Consumer Spending Trends
Wednesday, May 25, 2022 from Floor Covering Weekly
The Covid pandemic effected tremendous change in American’s lifestyles, priorities and value systems. They were all driven by our heightened awareness that life is precious and our future health and happiness are not guaranteed.
As a result, the cliché — “Home is where the heart is” — took on new meaning that translated into a deluge of spending on home-related products. Home-related businesses, retailers and manufacturers scored big as American consumers spent a record $470 billion on home furnishings and durable household equipment last year, according to the Bureau of Economic Analysis.
Consumer spending on home grew 20 percent in 2021 over 2020, which followed an 8 percent advance in 2020 over 2019. While 2020 growth didn’t come close to the unprecedented increase in 2021, it was still double the average 4 percent year-over-year advance tracked from 2010 after the recovery from the last recession.
History and common sense tell us the home market has only one way to go: down. How far and how fast it declines is anyone’s guess, but there is no way that this year’s growth will match 2021 or even that the category’s $470 billion high is sustainable. We need to get ready for the home market in general and our businesses in particular to regress toward the mean.
For home businesses, comparsions to the highs reached in 2020 and most especially 2021 will be meaningless. Rather 2019, when $360 billion was spent on home-related purchases needs to be the new benchmark. The years 2020 and 2021 were happy accidents but in no way reflect reality in the home market.
While we anticipate the home market to settle back to normal, home businesses face a new reality: sky-rocketing inflation. It reached a 40-year high of 8.5 percent in March with no end in sight. Not only is everything getting more expensive for Americans, home goods are rising faster than the average, including furniture and bedding up 15.8 percent, major appliances up 12.4 percent and floor coverings rising 10.3 percent. The good news is home businesses have lived through inflationary times, so we know what to expect and can plan for it. But the bad news is, it almost never ends well. Famed Keynesian-economist Paul Krugman remains optimistic that a full-on recession can be avoided, but he still said, “Rising prices will get worse before they get better.”
On the other hand, Larry Summers, who served as treasury secretary under the Clinton administration, is less hopeful. He anticipates the current Federal Reserve’s policy will “lead to stagflation with unemployment and inflation both averaging over 5 percent over the next few years and ultimately to a major recession.”
Given the natural ebb and flow of consumer demand, home businesses would naturally face moderating demand after the heavy investment homeowners made to their homes in the past two years. Rising inflation adds even stronger headwinds as inflation-squeezed consumers tilt away from discretionary to necessity purchases. Home businesses need to prepare for another round of dynamic change over the next few years. We’ve benefited mightily from favorable tailwinds over the past two years. Now we must steel ourselves for the winds to blow in the opposite direction.