[Delray Beach, Fla.] Catalina Research has released its latest Floor Coverings Industry Quarterly Update. According to the report, U.S. floor coverings manufacturer sales (shipments minus exports plus imports) growth slowed substantially in the third quarter of 2022 as rising interest rates caused the housing market to decline. Homeowners also began to reduce discretionary flooring replacement purchases due to inflationary pressures moving through the economy. In addition, retailers and distributors were working off excess inventories accumulated in the first half of the year.

As a result, Catalina estimates U.S. manufacturer dollar sales could have increased by 5.6 percent in the third quarter. This is down from a 13.4 percent gain in the first half. Square foot sales, however, already began to decline in the third quarter since the dollar gain reflects a 7.4 percent increase in average selling prices. Manufacturers increased prices to cover rising material, labor, and transportation costs. The slowdown has been especially sharp for foreign-sourced products. In the third quarter, U.S. floor coverings imports could have increased only 1.5 percent in dollars, and declined by 5.2 percent in square feet. This is down from a 16.3 percent dollar gain and 9.3 percent square foot increase in the first half of 2022.

A weakening housing market and a slowing economy is expected to continue into the fourth quarter and into 2023 as interest rates are pushed higher in the last quarter of the year. Weakness will be seen in all end-use markets, and all product sectors will see slowing sales.

Among end-use markets, builder purchases could weaken at the sharpest rate. New housing permits could have declined by 7.2 percent and housing starts by 4.1 percent in the third quarter. Permits and starts declined by 13 percent to 14 percent in the important single-family home market. The drop in permits will definitely result in a decrease in builder flooring purchases by the first quarter of 2023.

Meanwhile, residential replacement purchases are being hurt by the double-digit decline in existing home sales. The turnover of an existing home is the driver of homeowner flooring spending, and the decline in existing sales weights on flooring purchases six to twelve months after the downturn. Existing home sales have been declining all year and the demand accelerated in the third quarter as mortgage rates moved above 6 percent.

However, a number of factors could allow the residential market to outpace the overall floor coverings market in the second half of 2022. One is pent up demand, as homeowners take on remodeling projects put off during the pandemic. Homeowners are also investing in their existing home instead of moving, since they are reluctant to take on a new mortgage with a higher rate. At the same time, homeowners have an incentive to invest in their dwelling due to the sharp increase in home values. In addition, new home purchases are still on the rise reflecting the increase in starts in the first half, and these home buyers may still purchase carpets and area rugs for their new home.

Commercial markets have recovered during 2022, however, have lagged overall industry trends. Rising interest rates will not change this situation, and commercial markets will be hurt as rising rates result in recessionary trends moving through the economy. Public building construction spending also remains on a downward trend.

The slowdown is being felt in all industry product sectors. The impact, however, has been greatest in soft surface lines as buyer demand shifts to hard surface flooring. Dollar soft surface manufacturer sales could have declined by 1 percent to 2 percent and square foot sales by 10 percent to 11 percent over the first three quarters of 2022. On the other hand, hard surface flooring sales could have increased by 24 percent in dollars and 16.4 percent in square feet in the first half. In the third quarter, however, the hard surface flooring sales gain could have dropped to 9.3 percent and 5.1 percent, respectively, since hard surface flooring sales are more dependent on the weakening builder market. In fact, most hard surface square foot sales could have declined in the third quarter of 2022. The only sector to experience significant growth in the third quarter was resilient flooring, which continues to benefit from sharp increases in luxury vinyl tile sales.

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