Appliance market sluggish but sales could pick up​

In contrast to some other segments of the consumer goods sector this year, the U.S. appliance industry has managed to post only pedestrian growth of 1 percent so far in 2018. I had higher expectations for appliance manufacturers at the start of this year, but with half the year already in the books, I confess to being tempted to lower my annual outlook. At the beginning of this year, my forecast for 2018 called for growth of 4 percent in total output of domestically produced appliances.

The sluggish first-half performance notwithstanding, there is mounting evidence that demand for appliances will accelerate moderately in the second half of the year. This means that demand for plastics materials, molds and machinery needed to make appliance parts should also increase moderately in the third and fourth quarters.

I have decided to stick with my original forecast a bit longer because the critical leading indicators for this industry — housing starts and consumer spending for durable goods — are starting to show some strength. I'll admit that the downside risks to my forecast have increased, but I still expect stronger levels of business activity for appliance producers.

The graph of the rate of change in the appliance industry data shows that production levels have been decelerating for the past two years. This lackluster performance is corroborated by the data that measures retail sales at appliance stores. According to the Census Bureau, total receipts at appliance stores are up just 2 percent so far in 2018. By comparison, total sales for the entire retail sector are up more than 5 percent, and sales at furniture stores are also up more than 5 percent.

I would have expected better demand for appliances given the overall economic conditions that have prevailed during the past few months. An economic environment in which there are rising household income levels, low interest rates and steady gains in consumer spending has historically generated stronger demand for appliances.

But this industry was hit hard by the last recession. And even after nine years of expansion in the U.S. economy, the appliance segment is far from fully recovered. In fact, the recovery in U.S. production levels has only gotten back about half of what it lost during the recession. Obviously, the total capacity of this industry has substantially diminished in recent years, and only time will tell if it is ever fully recovered.

One thing that would certainly help such a recovery is stronger growth in the residential construction and real estate sectors. And here there is some good news so far this year.

You can see on the chart that there is strong historical relationship between the pace of growth in U.S. housing starts and that of domestic appliance production. The trend in the starts data is more volatile than the trend in the appliance data, but most of the time the lines for these two series move in the same direction. And until the past few months, the rate of growth in the number of housing starts was also in a two-year trend of deceleration.

But if you look closely at the graph, you can see that the housing starts data is accelerating in 2018. For the year to date, total starts are up 11 percent when compared with the same period of a year ago. I expect this pace of growth to moderate during the second half of the year, but my forecast still calls for a robust gain of 8 percent in the total number of new houses started.

The appliance industry will also continue to enjoy a tailwind from the persistent strength in the residential real estate segment. The data for existing home sales is down moderately so far in 2018, but this is primarily due to a lack of inventory. Overall market conditions are strong. Data that measures both inventory levels and time on the market is at cyclical low points, while median home prices are at an all-time high.

All these indicators lead one to think there will be solid demand for appliances in the near-term, but there is one more factor that merits closer attention in the coming months. You will recall that the Trump administration imposed a steep tariff on imported washing machines earlier this year. These tariffs were welcome news for U.S. manufacturers such as Whirlpool.

It is still too early to determine how this will impact the U.S. production data, but the effects of this tariff can already be seen in the prices consumers pay for washing machines. According to the latest data from Bureau of Labor Statistics, the consumer price index for laundry equipment is up 87 percent over the past three months on an annualized basis.

The idea here is that by raising the price of low-cost imports from China and South Korea, you make American-made appliances more attractive. That should push U.S. production levels higher. I will wait for more data to come in before I render an opinion as to whether this strategy is working. As President Donald Trump is fond of saying, "We'll see what happens."