Unlocking Growth

December 4, 2015  by in Business Strategy, Industry   

The furniture industry is on track for a 5.5 percent increase this year, and all signs currently point to a strong 2016, too.

 

Following years of an uneven recovery from the recession, the furniture industry has picked up steam this year. Industry sales are performing better than expected in 2015, and all indicators point to seeing similar growth in 2016.

This year the industry is on track to grow 5.5 percent with the sale of furniture increasing 5.3 percent and mattress sales growing an impressive 6.8 percent. This is higher than last year’s projections of 3.7 percent growth for 2015 with furniture sales growing 3.6 percent and mattress sales increasing 4.4 percent. Next year should deliver similar growth with industry sales of 5.5 percent.

 

 

Surprising Growth

Demographics determine the number of possible furniture industry consumers. However, economic catalysts are the external factors that drive consumers to buy furniture. Historical patterns and expected economic developments of these catalysts come together to form a forecast. Sometimes historical patterns are interrupted by other unexpected external occurrences, and retail sales either grow or decline.

So what indicators and catalysts changed to push projected industry growth of 3.7 percent to 5.5 percent?

Employment was a key driver. More people went back to work more quickly than originally predicted. At the end of October, the unemployment rate fell to 5 percent. Year-to-date the average rate has totaled 5.6 percent, which is down from 6.2 percent through all of 2014. It was expected to fall, just not as significantly.

 

Low and steady interest rates gave the industry a boost, too. The Federal Reserve’s decision throughout the year to hold the prime rate steady at 3.3 percent and the drop in 30-year mortgage rates from 4.2 percent at the end of 2014 to 3.9 percent came as good news to consumers. Most economists felt a rate hike was due in 2015, but those predictions have now been pushed out to mid-December or next year.

 

 

The ups and downs of the stock market give consumers the jitters. Consumer confidence has been sensitive to the ups, and especially the downs, of the stock market. Coming out of the recession, market fluctuations kept consumers financially uneasy and certainly less confident. The volatility of the stock market has still been present this year; however, consumers seem less reactionary than in the past thereby lessening the market’s impact on consumer purchases.

 

 

The price of gasoline is always a key factor for consumers. Energy prices have long been a consumer ouch point. One of the big surprises this year has been the extended period of cheaper gasoline. It’s estimated by the U.S. Energy Information Administration that lower gasoline prices will save American consumers and business more than $120 billion dollars this year compared to 2014 when consumers used nearly 137 billion gallons of fuel.

Consumers buy when they feel more confident about the economy and their personal situation. Consumer confidence is a primary factor in consumer spending. This year, consumers have remained confident with the index averaging 98.5 through October (1985-87=100). Ranging from a low of 91 in July, the index has reached highs of 103.8 in January and 102.6 in September. In October the index fell to 97.6, which is still a confident number, and in November, the index took another slide to 90.4.

 

 

2016 Should Stay on Track

Although numerous external factors, including global geopolitical instability, could derail the U.S. economy next year and impact the furniture industry’s growth, many economists see the U.S. economy study enough to stay on path. Demographic factors are strong going forward as Millennials age into their household formation years. Employment is solid, personal income is growing and consumer spending is on the rise.

Millennials are the largest generation since the Baby Boomers, and the generation is filtering into the household formation years. That said, consumers must see a combination of jobs and income to form and maintain households. This segment has been hard hit on the job front and slow to flex its economic muscles. With steady job gains, strong winds are blowing. This generation will impact the economy—and specifically the housing and furniture industries—for decades to come. Over the next five years the 25-to-34 age group will increase by 2.8 million people.

 

 

No one questions the relationship of the furniture industry to the housing market. The homeownership rate has been falling since 2004 when 69 percent of the national households were homeowners but dipped below 65 percent in 2015. Apartment rentals are on the rise and homeownership is increasing but very slowly. Regardless, demographics bode well for household formations in both rentals and single family homes next year as low inventory of existing homes for sale come head to head with pent-up demand. New home starts are expected to grow more than 15 percent after 12 percent gains this year, and new home sales increase over 20 percent following 20 percent growth in 2015. (For a more detailed discussion of the profile of the current housing renter versus homeowner, see Statistically Speaking on page 36.)

 

 

There’s no way to discount the impact of the consistently falling prices and the consumer’s ability and willingness to buy. The Consumer Price Index for furniture and bedding is on the industry’s side. While all consumer prices rose slightly last year by 0.1 points, the Consumer Price Index for furniture and bedding fell more than half a point—0.6 percentage points—for the third straight year. This means furniture and mattresses are consistently becoming more affordable to consumers.

It’s always a good sign when businesses are hanging out help wanted signs. Furniture stores are back in the hiring business. A final strong indicator for 2016 is that while employment is growing throughout the economy, furniture stores are hiring again, and at a faster rate than other retail entities. This year, the industry is on track to increase furniture and home furnishings store employment by 3.3 percent, higher than the 2.4 percent growth for all other workers.

Could the Economy Get Derailed?

Several global geopolitical events could detail the U.S. economy in an election year, impact the stock market, and slow the furniture industry’s growth—specifically Middle East unrest and global economic slowdown, especially in China.

Of particular concern is the domestic policy of the Federal Reserve in terms of when to raise interest rates and how much. Rate increases could undermine exports by strengthening the dollar or cause volatility in financial markets. Most, however, agree that the Federal Reserve will take it slow and easy. Right now the economy looks solid. Incomes are on the rise and employment is growing. Household formations look promising and the homebuilding industry is full steam ahead. All should point to a positive outlook for the furniture industry in 2016.