“We are not in a recession, and we’re not headed for a recession. There is a lot of opportunity out there.” That message was at the heart of a data-laden presentation delivered by Lauren Saidel-Baker of ITR Economics during her keynote speech at the North American Association of Floor Covering Distributors (NAFCD) and North American Building Material Distribution Association convention held in New Orleans late last fall.
“I read a lot of headlines asking, ‘Is a recession coming?’ But if you just look at the U.S. gross domestic product track, you’ll notice GDP is actually rising,” Saidel-Baker told attendees. “This is not a recession. In fact, GDP today is higher than it has ever been in our country’s history. However, what is changing is the pace of that growth. We’re still in positive territory, but at a much slower pace than we have seen, especially in this bounce back from the COVID-19 pandemic.”
While Saidel-Baker noted that some industries are in “outright decline” and that others appear to certainly be headed there, the vast majority of the key market sectors of importance to the industry are projected to show growth in 2025—certainly in the latter half of the year. “We do have a few good years ahead of us despite all of that uncertainty,” she stated.
Saidel-Baker covered a host of topics in her presentation, which was sponsored by Anchor Peabody.
Impact of the election
ITR Economics CEO Brian Beaulieu often refers to presidential elections as the “silly season.” In the heat of intense campaigning, he said, candidates make all sorts of promises and proclamations with no guarantee that they’ll come through in the end. “Candidates just say whatever they want to say and it doesn’t matter whether it’s true or not,” he said. It’s more important, he noted, to follow the historical data.
To that end, ITR Economics presenters often highlight charts showing GDP growth during past administrations—beginning with Eisenhower up to present day—in a move to demonstrate that a particular president or political party has little bearing on the performance of the U.S. economy. Saidel-Baker continued in that tradition in her talk.
“At ITR we are nonpartisan,” she told attendees. “We are apolitical, and we historically just don’t find that the economy has a favorite political party. We have run these numbers every which way we can think of—i.e., who’s in the presidency, who controls the house in Congress. Historically, there are a couple of recessions that align with an election year, but GDP generally doesn’t respond to elections. If we go back over history, and we have run the numbers related to GDP growth, there’s not a statistically significant difference between Republicans and Democrats.”
The more important takeaway for the flooring industry, according to Saidel-Baker, is to focus on what you can control and make decisions based on sound economic principles. “Warren Buffett said: ‘Red or Blue, I can still make green,’ and I think that’s the best way to take our political reality,” she told attendees. “We will not be changing our forecast based on the election results. Just keep planning for your business.”
America’s position on the world stage
In her presentations, Saidel-Baker often cites anecdotal surveys that uncover grave misperceptions of where the United States stands on the global stage in terms of the economic power hierarchy. Despite the abundant information available on global economies, she said many misperceptions prevail. As illustrated in a rhetorical question she posed to attendees: “If I were to ask you which is the biggest economy, or which country contributes the most to global GDP, some folks might say, ‘Oh, it’s China.’ In truth, China’s actually only about 18% of the global economy. The U.S. is still the largest economy on a GDP basis. America accounts for more than a quarter of global GDP.”
While China’s GDP growth is still impressive—hovering around the 5%-6% mark—ITR said it’s important to put those numbers in the proper context. “Looking at things on a global scale, we hear so much about China—but that economic miracle at this point is more or less played out,” she stated. “Historically, China has been a much higher flyer than the United States. Even today, 5% growth in China’s GDP compared to the U.S.—that would be fantastic. We’d kill for that. But for China, this is nothing to write home about.”
Looking at data from China’s Bureau of Statistics, you’re just not seeing that double-digit growth environment anymore. “The data show a precipitous decline in China that has not come back,” she said. It’s not just patriotism and nationalism fueling this sentiment. Statistics as well as movement of investment dollars show the place that other countries look to for return on their manufacturing investments is right here in the United States. “We have such investment happening here in the United States, especially in manufacturing,” Saidel-Baker said. “It really is a good place to do business.”
Inflation: A global phenomenon
The bad news about inflation is it’s a global phenomenon that still persists. Whether it’s the fallout of aggressive fiscal spending that was necessary to sustain the U.S. economy at the height of the pandemic, or the ongoing aftershocks of conflicts around the world and the subsequent impact on global supply chains, the resulting inflation has been extremely challenging to tame.
“We have just heard so much about inflation in recent quarters—we feel it, right?” Saidel-Baker stated. “As consumers, when we go to the grocery store, we see those prices on the shelves. That is so top of mind for consumers and for businesses—inflation really matters. We are so constantly aware of prices in a way that we just haven’t been for more than a decade. Moreover, inflation is cumulative. This is on top of all that inflation that we absorbed back in 2021 and 2022.”
Now for the good news: “Looking at the big picture, growth in inflation is slowing,” Saidel -Baker said. “We’re in a disinflationary environment today in the U.S. What that means is that our inflation percentage, as we quote it, is positive, but it’s coming down. Our peak in the consumer price index in the United States was around 9%. That is huge. That was all about liquidity in our market, the supply chain issues, the wake of the pandemic, etc—all that had a strong impact on pricing.”
This “disinflation,” Saidel-Baker stressed, is not to be confused with the term “deflation.” Under deflation, she noted, we would see a decline in pricing levels below the zero line. “That is not where we are and, honestly, that’s not where we’re headed, either,” she stressed. “A lot of fundamental factors are going to keep inflation positive on a consumer price basis.”
ITR Economics will be keeping a close eye on future moves by the Federal Reserve to get inflation back to the elusive 2% target rate. Even prior to the election, the firm predicted that inflation will actually rise this year. And with inflation still the primary driver when setting interest rate policy, the Fed is expected to play an outsize role stabilizing the economy in both the short and long term.
“Everyone thinks the Fed’s job is to keep either stock prices high or asset prices elevated or to keep GDP growth moving forward,” Saidel-Baker stated. “But that’s not what they’re here to do. The Fed has a dual mandate: stabilize prices—hence the 2% inflation target—and achieve full employment. Everything they’re doing with interest rates is to drive those two forces. They haven’t reached their 2% target yet, but we’re headed enough in that direction that they’re confident and comfortable to start cutting rates.”
Challenges of hiring and recruiting
While some aspects of the economy have improved since the pandemic—i.e., leisure travel, entertainment, etc.—constraints in hiring across a variety of sectors remains an issue for many employers. While the Fed has been mindful of the impact of rate adjustments on wage growth and job creation, it knows it cannot unilaterally solve the labor pool problem.
“If there is one constraint businesses are really running into today it’s hiring,” Saidel-Baker said. “This has been a problem for years, but it’s starting to loosen up. One of the main reasons why the Fed felt comfortable in cutting rates is it’s less worried about inflation and more about the labor market—so it’s focus is shifting. The Fed needed to begin cutting rates because it doesn’t want to see further deterioration in the labor market.”
That’s only half the battle, Saidel-Baker noted. Truth be told, there are indeed positions out there that need filling. It’s largely a question of skills. “I’m not worried about the number of people that can’t find jobs; I’m worried about the number of jobs that can’t find people,” she declared. “At the low point, we had about two job openings for every one unemployed worker. This unemployed persons per job opening was at about 50%. Today, we have about 92% of a worker for every posted job out there.”
Some employment sectors miscalculated their workforce needs at the height of the pandemic and are now readjusting. Take tech, for instance. “They over-hired at the peak, so they’re now right-sizing and we’re continuing to see layoffs in that sector,” Saidel-Baker noted. “But in construction and manufacturing, this is still a tight market. We’re still having to compete for these workers, and I don’t see any glut of new workers coming onto the scene.”
Bottom line: There’s still lower labor force participation even though there are fewer folks sitting on the sidelines. “There’s no cavalry coming to the rescue,” she said. “That means that the labor market is still tight by historical standards. Not as tight as we were a year ago, but still tight compared to long-term history.”
ITR Economics continues to see a labor shortage in key sectors such as construction. It’s this shortage of workers, the firm notes, that’s contributing to project delays. The silver lining is it’s a segment that’s seeing the quickest rise in terms of job openings. All this puts more focus on the issue of recruiting. “We’ve seen increasing interest in the trades,” Saidel-Baker noted, adding that not everyone has to go to a four-year college anymore. “Electricians, carpenters, etc., can earn high wages here, high hourly pay. We’re seeing the demand.”
However, there are two sides to every coin. And the other side of this tight labor market coin, according to ITR Economics, are rising wages. This puts a margin squeeze on business. “As much as consumers like to complain, overall, our income is rising at a faster clip than inflation,” Saidel-Baker said. “Our purchasing power today is higher than it’s ever been in history. While there are pockets of very real concern, the net consumer, our median consumer, is actually in better shape today compared to even a few years ago.”
Construction trends
Much has been made of the impact of higher interest rates on both construction planning and spending in the U.S. Rightly so, given the level of financing required to sustain both residential and commercial building construction in America. With three Fed interest rate drops in the past four months alone, greater access to financing can only fuel further construction or resume projects that were temporarily put on hold when borrowing and material costs increased in recent years.
“Anytime we get some decline in interest rates, that’s going to be stimulative,” Saidel-Baker said. “Projects make more sense when the cost of capital is lower.”
Historically speaking, we’re still seeing tighter lending standards in spite of the recent decreases in interest rates. But the mere fact that rates are beginning to trend in the right direction could usher in an environment where builders feel more comfortable borrowing. “The good news today is that we’re loosening standards again,” Saidel-Baker added. “We won’t be there today in real time, but coming down the line, more of these projects will see lower interest rates by early 2025. That’s going to cause a little bit of stimulation in the market.”
But what happens if we don’t see further reductions in interest rates or, worse, an uptick in 2025? “We’ll have about a year before the tightening of bank standards really impacts those new projects that are being started,” she warned.
With respect to the residential building market, ITR Economics cited positive movement over the past 12-14 months while acknowledging persistent headwinds. “We started just over 1 million units [annualized] in the past 12 months; that’s actually a pretty healthy run rate,” Saidel-Baker said. “We’ve really been under-building since 2008. We ran into a little bit of a headwind in 2022, where we saw that rate of change go negative. This was driven entirely by affordability, which caused decline in existing home sales. That, in turn, disincentivized new home construction.”
While we’re now on the “right side of things” in terms of a projected growth track, affordability remains a challenge, especially in markets like the Northeast and on the West Coast. ““We’re not back to where we had been, and so that’s going to throw a wet blanket on growth going forward,” she said.
End-use market activity
While headwinds stand to impact segments like retail sales, movement in other indices is encouraging, according to ITR. Specifically, the residential re-modeling sector. “It’s not like we were on fire, but our remodeling index is starting to tick back up,” Saidel-Baker noted. “It’s too soon to say that this indicator is going to support things in the very near term, but likely by the medium term. The leading indicators are in place, and a recovery just on the horizon.”
One sector that stands to potentially benefit from a slow recovery in new home construction and existing home sales, according to ITR Economics, is the existing home sales sector. “Anytime we have low housing stock along with affordability constraints, you generally see more folks either renting condos, townhouses or apartments. The current decline we’re seeing in multi-unit housing start is rounding the corner. This is where we’ll see a little bit more sustainable growth.”
But what about the specified commercial contract market? How’s that segment expected to fair in the medium to long term? ITR Economics shows non-residential growth up nearly 9% from year-ago levels, but it’s down from double-digit growth in the sector. “This is the kind of growth that’s really just hard to keep up with,” Saidel-Baker said. “I’m sure many of you have kept very busy working those longer hours, but you’re probably already starting to feel that slowing in commercial. Again, still positive but slowing growth.”
Another factor that bodes well for the commercial construction market and project planning is the bellwether architectural buildings index. While there’s varying regional activity, by and large the sentiment among architectural firms—companies that specify building materials, flooring products, etc—is trending positive. “It’s kind of a mixed bag here, but what I’m really taking a good signal from is the inquiries index. Inquiries are leading indicators to starts, making the inquiry of the architecture firm for you. The fact that it’s above 50 shows interest and growing demand.”
Within the commercial market, office construction is off from pre-pandemic levels, according to ITR Economics research. However, once data centers are removed from the mix, the growth rates seem more normalized. (These power-hungry data centers require much more space than traditional offices.) “While office construction is down, the bottom is not falling out from under this market,” Saidel-Baker said. “It is contracting, but if you look back it’s akin to roughly the 2019 level of construction. In addition, there is an increased return-to-work mandates. Not everyone who’s remote or hybrid is actually fully remote. Many of them still do be in a physical seat.”
Growth rates are coming back down to earth with respect to the education sector. ITR Economics expects 2025 spending in this segment will be about 2% below 2024 levels before inching up again in 2026. “If you are in this market, please be very aware that higher education spending (i.e., colleges and universities) is absolutely outperforming primary and secondary school construction,” Saidel-Baker said.
Hospitals, which have seen an uptick in spending that accelerated during the pandemic years, is expected to cool somewhat in 2025. However, ITR expects the decline will be relatively mild, down just 0.3%. On the whole, ITR expects residential will outperform non-residential spending over the short to medium-long term. “If you have the ability to pivot, that is where the opportunity really should be focused,” she told attendees. “That is where your efforts will be more rewarding in 2025. By 2026 we see non-residential kicking back up.”
How long will the rebound last? “We’re forecasting a lot of growth, not just in ’25 and ’26, but beyond that. The next five years are really going to be a good time.”
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