Home appliance data points to solid consumer support for US economy

By now you have heard that the near-term outlook for the U.S. economy depends on the confidence level and spending behavior of the American consumer. The other major components of the GDP calculations — business investment, government spending and foreign trade — are either maxed out or in a state of cyclical decline at the present time.

Consumers, on the other hand, are fully employed with rising incomes. They also have relatively low levels of household debt, which has been accrued at low interest rates. And most importantly, they account for more than two-thirds of all U.S. economic activity. The conventional wisdom is that consumers are flush and relatively content at the present time. Therefore, they will continue to raise their spending levels at a pace sufficient to offset the lack of growth in the other segments of the economy. This situation will prevail for the foreseeable future.

I don't always hold with conventional wisdom, but this time I am going along with the consensus. There is no question the rate of economic growth in this country is slowing, and the data suggests many sectors, particularly manufacturing, have been slowing for the past year or so. But the data also indicates the current economic cycle has hit a near-term bottom, and overall activity should now start to expand gradually.

A good example of this pattern is the trend in U.S. production of appliances. I admit to having a soft spot for the data from the domestic appliance industry for several reasons. First, it is a reliable indicator of consumer spending activity. If it is a good time for the appliance industry, then it is very likely a good time for everybody. Second, it represents a large end market for plastics products. Finally, and perhaps most important given the current business environment, this industry provides great insight into topics pertaining to supply chains, tariffs and foreign trade policy.

So what does the data tell us? According to the Federal Reserve's industrial production index for household appliances, the recent downtrend in U.S. appliance production hit bottom in the second quarter of this year, and it is now starting to improve.

This index posted a seasonally adjusted monthly average of 112 in the third quarter, on a scale in which 2012 is equal to 100. This was a decline of just a little more than 1 percent when compared with the same quarter in 2018, but it represented a gain of more than 2 percent when compared with the second quarter of this year.

The monthly data for total appliance output steadily declined from the middle of 2018, just about the time the graph dropped below the zero line on the chart, until the middle of this year when the graph stopped falling and then started to trend upward. The data from the third quarter of this year indicates the trend has hit a cyclical bottom and should now start to rise.

There is not enough time left in 2019 for this nascent upward trend to generate a positive annual growth rate for this year as a whole, but there will be enough momentum next year to produce a moderate gain in 2020. My forecast calls for a decline of 3 percent in total appliance production in 2019. This follows a slip of just less than 1 percent last year. For 2020, I expect a gain in the range of 2-3 percent. Such an increase is in line with the projected growth rates for the overall economy and the residential construction and real estate sectors. An increase of this magnitude next year will put the industry back to roughly the same overall level of output as in 2018.

This forecast is based on a continuation of the major macroeconomic trends that have prevailed for several years: A low unemployment rate combined with a gradual rise in household incomes, low interest rates and a moderate rise in residential construction spending. These are the trends that have supported the consumer sector for the past 10 years. Based on the evidence currently available, I see no reason for these trends not to prevail for at least another year.

The data on housing starts and existing home sales were solid in the third quarter. Both of these sectors are good leading indicators of demand for new appliances, but the trends in both sectors remain constrained by supply-related issues. Homebuilders continue to report difficulties in finding enough skilled laborers to meet current demand for new homes, and a shortage of listings of single-family houses is weighing down the growth rate for existing homes.

Total listings hovered at just a little more than 1.7 million units throughout 2019. History shows this is about as low as this number ever gets. The fact that mortgage rates are also near historic lows means home prices will start to rise. A rapid appreciation in home prices is perhaps the biggest, near-term threat to the residential real estate and construction sectors, so this is something suppliers to the appliance industry should monitor.

My expectation is it will remain a seller's market next year, but rising wages and confidence levels for homebuyers will still be enough to generate a moderate increase in both existing home sales and housing starts. This in turn will create enough demand for new household appliances to push the production data moderately higher.