Inflation Woes Slow Economy

Inflation Woes Slow Economy

Monday, July 11, 2022 from Floor Covering Weekly

Inflation Woes Slow Economy

Just as the world comes out of the two-year pandemic, record inflation and gas prices have put the brakes on what was a fast-growing economy. With everything from groceries to gas costing more, consumers are reconsidering where to spend their money — and increasingly, that doesn’t seem to be on home projects and flooring products.

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Danushka Nanayakkara-Skillington, assistant vice president of forecasting and analysis for the National Association of Home Builders (NAHB), said most experts expected inflation to peak in March, but now it is at the highest level it has been since 1981; in May it was 8.6 percent. “Think of inflation as three different components: food prices, energy prices and airfare. Everything has gone up,” she said.

“Much of the [inflation issue] can be attributed to strong demand and the economy opening so rapidly,” Nanayakkara-Skillington added. “I think the Federal Reserve increasing the interest rate can help slow it, but we do need the supply side to increase if we want to bring the growth into balance.”

Nathan Corbitt, partner and wealth advisor at Brightworth, also stressed the imbalance of supply and demand as a critical component in the inflation picture. “There is just too much demand and not enough supply. That’s why people thought [inflation] was transient — if you fix the supply problem it would go away. From a financial perspective, that’s what I am worried about; everyone is so concerned about the demand problem no one is talking about supply.” And while the supply chain issues have eased a bit, inflation has not (see related story on page 9).

Spending Shifts

Consumers cannot and have not stopped spending money. But the rising prices of everything from plane tickets to chicken has changed where consumers are spending.

“Airfare is up 48 percent, but everyone is flying. Airports are packed,” pointed out Nanayakkara-Skillington. “People are not not going on vacation. And food prices are up 12 percent, so you really feel it when you go to the grocery store. And you have to put gas in your car and buy groceries. The cost of living is increasing and everyone feels it.” The result is “homeowners are spending money on what they are prioritizing, which is going on vacation and going out to eat.”

She noted that while remodeling is still strong, growing at 9 percent this year and 6 percent next year, rising material costs may depress the market.

Consumers still have a lot of liquidity — which contributes to inflation as money is still flowing into the economy fueling demand. “It’s expensive to travel, but that is not slowing down anyone from traveling because they still have the liquidity to do that,” Corbitt explained. “My take on liquidity in general is that there is still a lot of it in the market, and more specifically in the bank accounts of many consumers. Thus, they are spending some of this extra liquidity now on travel, and thus gasoline. However, this liquidity has limits, and as gas prices continue to stay elevated, consumers will be forced to either use more of it now or stop traveling. Thus far, they’ve chosen to use more now. We are buying things that are short term expenses, like food, entertainment and travel. Those things are highly inflationary.”

Flooring industry executives fully expect inflation to impact their businesses. “Gas prices and inflation are indeed realities,” said David Sheehan, vice president of Mannington Mills. “Flooring is already a ‘postponable purchase’ and these factors can further postpone home improvement projects because the natural tendency is to hold back on big ticket purchases when you are feeling price increases in your wallet.”

He added that gas and inflation woes are not causing a complete shutdown in spending, just a shift. “Consumers are spending money, just not on home improvement projects. We are seeing slower store traffic and decreased demand. It does not appear to be 100 percent gas/inflation driven — it’s a shift in consumer spending to travel and entertainment.”

Noted Russ Rogg, president, Metroflor Corporation, “In the flooring industry, aside from competing against other manufacturers or brands, we often compete with other durable goods or even services that a consumer may be considering. This could be a television, furniture … or even a vacation. With inflation rising so quickly and having such a meaningful impact on groceries, gas, etc., I think that there will be an inevitable slowdown based on declining consumer confidence. These cost increases are really hurting the average American and when they’re focusing on how to pay for gas, they’re not likely thinking about how to replace their flooring.”

Indeed, consumers have become more cautious with their spendings, “which in turn slows down income for flooring businesses,” said Aviel Kogan, marketing manager with Republic Floor. “With less money being funneled into our industry, the less growth we will see.”

No Quick Fixes

The Fed increased the interest rate recently to try to slow inflation, which is a normal move. However, that will take time, and the impact on consumers is happening now, both with higher interest rates and increased costs of goods. Experts fear the result will be a recession, which would further curtail consumer spending.

“People are putting the brakes on spending and will until we get inflation under control,” said Jamann Stepp, vice president of hard surface for The Dixie Group (TDG). “I don’t know if we do or don’t go into a recession and I don’t know if we are already in one,” but the outlook is bleak, he noted.

“Consumers are going to be cautious and will start holding onto cash reserves,” said said NAHB’s Nanayakkara-Skillington. “We are expecting a recession, even a mild one, in the middle of next year. I don’t think the Fed can put it off. It will be a little bit of a bumpy ride. Theoretically, if we do have a recession, the monetary policy will be tighter and do whatever it takes to promote growth.”

Said Corbitt, “this whole thing is way more complicated than people realize. It’s not just how much money is printed. The issue is people don’t invest in the long term. What’s more, what would have happened over 10 years happened in 10 months. So, compensating for that won’t happen overnight. But Washington, D.C. is not comfortable with long-term solutions.”

Tipping Point

While the economy is still humming along, there will be a point where the forces of inflation, gas prices and uncertainty catch up and consumers really tighten their belts.

“I think there will be a tipping point, but I have no idea what that might be,” Corbitt said. “Usually, we see this sort of thing in the rear-view mirror much more clearly than we do when it’s in front of us. The obvious exception would be existential events like Ukraine/Russia. I think we’re already seeing recessionary warning signs in the form of supply chain breakdowns and persistent inflation. We’re even seeing hiring slow as more companies have initiated hiring freezes in the last two months. All are indicative of slowing economic activity/expectations. But again, as long as consumers have liquidity, these will be mere warnings. What we don’t know is when that liquidity will run out.”

The tipping point may come in the fall, Nanayakkara-Skillington said, when gas price data catches up with consumers. “I haven’t seen [slowdown in spending] — yet. But I won’t be surprised if we see it in the fall.”

Metroflor’s Rogg noted that he hasn’t seen a tipping point reached relative to the cost of the company’s flooring products yet. “What’s more important to watch will be the actions of consumers. If a given flooring product is now $3.99 when it was $3.29 a year ago, I don’t think that has a major impact. But when gas prices have doubled and food has increased 20 percent to 25 percent, it has a real impact on someone’s overall budget, and if that keeps up, it could slow down a willingness to invest in new flooring regardless of whether it’s $3.29 or $3.99.”

Raising Prices

Inflation has directly impacted flooring companies in the rising costs of fuel and materials. Many manufacturers have no choice but to pass along price increases.

“Inflation is a reality in the cost of flooring as well,” noted Rogg. “Raw material increases, gas, ocean freight and so forth are at all-time highs and subsequently, most resilient flooring products are being sold at much higher prices than they were a year ago. We have worked on lower margins and cut back on various business expenses so that we can pass as little as possible forward in the way of price and/or freight costs increases.”

Explained James Lesslie, president of Engineered Floors Contract, “Our raw materials and energy costs have doubled in many cases. We have no choice but to pass on the costs. Not sure where the tipping point will be, but I think gas prices will influence consumer behavior much more than carpet prices. Consumers really have no idea what a typical carpet should cost.”

TDG raised prices last year to offset some of the raw material costs, said Stepp, noting that the company has already had to institute price increases. “We raised prices to keep up but we still didn’t become whole. Even though we increased prices we gave a way a little bit [of margin],” he said.

Gas as a Gauge

Gas prices are having a direct impact on consumer spending and there is not a consensus on how to solve the issue. The average price of a gallon of gas is $4.97, almost double what it was a year ago. That price affects everything on the supply chain, from truckers to groceries to consumers. There are some ways to mitigate the issue, but nothing will happen quickly.

“The government may put out more reserves,” said Danushka Nanayakkara-Skillington, assistant vice president of forecasting and analysis for the National Association of Home Builders (NAHB). “They need to do something.”

Even with a slowdown in demand, there still is a strong trucking industry, but that industry is facing huge fuel costs, noted Nathan Corbitt, partner and wealth advisor at Brightworth. “Fuel costs impact so many different parts of the supply chain.”