NAFCD: Outlook upbeat for commercial market
Chicago – “The bottom won’t fall out of your business next year; you just need to adjust your expectations.” That was the main message Connor Lokar, senior forecaster at ITR Economics, brought to attendees of the North American Association of Floor Covering Distributors/North American Building Material Distribution Association (NAFCD+NBMDA) convention earlier this month.
Speaking at the NAFCD+NBMDA convention, “Economic Trends in Construction and Industrial Markets,” Lokar provided encouraging prospects for the commercial construction industry, despite the impact record-high inflation has had on the housing market and the US economy in general. “The macroeconomics will be slower in 2023 as we are at the tail end of the business cycle – things are slowing down. The good news, however, is that we are on fire on the commercial side. We are sailing back to normal.”
Lokar presented data showing that virtually all non-residential segments are in a recovery or growth mode – led by institutional, accommodation, manufacturing and commercial. In addition, the value of the non-residential building industry and the Architectural Billings Index – the main barometers for spending on commercial projects – are in positive territory. Finally, the multifamily segment of the market (a sector common in the commercial category) is showing signs of strengthening.
“Multi-family housing is up 22.7% from last year and will continue to grow in the coming quarters,” Lokar said. “If the housing market is the locomotive, the commercial market is the galley. Commercial usually lags GDP for 12 to 16 months. This means you can start looking for solid commercial market activity in 2023.”
However, the outlook for the housing market is not so rosy. Research by ITR Economics shows that new home sales are down 18.2% from last year when the NAFCD conference was held in 2021. Other warning signs are visible in the pace of sales at Home Depot (-3%), although the drop in volume is masked by slightly higher prices. But the biggest threat of all, Lokar noted, is Fed tightening in the form of higher interest rates. Higher rates, he noted, make it more expensive to get a mortgage, refinance a home or buy a vehicle.
“The Fed is demanding its pound of meat from housing this year,” Lokar noted. “Homebuilders, who had PTSD 15 years ago, are proactively withdrawing; they don’t write blank checks. We will probably see a double-digit contraction in the housing market before all is said and done.”
In the midst of all this, the most important thing to remember, Lokar stressed, is to keep things in perspective. “We had our moment in the sun at the end of 2020 to 2021 – now consumers are spending their money elsewhere,” he explains. “The stimulus-driven surge that the U.S. economy witnessed during the first 18 months of the COVID-19 pandemic is fading. If you depended on that never-ending growth trend, it won’t happen. It’s still a healthy trend, but no big growth numbers. The pie isn’t getting any smaller – it’s just not getting bigger as fast as last year.”
What all this means for flooring distributors, retailers, manufacturers and contractors, he noted, is that we have to adapt to it. In other words, it’s not the end of the world. “Remember, we had a tremendous amount of pent-up demand, a bull stock market and high savings rates,” he said. “But the reality is that this would not be sustainable in the long run. Literally overnight we put the largest consumer economy on ice. COVID-19 caused behavioral changes in consumers, who were euphoric for housing. Now we are back in the trend where we would have been different if we had a normal 2020-2021 – at least on the residential side. The housing market will not recover until the second half of next year. We’re already seeing most of the overcooked markets, like Texas and Florida, have collapsed.”
For the short to medium term, ITR Economics recommended continuing to invest in flooring companies, expanding their workforce and monitoring growth opportunities, both organically and through acquisitions. “We’re seeing price pressures from materials and components easing, and inflation getting better, but not tangible,” Lokar said. “The market isn’t going to bring us robust growth in 2023 – not through pricing or new contracts. You’re going to have to get it!”
Lokar may have set the stage, but ITR Economics president, Alan Beaulieu, put the finishing touches to the conference with his humorous yet informative keynote presentation on the final day of the NAFCD+NBMDA convention. Alan and his twin brother Brian, a regular at past NAFCD events, have been providing practical advice to executives and business owners serving the flooring industry for years. His latest presentation was no different.
Following are some of Beaulieu’s top takeaways:
On the possible consequences of the midterm elections. “I’m not going to take sides and say, ‘Hey, if this side wins the midterms, then we’re going to have to change our prediction’ because that’s just not true. It doesn’t matter who wins the midterms, it won’t change our prediction Whether it’s a Republican or a Democrat running the White House, or one party or the other controlling both chambers, it doesn’t affect our prediction We encourage you to vote, but it doesn’t make any difference .”
Influence of inflation on consumer spending. “The reality is that consumers are in great shape and businesses are in great shape, and you will find that the economy will continue to develop. The US economy is not collapsing, despite what you hear from Warren Buffett, Jamie Dimon, George Soros or… News week.”
The weakening of the American economy can be explained rationally. “If you look at the first quarter GDP results, it’s down 0.4% from the fourth quarter, which is very small. And it was based on our trade imbalance with the rest of the world that grew to record proportions. If that happens, it will be negative for GDP. The trade imbalance grew as exports decreased and imports increased. Stuff we needed came in and that caused GDP to drop. That, and the government spent a little less money, all weighed down on GDP. That’s hardly a crisis in business when those things happen. GDP in the second quarter fell by 0.2%, which is almost nothing.
“The Federal Reserve Board’s relentless pursuit of cutting energy and food prices—two things they cannot control—will not be successful. Meanwhile, they continue to raise interest rates. They are willing to take us into recession in their effort to end inflation.”
Outlook for businesses in 2023 and beyond. “The second half of 2023 will be strong and 2024 will be even stronger. And when this economy of ours moves beyond COVID-19, we’ll get back to work. We are the world’s largest economy and combined with our friends in Canada and Mexico, the North American economy can’t be beat. The long-term study conducted by ITR Economics shows that the US will be the strongest economy in the world by 2050.”
(See more coverage of the NAFCD convention in future editions of) FCNews.)