From Home Furnishing Business
Cover Story: State Of The Industry Strong Economic Growth in 2018 to Moderate in 2019 and 2020
Last year left furniture executives wondering just what it was going to take to finally lure consumer dollars away from other consumer goods and back to the home furnishings industry. For Furniture Stores especially, 2018 is turning out to be the year the industry hopefully is getting back on track. Millennials are coming into their prime furniture buying years, the housing industry is set to gain more steam, unemployment is low, and wages are picking up.
The overall U.S. economy is experiencing the second largest period of economic growth since World War II. And if the growth continues through 2019, it will be bigger than the dot.com boom. Economic growth in the U.S. is expected to remain above average through the end of 2019 but could fall back from growth levels seen in 2018. Most economists believe a recession is out to at least the end of 2020, perhaps 2021 or even 2022.
The Furniture Industry
Forecast. New data from a comprehensive revision of Personal Consumption Expenditures by the Department of Commerce, U.S. Bureau of Economic Analysis (BEA), confirms what industry experts have suspected for years. The furniture industry grew more slowly immediate post recession years than the prior PCE numbers indicated, cumulatively almost 10 percent less. This data detailing personal consumption of furniture is tied to the U.S. National Accounts including GDP.
The newly revised PCE numbers also readjusted furniture industry growth upward to a 4.9 percent increase 2016 to 2017. And through August of this year, PCE furniture consumption increased 7.4 percent compared to the same 8 months last year.
Industry sales, all channels, are forecast to slow slightly the remainder of the year, but should finish at least in the 6 percent increase range by year end. Growth should moderate in 2019 to between 4.8 percent and 5 percent continuing to 4.7 percent in 2020. (Table A)
The Bedding industry has been the fastest growing segment of the industry since the recession until last year when the industry was disrupted by consolidation as well as increased internet presence from online companies marketing primarily bed-in-a-box product. Growth in 2017 was 1.5 percent compared to 5.3 percent for all other furniture products. This year the Bedding industry has begun to recover and should expect growth of 4.4 percent while all other furniture is on track to increase 6.3 percent. Both furniture and bedding sales should approach 5 percent growth in 2019 and slightly lower in 2020. (Table B)
Distribution Channels. For Furniture Stores, one would have to go back to 2004 to see a higher growth year. Furniture Store estimates through August show a 7.8 percent increase in sales compared to the same period last year. This increase exceeds the performance of all other home furnishings channels, except electronic shopping (internet)/mail order retailers that grew 9.7 percent August year-to-date. These two channels, along with General Merchandise Stores, are the only furniture and home furnishings channels that are outperforming the 5.4 percent growth among U.S. retail sales for all products. Electronics and Appliances stores continue to decline in number. Home Furnishings stores sales have slowed. (Tables C and D)
Prime Furniture Buying Population. The good news is that Millennials are finally working their way through their prime furniture purchasing years. The age group 35 to 44 is now the fastest growing category under 65 and is expected to increase 1.3 percent 2018 and 2019. As the largest generation since the Baby Boomers, they have delayed marriage and household formations. Jobs coming out of the last recession were hard to find, didn’t meet their salary expectations, or were not the jobs they wanted. Whether this generation will place the same importance on their homes and home furnishings as their Boomer parents is not entirely clear at this time. Nevertheless, they are the prime consumer force in the United States. Unfortunately, GenXers in their mid 40s and 50s with their high salaries and big homes are still impacting the industry but are the fastest declining age group of prime purchasers falling 3.1 percent this year in numbers and another 3.6 percent next year. Baby Boomers are still impacting the industry as the older age groups continue to grow. (Table E)
The U.S. Economy
Despite a politically charged climate with concerns over international trade alliances and tariffs, upcoming mid-term elections, and polarized political parties, the U.S. economy continues to barrel forward at a record pace. The Home Furnishings Business (HFB) forecasts that follow are a result of a compilation of predictions by leading U.S. economists. Figure 1 provides the complete sources.
Real Gross Domestic Product. GDP of 4.2 percent in the second quarter, up from 2.2 percent in Q1, reflects the economy’s robust growth. Most economists agree the second half of the year won’t be able to keep up that pace and the year will finish around 3 percent growth. GDP is expected to slow in 2019 to 2.7 percent and further to 2.0 percent in 2020. A large number of experts feel this historical expansion will continue to cool with a recession looming toward the end of 2020 or 2021. (Table F)
Payroll Employment and Unemployment Rate. The U.S. worker shortage still looms large, especially in retail stores, as businesses struggle to find the right workers to match the job. (See the May, 2018 issue of HFB Magazine, “Statistically Speaking: Companies Look to Technology to Help Solve Nationwide Worker Shortage.”) Furniture store executives, in particular, have expressed frustration at turnover rates while trying to implement new strategies to attract and maintain quality employees. Non farm workers are forecast to grow 1.7 percent in 2018, slightly higher than the 1.6 percent growth in 2017. And although growth will slow over the next two years, companies will still add employees at a forecasted rate of 1.5 percent in 2019 and 1.3 percent in 2020. (Table G)
As the economy adds jobs, unemployment is forecast to continue to be low at 3.8 percent this year and into 2019 with only a slight uptick in 2020. (Table H)
Stock Market. The Dow Jones continues to express little interest in the political climate, instead focusing on increase business performance. The Dow Jones is forecast to end this year at 28,000 plus and grow above 30,000 in 2019. The market is expected to remain strong for most of 2020, but performance will depend on when an often predicted recession might arrive at the end of 2020 or wait until 2021 or even2022. (Table I)
Consumer Prices. The furniture industry continues to struggle to get prices up. This year growth in prices is expected to be negative again, down 0.5 percent from 2017, primarily in bedding. Hopefully, furniture and bedding prices will go positive in 2019 and continue to grow slowly into 2020. Meanwhile all consumer goods prices are forecasted to grow 2.6 percent this year and 2.3 percent in 2019. (Table J)
Gasoline Prices. The International Energy Administration predicts that the United States will become the world's largest oil producer by 2023 growing enough to meet domestic demand. While OPEC walks the tight rope between increasing and lowering production to insure profits and continued exploration, in a free U.S. economy that may prove to be more difficult. Oil companies must find the right balance between increasing supply slowly enough to keep prices high enough to pay for increasing exploration. Perceived shortages caused by hurricanes, the threat of war in oil-exporting areas, or refinery shutdowns can cause panic and prices to spike. Gasoline prices are expected to remain below $2.50 for a gallon of regular gasoline 2019 and 2020, with this year forecasted to average $2.70. (Table K)
Consumer Confidence. The current high level of confidence at press time reflects a sturdy economic expansion in the U.S. that’s about to turn nine years old with no end in sight, according to Market Watch/Barclays. Job openings are at a record high and unemployment is at a 17-year low. Confidence grows despite trade rhetoric, stock market volatility, and political unrest.
Lynn Franco, Director of Economic Indicators at The Conference Board says that, “Overall, these historically high confidence levels should continue to support healthy consumer spending in the near-term.” (Table L)
Prime Interest Rate. This short-term interest rate is the most commonly used in the banking system. The average rate for the year should be at 4.9 percent, according to leading economists. The 5 percent rate at press time, however, is forecasted to be raised to 5.25 percent by the Federal Open Market Committee (FOMC) before year end and continue through 2019. Another increase to 5.5 percent is forecast for 2020. The Prime Rate is generally increased if the FOMC determines that the pace of inflation within the U.S. economy is too high so as to bring inflation under control. (Table M)
The Housing Market
30-Year Mortgage Interest Rate. As the Prime Rate has edged up, so has 30-Year Mortgage Interest Rate to a forecasted average of 4.6 percent this year. While still low, rates should edge up again in 2019 to 5.1 percent and 2020 to 6 percent. (Table N)
New and Existing Home Sales.
With low inventories and slow residential construction, existing home sales are forecast to decline this year 1 percent and pick up slightly in 2019 at 2.1 percent growth, according to the National Association of Realtors (NAR). These low inventories are contributing to higher home prices. With existing home low inventories, new single-family homes are being cobbled up, many pre-construction. Sales of new homes are forecast to grow 8.6 this year following a 9.3 percent increase in 2017. As new residential construction ramps, up 2019 single-family sales should hit double digits. (Table O)
Housing Starts. Despite a recent slowdown, residential construction shows a positive trend. According to Kiplinger, “Increases in the cost of building materials and shortages of land and labor have left builders unable to ramp up construction faster, despite optimism in the industry about the direction of the market. Prices for building materials, however, have recently begun to ease somewhat.” (See HFB Magazine, July 2018, “Statistically Speaking: Housing Industry Struggles to Keep up with Consumer Work/Lifestyle Demands.”) The National Association of Realtors (NAR) forecasts Housing Starts for single-family units to grow 7.7 percent this year and is optimistic about double digit growth in 2019. No economists on HFB’s list ventured a forecast past 2019 but the trend should be positive. Likewise, after a negative growth year in 2017, multi-family units have rebounded and should increase 7.6 percent this year. The NAR predicts Housing Starts growth should then be flat in 2019. (Table P)
Home Prices. In July this year, the Census Bureau reported the median price of a new home sold in the U.S. was $328,700. Existing homes sold, tracked by the National Association of Realtors (NAR), reflect a July median price of $269,500. Low inventories of existing homes should help increase the price by 5 percent this year, with prices continuing to increase in 2019 at 3.6 percent. New home prices should be down slightly this year less than 1 percent, but grow 2.6 percent in 2019. (Table Q)
Conclusion. The U.S. economy appears very healthy. This growth should continue throughout next year, but at a slightly slower pace. In 2020 the economy should moderate further with increased anxiety among businesses as to how long the expansion can last.