to decline, prices to rise, consumer purchasing power to fall, and interest rates to increase, all of which threaten to push the economy into a major slowdown or recession if left unabated. The incremental raising of the discount interest rate by the Federal Reserve has been successful in slowing inflation; the CPI fell from 8.6 percent (its high point in the second quarter of 2022) to 4.1 percent currently. It is expected that the CPI should fall to 3 percent by the end of this year and to 2.3 percent in 2024.
- Energy prices remain high as the federal government has made investments in fossil fuels difficult, and canceled oil and gas drilling permits on federal land.
- Undocumented immigrants and refugees entering the U.S. could expand welfare rolls and social costs, and raise government spending and debt.
- The Ukraine and Israel-Hamas wars are threatening to grow into a wider and more dangerous conflict absorbing increasing amounts of financial aid from the U.S.
- 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.
- Oil disruptions or sanctions resulting from the Israel-Hamas war could exacerbate energy prices, further threatening a rise in inflation.
- Although unlikely based on past experience and data available, a forced lockdown to thwart another COVID-19 or similar outbreak would shut down the economy and cause a major economic downturn or recession.
This is a summary of the September 2023 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.
Key economic indicators have fallen over the last four quarters indicating that a major downturn is in progress and likely will last into the next six months.
Santo Torcivia is president of Market Insights LLC in Reading, Pennsylvania. He can be reached at 610.927.2299 or storcivia@marketinsightsllc.com.
