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Economics: 2018 looks strong; possible bend in the road for 2019

January 22/29, 2018: Volume 33, Issue 16

 

 

One of the highlights of the annual North American Floor Covering Distributors convention is the economic overview from ITR Economics, one of the most accurate forecasters in the country. This time around it was Brian Beaulieu, one of the company’s two principals along with his twin brother, Alan, who gave an upbeat forecast for the next 10 years.

What follows is a synopsis of the 90-minute presentation in Beaulieu’s words…

The future looks good as the economy continues to grow. We still see softness in 2019 that you can manage through. We see the first three quarters of 2019 being flat and then the economy begins to rise in earnest in the fourth quarter and into 2020 and 2021. We are not anticipating any significant recession in the next four or five years.

Given that we see a lot of growth in our future, given that interest rates are still so cheap, given that we have a labor shortage to contend with, you should take advantage and invest in your businesses today. The No. 1 problem we will face for the next 13 years is a labor shortage. Attracting and keeping talented people will be the bane of our existence. Invest in technology and equipment that will alleviate your need for labor. This is a global phenomenon.

Politics
Republicans believe the economy does better when a Republican is in the Oval Office. Democrats want to believe the economy does better when a Democrat is in the Oval Office. Warren Buffet said, “Red or blue, I can still make green.” Stop worrying about who is in the Oval Office. What you do every day in your office matters far more than what they are doing in Washington.

Tax cuts
If you think the tax changes is something that will knock the socks off the economy, we don’t see it that way. Go about your business with the hand you’ve been dealt. Stop relying on a tax break to make things better. If you think deregulation has helped you, more power to you but that can be changed with the next president. Stay focused on the business of your business.

Stock market
The stock market is going up because corporate profitability is on the rise. However, it is relatively expensive. If you put fresh money into this stock market now your average rate of return for the next five years will be between 1% and 2%. The best thing to happen would be to see the market pull back. A 10%-15% correction would be beautiful. You can’t time this market in terms of the lows and the highs, but you can decide when to put in fresh money. Be patient. Now is not the time.

Trade
Contrary to popular belief, trade is important to the U.S. And if you throw trade barriers to stop imports you will also end up hurting exports. Sixty percent of our exports are manufactured items. Manufacturers will feel this pain more deeply. We are still one of the world’s pre-eminent manufacturers, but we also are in need of being able to sell our wares abroad.

Global picture
The world’s total GDP is $65.278 trillion; the U.S. comprises 24.7% of world’s economy. China is 14.9%. How long will the U.S. remain No. 1? When will China overtake us? The reality from an economic perspective is the U.S. will be No. 1 for the next 100 years. Why? Three factors:

  1. Demographics. A growing population ensures organic economic growth. We have a growing population in the U.S.; China does not. Every 13 seconds the U.S. net population (birth + immigration – death) increases by 1. India is another country that has a positive demographic trend.
  2. Natural resources. You have to own your natural resources if you will thrive during a period of inflation like we are moving into. The U.S. is blessed with natural resources; China has a relative paucity of natural resources. You have to get to India before you find another country strong in natural resources. Brazil, Canada and Mexico are strong but have negative demographics.
  3. Rule of law. History shows private property rights is essential to long-term growth. Also, intellectual property; if you are going to be an innovative, creative society and economy, you have to have the intellectual property. And bankruptcy law; you have to be able to fail forward. You have to be able to come out from underneath, make mistakes and try again.

The only country that wins on all three of those scores is the USA.

Housing
This is a tale of two stories—single unit and multi-family. Single unit starts is a rising trend that will generally last until 2029-2030. It is not a continuous rise and will stall from time to time, but it won’t be like the Great Recession.

Buy urban because people are going urban. That’s where baby boomers want to live. And at least 40% of millennials now say they want to go there. It’s the one place where the supply will be less than the demand going forward. People also want to live near water. So buy in an urban area, high up where you can see water or be on the water. That’s the trifecta. There are 100 million more Americans coming at us between now and 2050. They all are going to want someplace to live. You may as well own that place.

You want to sell most of your real estate off in 2029-2030. We think that next decade will be one of deflation, and you don’t want to be stuck holding that property.

Multi-unit starts is a different story. Don’t expect anything good during the first half of 2018. Be careful about this segment of the market. Rent growth is 2%, barely keeping up with inflation.

Home prices are going up. That trend will largely continue until 2029-2030. The only thing that can upset this trend is if they repeal Dodd-Frank. That would stop home prices from growing. This would be good for the economy and a blessing for the financial industry but disruptive to this trend.

Bond market
The bond market is bigger than the stock market. This market looks forward 18-24 months. Much more dollars are involved globally. The bond market looked at the election, looked at Trump’s promises and decided interest rates needed to go higher. If you are going to exacerbate the labor shortage by restricting immigration, then labor cost will go even higher. If you are going to cut taxes without cutting spending, the national debt will go up. International debt, inflation and the bond yield goes up. It was the same thing when Ronald Reagan was elected president in 1980.

Certain forces back then gave us a declining trend. Globalization gave us deflation and declining interest rates. What’s the worldwide trend today? Protectionism. Trump is anti-globalization. That coupled with the propensity for inflation means interest rates are likely to go up. So the only rational thing to do is to borrow as much money as you possibly can to invest in your businesses, or buy wealth-creating assets. How much should you borrow? If you are sleeping through the night you have not borrowed enough money. Unless you are three to seven years away from retirement.

Credit
We are on a long, rising trend. Seventy years of history says debt does not take down the economy. The economy actually grows with consumer credit. It’s not about what the debt is, it’s how we are handling that debt. Don’t be afraid to extend credit terms to other businesses. Do your normal due diligence, but one of the ways you can increase market share and attract more business is through your credit offerings. This is a safe environment to do that.

Retail business
Sales are growing at a good, 3.8% clip. That is strong enough to ensure the economy will continue to grow through 2018. When retail sales drop below a 2%-2.5% growth rate, that’s when you start worrying about the economy. There is no need to worry.

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Flooring dealers laud mills’ decision to reinstate terms

October 23/30, 2017: Volume 32, Issue 10

By Ken Ryan

 

Screen Shot 2017-10-27 at 11.57.44 AMSpecialty flooring dealers who say their profits rely heavily on term discounts offered by the two major mills applauded Mohawk and Shaw for reinstating terms on residential carpet products.

Terms are percentage discounts for paying bills within a certain time frame, often within 10 days of receipt of invoice. Terms are a huge deal for legions of flooring dealers, as many view the payment discount as the single largest contribution to their profitability. As such, losing such a perk would strip thousands, if not tens of thousands, right off a dealer’s bottom line.

“I would say 99% of retailers base their selling price on the cost of the material with freight added,” Paul Johnson, owner, Johnson Floor & Home/Carpet One, Tulsa, Okla., explained. “No one subtracts the discount term and then figures their margin. So the best, most financially astute retailers pay their invoices on time and take the discount. The discount literally drops to the bottom line.”

Johnson noted that the World Floor Covering Association has conducted many profitability studies over the years and on average a “good” flooring retailer makes 2% net profit. “So you can readily see the positive effect discount terms have for the profitability of retailers. The best thing hard surface manufacturers and distributors could do to help the profitability of their retail partners is start offering discount terms for timely payment.”

Cathy Buchanan, owner of Independent Carpet One Floor & Home, in Westland, Mich., can attest. Each Thursday at noon she sits with her office manager and goes over the existing bills. She takes pride in knowing that over the past two to three years Independent Carpet One Floor & Home has been taking discounts. “We are totally caught up to Nov. 14 [on Oct. 24] we paid $21,824.44 [in bills] and took in a total of $841 worth of discounts from Shaw alone. To think we would be losing those discounts truly hurt and cut into my excitement every Thursday of showing my mother how much money we saved and to see her smile.”

Buchanan said a price increase of 5% isn’t the same as losing a 5% discount on terms because with price increases she can pass the increase on to her customers and reprice her showroom floors. “Yes, it is a burden especially within my 10,000-sq. ft. showroom to do that but the burden is a lot less than punishing the retailers that do take discounts. When we make our desired margins—and make money at the end of the year—everyone is happy.”

On Oct. 12, as part of an announced price increase on residential and Main Street carpet products, Mohawk had announced plans to eliminate discounted terms on residential carpet products, if purchased on that basis, in lieu of a price increase. But perhaps bowing to industry pushback, the carpet rescinded that portion and allowed the exchange of discounted terms in lieu of the announced price increase. The announced price increase of 5-6% on all of its residential and Main Street carpet products will be applied to all customers in similar manner for orders placed on or after Nov. 27 and shipments after Dec. 29.

In an Oct. 6 letter to dealers Shaw stated that instead of a standard price increase, it would move to standard billing terms of net 30 days company-wide. The manufacturer said the move would standardize terms across flooring categories and bring it in line with other building material suppliers and providers. For carpet products already sold on net terms, prices would increase 5-6%, with the changes to take effect with orders on or after Nov. 13, and shipments on Dec. 4. Shaw similarly reinstated the discount.

Flooring dealers understandably let out a collective sigh of relief. “We were happy to see they rescinded doing away with terms and decided to raise prices instead,” said Ben Boss, owner of Boss Carpet One Floor & Home, in Dixon, Ill. “Shaw and Mohawk’s concern of a level playing field is valid. Shaw and Mohawk have competitors that do not offer terms. Many dealers and their sales staff forget about the terms Mohawk and Shaw offer and will take a price without terms and unfairly compare the two prices.”

The way Billy Mahone III, manager at Atlas Floors Carpet One in San Antonio, sees it, terms are a win-win for both parties. “To me terms are an important tool for both mill and retailer, improving cash flow for the mills and helping retailers with their bottom line. I’m glad both mills reversed their decision to do away with terms because we take advantage of terms any chance we can get.”