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September 28, 2016 02:00 AM

Appliance market set to grow in 2017

Bill Wood
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    Jessica Jordan
    Bill Wood

    The Federal Reserve's industrial production index for household appliances in August was 109.9 (2012 equals 100). This was the lowest value since the fourth quarter of last year. It was 5 percent below the strong July figure of 115.9, and it was about 1 percent lower than the 111 value from August 2015.

    Despite this decline, the total U.S. output of appliances for the year to date is still up more than 3 percent when compared with the same period in 2015.

    Now it is never a good idea to put too much weight on just one data point. But a decrease of this magnitude indicates that the near-term trend in total output of U.S. appliances lost momentum at the end of summer. This softness in the data is just significant enough to convince me to tweak my forecast downward for this year. I now expect a modest gain of 2 percent in the annual total for 2016. This follows a 4 percent increase in 2015.

    And now the question becomes, “Will this softness in the market persist, or is this just a short-term correction?”

    This is the time of year when most OEMs are thinking about their forecasts for next year, so it is not too early to start discussing the outlook for 2017. If appliance manufacturers notice a sustained downward trend in the third quarter of 2016, then plastics processors that supply this industry may need to factor this into their plans for 2017.

    In a macroeconomic environment like the one we have had for the past seven years — where overall economic growth averages only about 2 percent a year — these fits and starts tend to occur too often for comfort. American consumers, and the manufacturers who sell to them, are unable to build up any sustained confidence. There is no obvious reason to expect a recession, but the pain from the last recession was so acute that most people are still a bit apprehensive about the future. The prevalence of hesitancy in the marketplace results in a self-fulfilling prophecy of sluggish growth.

    As your intrepid manufacturing sector analyst, my job is to look at all of the relevant trends, not just one data point, and then assess the most likely outcome with courage and conviction. The monthly figures for appliance production in both June and July were quite strong — too strong based on the underlying demand. So there is a high probability that the decline in the August production index is just a short-term adjustment, and a trend of unimpressive but stable growth will soon re-emerge. This forecast is based not only on my faith in a reversion to the mean, but also on the longer-term trends in the activities that generate ongoing demand for products like household appliances.

    The Fed's monthly appliance production data is the most relevant for data series for plastics processors and mold makers who supply this sector because it is an indicator of demand for plastics parts, packaging products and new molds. But for the purpose of forecasting trends in appliance production, it is useful to analyze the changes in leading indicators such as residential construction.

    As the chart indicates, housing starts have been steadily rising for the past six years, but they have yet to return to pre-recession levels. For many consumers this means that the housing market is still not healthy and reliable. Housing prices have increased over the past six years, and in some areas they have returned to pre-recession valuations. But the good feeling that consumers get when the market value of their homes is strong and rising — the feeling that economists refer to as the “wealth effect” — has not really kicked in yet.

    And if you take a close look, you will see that the rate of growth in housing starts during the summer months definitely decelerated. This shows up on the chart as a flattening of the curve. Since the trend in the appliance industry data tends to follow the trend in housing starts, it is not surprising that the appliance industry data would also exhibit a period of softness.

    The deceleration in the starts data is almost entirely attributable to the slowdown in the South. Because of long-term demographic trends, this is the region of the country that has accounted for almost all of the growth in total U.S. housing starts in recent years. This past summer the construction sector in the South was buffeted by several weather-related problems.

    But while all of the floods, tornadoes and hurricanes slowed construction activity in the near-term, these catastrophes actually generate demand for new construction in the long run. In the coming months, demand generated by demographic trends will combine with demand caused by damage from natural disasters, and the result will be a surge in housing starts.

    This demand from the South will combine with demand from the West (which also has a growing population and is recovering from some natural disasters), and the result will be another strong gain in the housing starts in 2017. The forecast is for a gain of 6 to 8 percent in the total number of houses started in the United States. The strongest growth will be in the West and the South.

    All of this will be a boon for the appliance industry. So I expect the appliance data to stay near the current level for another quarter or two, and then a trend of faster growth in output will return in 2017. After an annual gain of 2 percent this year, my forecast for total U.S. output of household appliances is to increase by 4 to 5 percent in 2017.

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