[VIDEO] Macro-Economic Factors Impacting DIY and DIFM Home Improvement Behaviors in 2023

TRANSCRIPT

(00:00)
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.

(01:15)
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.

(02:36)
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.

(03:55)
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.

(05:09)
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 %.

(06:24)
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.

(07:45)
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.

(08:59)
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.


(10:17)
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 here.