In our webinar on April 27th, 2023, Dave King, Executive Director of HIRI shared a handful of macro-economic factors that are driving some of the changes we are seeing within the home improvement industry.
We thought it relevant to share those factors with members and non-members alike. Below you can watch the first 10 minutes of the full webinar to get a sense of the current macro-economic environment and how it is impacting homeowner behaviors.
The housing and home improvement market continues to change rapidly.
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Let’s talk some macroeconomic things that we’re thinking about and seeing right now. We actually pulled this information from the Monthly Economic and Industry update monthly report that we do. As a member, please take advantage of that. We collect roughly 50 variables that we think are highly relevant to the home improvement space. We put it all in one deck, one Excel file, put that online so you can get all that information without needing to go collect it yourself. I wanted to point out a few specific indicators that I think is relevant to today’s conversation. If you look at this blue line here, this is the home improvement project activity intent since 2013. Again, I love that we have some of this history. We can go back so far. As you can see, typically, we’re in that 70% to 80%, at least from 2013, up through, part way through the pandemic. Now, the other two variables that I’ve included on this slide is the University of Michigan’s consumer sentiment. I put it as a percentage; technically it’s not. It’s a number, but visually it’s accurate and it’s showing you what’s going on. And then I’ve also included CPI numbers on a quarterly basis here, and that’s that light gray line.
And I want to call out a few things. So that project activity really didn’t change when the pandemic hit. We still see high numbers. In fact, on average, it’s actually slightly higher. But notice what happened when the pandemic hit. Consumer sentiment really took a hit. It went from mid ’90s down to more closer to the ’80s. But it was really resilient. And once we got past this like, “Hey, is home improvement going to be okay? Am I going to be okay?” We saw consumer sentiment rise and we saw that all the way up through Q2 of 2021. And then it really took a nosedive. In fact, more so from peak to trough, more so than the pandemic. And I think there’s a real good story that really a driving force of that has to do with the inflation and the Fed’s response, i.e, the interest rates that are charged to the financial institutions and subsequently to the consumers. And so what I found really interesting is that when inflation exceeded about 4% to 5%, that’s when project activity really started to drop in a meaningful way. There’s a couple of reasons why this is.
One, interest rates go up, which means people that are borrowing money to do this work are less likely to do so. So you’re going to see less activity happening there. Additionally, with high inflation, there’s so much conversation around, can you afford it? So from a consumer psychology perspective, people are going to be a little more hesitant to spend money. And we view both of those as driving forces for why project activity went down. I’m going to share some content about this pivot that happened Q3 of 2022. I want you to just look here, notice that inflation has started to come down. Project activity shortly thereafter hit the trough, appears to be going up. Will it continue to go up? We’re going to give you some guesses, our best understanding of it. But also consumer sentiment bottomed out in Q3 of 2022. So why is this? And why do we care? I am pleased to be able to share with you today that there’s some real optimism in home improvement. Now, there’s some things that there’s some tailwinds, some red flags, canary in the coal mine thing that say, Hey, things could get worse.
The Fed could choose to continue to raise rates for some time, but I’m going to show you some information that’s on the screen right now that leads me to conclude that they probably don’t need to. And that’s a very qualitative assessment. A lot of different valid arguments for why they should keep raising it, keep them the same, and also lower. But what we do know is that our seasonally adjusted inflation rate is at 5% through March. I think it’s May 10th, we’ll get the numbers for April. But here he’s put together a forecast of where we think inflation is going to go. I want to call out that when April numbers are released, which will happen in May, I think we’re going to be under 5%, just barely. But by June’s release, or excuse me, July’s release of June data, I actually think we’re going to be under four. Let me tell you why. Inflation, the way it’s calculated, obviously year on year, what’s the change in prices? That’s the most simple way to think of it and to understand it. But there’s another way to look at it that I think is really helpful to understand if these things matter to you.
And that is when you look at month on month change, it takes 12 full months to work through, stated another way, if you have 1 % inflation, I want you to look at June 22, where that orange line is. By the way, that’s the same location as the prior slide, June being the end of Q2 and the start of Q3. That was when we had our highest monthly inflation. I think it was like 1.2%. If you analyze that, that would be something like 15 % if it stayed at 1.2 % per month. But we know it’s not going to stay there. But it’s really helpful to understand this that it takes 12 months for that annualized rate that exceeds 12 % to fall off the books per se. And look at what happens in July. Look at how much lower it is. And you need to look at the right axis to understand this monthly CPI that’s here. And so 1.19 in June, and then it drops. It actually went slightly negative in July. And then for the rest of the year, it’s been more or less between 0.1 % and 0.4 %. All of those, when annualized, puts it at under 5 %.
And so what I’m anticipating is that when the June 2023 numbers are released, there’s going to be this big drop. And it’s going to be like, Oh, my gosh. The Fed policy is suddenly working. And it’s like, Well, yes, it is working. But it’s also because we had this one month where things really popped in June 2022, and that number is simply going to fall off. Why do we care about inflation rates? Inflation coming down, one obvious reason being the Fed rate and subsequent rates charged to consumers. But let’s talk about the money that people have at home and let’s talk about discretionary income for a moment. Orange line, same location, longitudinal, June of 2022. The dark blue line is disposable income. Look at what happens after June. It bottom s out. In other words, the lowest disposable income in the data points shown here is in June of 2022. From there, it’s gone up. These are in real numbers, so they are inflation adjusted. There’s an argument that, Hey, well, obviously, if inflation comes down, it bodes well. Well, yes, it does. And that’s the very point we’re trying to make here. Savings rate, the percentage of income that people are saving, also going up, appears to have bottomed out in June 2022.
So all of these things, when you combine them, inflation is coming down, so there’s less concern around, can I afford it? Is it going to get worse? Et cetera. Interest rates could come down, disposable income is going up, savings rate going up. All of these things bode very well for the home improvement industry. Let’s talk about our five year forecast. This is from our separate, our IHS market report released last month. It is current or barely ‘not current’; it’s a month old. As far as I know, this is the most recent data around the building products market from a forecasting perspective. Also remember, you can look at this by pro versus consumer. You can also look across just under 20 different building product categories. You can get very specific to your organization. Hopefully, you’re all aware of it. If you’re not, it is a great resource when you’re strategically planning for how you want to evolve as an organization when you’re looking at market share for your organization and overall just planning on the health of home improvement. But look at this number in 2023. We’re seeing 1.3% growth from 2022. By most people’s perspective, that is not a great number.
Oh, it’s only 1.3%, look at where it’s been. The last 10 years, it’s been five times that or whatever it is, but quite a bit more. I think if we spoke with anyone in 2019 and said, Hey, guess what? We’re going to have $567 billion spent on building product in the remodel and repair in the home improvement space. Everyone would be ecstatic with those numbers. If we look past 2023, look at those numbers. 3.5, 3.4, 3.4, 3.8. These are good numbers. They’re above inflation. It represents real growth. And these are actually inflation adjusted, excuse me. These are good numbers to be having. And 2023 is this like pause. Now, the big caveat is the Fed could screw things up and destroy the economy in this way or that way. A war or politics making bad decisions. There are so many things that black Swan events that could impact these things. The good news is we update this report three times a year and we try to take into consideration these things in our forecast. But right now, with the lay of the land as it is, we see a good five years of home improvement growth.
The low this year largely has to do with the very slides I just showed you of year to date and the next month or two. Those dynamics slowed 2023. If we look at the second half of 2023, there’s some real positive things.
Members, you can watch the full webinar below.
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