Cover Story: State of the Industry

October 15, 2019  by HFBusiness Staff in Business Strategy, Industry   

Needless to say, the external factors, such as tariff s and ecommerce, and internal factors, such as aging owners retiring and young consumers looking at renting instead of buying (that is if they can ever aff ord a house) any forecast becomes a “SWAG.” For those that don’t know what that stands for, email me.

When developing this, Florida was threatened with a direct hit from Hurricane Dorian. Everyone’s att ention was glued to the television, watching the forecasted path. It occurred to us that we could create our own spaghett i presentation of models and measure the accuracy of each. With that much exposure, many in the industry would stop prognosticating. Seriously, there are so many factors that are considered in arriving at the forecast. We fi nd the consumers and incorporate into our model. Unfortunately, one deviation can cause a major change in direction. The table below presents last year’s forecast with what actually occurred along with the consensus forecast for this year. Note the deviations, such as housing starts.

That is what happens in forecasting. Just like Hurricane Dorian, Florida was spared a direct hit, but the entire East Coast felt the power and endured the destruction. Unfortunately, the furniture industry forecast is similar. A downturn will happen in the near future. Exactly when and what sectors cannot be precisely determined, but for sure find the storm shutters.

The following presents the statistics behind the forecast, followed by the perspectives of those on the front line, followed then by those on the sidelines. Just recognize the ultimate perspective of the consumers. If 60% of consumers believe we are going to have a recession, we are in a recession.

Our Perspective — Forecast Spending, both by consumers and the government, appears to be the driving force behind forecasted steady, but slowing, economic growth this year and in 2020. Holding back the economy, however, is business investment in equipment, weaker inventories and structures and forecast soft housing and exports. Global declining manufacturing activity in the world’s advanced economies is putting pressure on the U.S. expansion. And then there’s the upside-down yield curve. Most economists predict a recession in 2020 or 2021, though most feel it will be short-lived.

The Furniture Industry Industry sales are forecast to finish this year 3.2% growth, well behind last year’s increase of 6.6% the year. Depending on recession fears, growth should moderate again in 2020 to around 2.4%.

The Bedding industry, the fastest growing segment coming out of the last recession, faced stiff competition in 2018 from imports along with disruption from consolidation and an increased Internet presence. This year the Bedding industry began to recover and should expect growth of 3.1% while all other furniture is on track to increase 3.2%. Both furniture and bedding sales should slow further over the next two years to under 2.5% growth. (Table B)

Distribution Channels. Retail sales, excluding motor vehicles and gasoline, should experience around 3.9% growth this year, with much of that growth taken up by e-commerce, leaving only about 2.0% growth for in-store sales. Except for internet shopping, retail sales are forecast to slow or go negative this year for all other broad distribution channels, according to the Census Bureau (based on sales through July). For Furniture Stores, coming off good growth in 2018 at 6.3%, the first half of this year has been a sobering experience for many. Furniture Stores are on track for sales to fall about 1% this year based on performance. A more robust fourth quarter than last year could pull these numbers up some. Home Furnishings Stores are also experiencing flat or declining sales compared to the first two quarters of last year, down 1% second quarter year to date. Electronic Shopping and Mail-Order Houses continue to experience high growth, up 12% thus far in 2019 Q2 YTD. (Tables C and D)

Prime Furniture Buying Population. Millennials (ages 23 to 38 this year) are firmly entrenched in the 25 to 34 age group and continue to pour into the 35 to 44 age group, the fastest growing category under age 65. This group is expected to increase 1.3% this year and continue to accelerate over the next few years. The younger 25 to 34 group is also growing, but more slowly going forward. Many in this age group who delayed entering the workforce are finally finding jobs, though not necessarily the ones that match their educations. Meanwhile Gen-Xers in the 45 to 54 age group, continue to decline. Of particular concern to the furniture industry is this age group tends to be at peak earnings, and a decline in number could slow consumer spending somewhat. Baby Boomers are still impacting the industry as the older age groups continue to grow and downsize, although not necessarily to less expensive homes. (Table E)

The U.S. Economy Many economists feel that overall the economy is healthy and that the forecasted slowing of Gross Domestic Product to within the 2% range is consistent with an economy that is slowing down to a more moderate growth rate which is not necessarily unhealthy. Unemployment is forecast to continue at the natural rate. There isn’t too much inflation or deflation. So again, except for an unexpected major domestic or global event, a recession, if any this next year, should be short-lived.

The uncertainty regarding trade wars with China, is being blamed for at least some of the forecasted GDP slow down.

The Home Furnishings Business economic forecasts that follow are a compilation of predictions by leading government agencies and U.S. economists. Figure 1 provides the complete sources.

Real Gross Domestic Product. GDP, which measures the nation’s production output, should continue to slow to an estimated growth rate of 2.2% this year and slow further through 2021 (Table F). The economy barreled forward last year, but slightly lower than the anticipated 3.0% annual growth. After a dismal fourth quarter last year that experienced only 1.1% growth in GDP, the first quarter of 2019 posted a surprising 3.1% increase. The second quarter slowed to a 2.0% rate. According to the U.S. Bureau of Economic Analysis (BEA) the second quarter slowing in real GDP primarily reflected downturns in inventory investment, exports, and nonresidential fixed investment. These downturns were partly offset by accelerations in consumer spending and federal government spending. A large number of experts feel this historical expansion will continue to cool with a mild recession looming toward the end of 2020 or 2021. (Table F)

Payroll Employment and Unemployment Rate. Since the end of 2017 through the second quarter of this year, the U.S. added 3.7 million jobs. Employment growth slowed, however, beginning in the fourth quarter of last year and has continued to slow, with the second quarter of this year adding only 437,000 jobs. The number of non-farm workers is forecast to grow 1.6% this year compared to 1.7% in 2018 and slow further through 2021 to 0.5%. Job openings exceed new hires.

On the positive side, the Bureau of Labor Statistics reports wage growth for nonsupervisory workers ticked up through the first half of this year and the number of hours worked rose. The share of the population employed is the highest since 2008. On the negative side, retail establishments continue to shed workers as stores continue to close and the telecom sector continues to shrink. No doubt businesses will be looking for workers in the future. Tighter immigration laws may have a larger impact on specific industries, for example Agriculture, where undocumented workers have been heavily employed. (Table G)

Unemployment is forecast to continue at the natural rate rising slightly over the next two years. This year should average 3.7% unemployment and grow to 4.2% in 2020. The short-term unemployment rate (those unemployed for less than six months) is near its lowest level since the Korean War in 1953. (Table H)

Inflation. The Federal Reserve is predicated to hold inflation steady over the next two years with 2019 averaging 1.8% and the next two years at 2.0%. (Table I) Stock Market. The stock market continues to do its own thing – rapidly reacting to geo political conditions then shrugging them off just as quickly. The Dow Jones started the year around 23,000 and at press time in September was at 27,000. The average for the year is forecast at 26,000 and the average next year at over 27,000 or higher if a recession doesn’t occur. (Table J)

Consumer Prices. The furniture industry has struggled to get prices up. Prices began to rise in 2019, but not in the manner the industry had hoped. With new tariffs imposed and the threat of additional tariffs this Fall, furniture industry prices are forecast to grow 2.7% and 3.0% in 2020. Meanwhile all consumer goods prices are forecast to grow 1.7% this year and 1.8% in 2020. (Table K) Gasoline Prices. Barring any international incident that would disrupt the crude oil and gasoline industry, the U.S. Energy Information Administration predicts gasoline prices will remain stable through 2020, forecast at an average of $2.62 per gallon of regular this year and $2.71 in 2020. The government is sticking to its forecast that the United States — already the world’s biggest oil producer — will become a net exporter of crude and petroleum products in 2020. The good news for the economy is lower gas prices reduce the cost of transportation for food and every other consumer product resulting in raised profit margins. It also gives consumers more disposable income to spend. (Table L)

Consumer Confidence. While fickle, Consumer Confidence remains relatively stable despite trade rhetoric, recession threats, and political unrest. This year began with a Confidence Level of 120 (1982 = 100) in January following less than expected consumer spending in December 2018, but quickly jumped over 10 points the following month. Confidence is forecast to remain around 130 to 135 the rest of the year, barring any dramatic events. According to Lynn Franco, Senior Director of Economic Indicators at The Conference Board, regarding August 2019 level of 135.1, “Consumers’ assessment of current conditions improved further, and the Present Situation Index is now at its highest level in nearly 19 years. Expectations cooled moderately, but overall remain strong. While other parts of the economy may show some weakening, consumers have remained confident and willing to spend. However, if the recent escalation in trade and tariff tensions persists, it could potentially dampen consumers’ optimism regarding the short-term economic outlook.” (Table M)

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 5.2% following a rate cut in September to 5.0% by the Federal Open Market Committee (FOMC) of the Federal Reserve. Some economists predict another rate cut shortly to 4.75% where it is forecast to remain through 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 N)

The Housing Market 30-Year Mortgage Interest Rate. Interest rates for 30-year mortgages remain very low, forecast to average 4.0% this year and 3.7% next year. (Table O)

New and Existing Home Sales. New single-family home sales picked up this year and are expected to grow 7.7% thanks to good housing starts in 2018. However, new sales are forecast to slow to 3.2% growth in 2020. The industry’s main obstacle to ramping up construction is that it has become more expensive for builders to break ground on new projects. Meanwhile, existing home sales have been struggling lately to gain momentum because prices have risen beyond many buyers’ means. Sales of existing homes are forecast to decline again this year 1.1% but pick up slightly in 2020 to 3.4% growth. Low mortgage rates are giving existing-home sales a slight boost.(Table P)

Housing Starts. The boom to housing starts predicted for 2019 never occurred, leaving demand high and inventories low in many markets. The blame is being placed on scarce workers, high costs to break ground, and long permitting processes in many cities. Predictions are now that 2020 will make up the difference for single-family starts which are forecast to be down 0.7% this year, but rebound in 2020 to 7.0%. The growth in multi-family starts, however, is forecast to be slow – up 1.1% this year and down 0.5% in 2020. (Table Q)

Home Prices. In July this year, the Census Bureau reported the median price of a new home sold in the U.S. was $312,800 and an existing home sold, tracked by the National Association of Realtors (NAR) at $280,800. The price of new homes is forecast to be down 2.5% this year, but rise 1.5% in 2020. In July, almost half of new homes sold were priced below $300,000, reflecting a shift among home builders to building more-affordable homes. Meanwhile existing home sale prices should increase 4.0% this year and 3.3% in 2020. (Table R)

Recession Fears: Many economists believe that recession fears are overblown. Others say signs of a possible recession keep stacking up and at some point, it no longer makes sense to keep explaining them away. In the September Wall Street Journal monthly survey of 60 economists, the question was asked: When do you expect the next recession to start? Less than half, 42.5% thought a recession would occur next year and another 35.0% felt a recession would occur in 2021. And according to the Duke University/CFO Global Business Outlook survey released mid-September, 53% of chief financial officers expect the United States to enter a recession prior to the 2020 presidential election. And two-thirds predict a downturn by the end of next year. Finally, add climate change to the list of economic worries, which the insurance industry ranked as the top risk for 2019. It beat out concerns over cyber damages, financial instability, and terrorism. In 2017, insurance companies paid out $138 billion in damage claims from natural disasters such as hurricanes, floods, and wildfires.

And don’t forget 2020 is an election year, which oddly enough historically usually bodes well for the furniture industry.