Raymond’s View agrees with Yogi Berra’s great quote, “It’s tough to make predictions especially about the future.” But one of a manager’s most critical jobs is preparing his business for the unknown. Part of that task is to read the economic tea leaves, to interpret what the future may hold for the industry in which his company participates.
If your company has survived the economic malaise of the past three years, you have proven your skills in adapting to lower sales and the associated impacts. Now you must face the uncertainty of an economy that, at best, is muddling along. How can you know whether business will get better or worse?
Help exists in the economic measures that are readily available on the internet. Let’s look at several key metrics that are especially helpful to us in the secondary wood products industry.
Jobless Claims. This statistic, reported every Thursday, shows the number of individuals who filed for unemployment insurance for the first time in the prior week. An increase means the labor market is deteriorating and vice versa. This metric has a remarkable record at marking the beginning of an economic upswing. For all of the recessions since the late fifties, the jobless claims figure has done no worse than call upturns six months in advance and often hit the start of the upswings on the mark. In spotting downturns this statistic is a leading indicator and has often predicted a turn for the worse by as much as one year. But advance notice is what anyone reading the economy wants in a forecasting tool.
Most economists watch the four-week moving average of claims to eliminate the volatility. As shown in Chart 1, claims peaked in early spring 2009. Many believe the recession ended about that time. Business did begin to improve. But the recent series of upticks in claims have some worrying that the recovery is slowing.
Consumer Spending. Spending by the public accounts for about two-thirds of our economy. People historically spend more freely when confidence in their futures improves. The best measure of this spending is retail sales, the total revenues of outlets that sell durable goods like dishwashers and furniture and non-durable items like clothing. This statistic is a leading indicator for new hiring and business investment.
Chart 2 shows the most recent bottom in consumer spending last spring, roughly in sync with the turnaround marked by jobless claims. About eight months passed before spending went positive year-on-year. Note that the devil is often in the details with this metric and bear close monitoring. July’s bounce is attributed to strong auto sales. Many products like furniture, appliances, electronics, building materials, and clothing fell during that month.
Housing. Without question, the primary driver of demand for most secondary wood products is new home construction and remodeling. Monthly housing starts data measure the beginning of construction of single and multi-family residences. Since most secondary wood products like flooring, cabinetry, and millwork are installed six months or so after construction begins, the starts number gives us another advance indicator of demand for those items.
As shown in Chart 3, starts have bounced along at an average annual rate of 589,000 since bottoming at 477,000 in April 2009. The number of starts peaked in January 2006 at an annual rate of nearly 2.3 million and has remained below 1.0 million since July 2008, the longest such period since this database was initiated in January 1959. During that period, sales of cabinets, flooring, and other wood building supplies have fallen to levels 60 to 70 percent below their peaks in the good old days.
The impact of this housing downturn was heightened by the extent of over building that occurred from 2002 through mid-2006. During that period starts ran at an annual average rate of 1.9 million. Before that, annual demand for new housing averaged about 1.5 million for fifty years. The result has been declining prices as supply has far exceeded demand.
Some economists claim that no economic recovery is sustainable without stable house prices. For that reason they also look at sales of new and existing homes. Prices, they say, will stabilize when the number of homes for sale falls to a four- to six-month supply. In June the inventory of new homes was 7.6 months, down from a peak of 12 months in January 2009. For existing homes, the supply was 8.9 months.
Another housing sector to watch is remodeling. About three-fourths of all spending on cabinetry is for remodeled kitchens, and nearly half of all wood flooring is installed during remodeling projects.
Bottom Line. The key for business planning is to identify the broad trend in the economy, up or down. Looking at our key metrics we see no clear indication of direction. Jobless claims are showing some signs of worsening. Consumer spending, while experiencing positive growth, is softer and is indicating a slower recovery. Housing remains depressed due to excess supply of homes. While better than a year ago, the economy is far from booming. Stay tuned to these key metrics to provide advance notice of better times.
Note: All charts courtesy of Econoday Inc.
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