Nov. 25/Dec. 2, 2019: Volume 35, Issue 11
By Reginald Tucker
New Orleans—Despite ongoing labor shortages among truck drivers and installers alike; the negative impact of tariffs on Chinese imports; continued consolidation across the industry; and the economic uncertainty surrounding the upcoming election year, the outlook for the floor covering distribution channel remains bright.
That was the prevailing message that emerged from the North American Association of Floor Covering Distributors (NAFCD) convention, held in conjunction with the North American Building Material Distribution Association conference (NBMDA) here earlier this month.
“What you do is of paramount importance to the growth of the economy,” said Alan Beaulieu, president of ITR Economics, in his opening remarks to NAFCD attendees. “It’s about you and what you’re going to do—not about what Washington is going to do.”
Beaulieu, a return speaker to the NAFCD conference who is renown for his uncannily accurate economic forecasts, stressed the importance of keeping things in perspective despite the upcoming U.S. Presidential Election in 2020. “Whatever party is in power has little to do with the economy,” he said, citing a 2016 study showing that since President Truman there is no correlation between the party in power and economic activity. “The average rate of growth in GDP is virtually the same for both parties. I want all of you to vote in 2020—just understand that it makes no difference.”
While Beaulieu does not foresee a “big sea change on the horizon,” he warns of a softening economy in the first half of the new year. “We’re going to be heading toward two consecutive quarters of negative industrial production as we head into 2020,” he said, noting that GDP has been slowing down since September of 2018. “U.S. industrial production goes negative (-1.2%), but the downturn is not going to last for long. You need to be ready for the upturn. On the residential side, we’re already seeing an uptick. 2020 is going to be a good year for you as well as 2021.”
He cited one potential blemish, however. “In 2022, there will be a big recession that’s going to impact housing. Don’t get silly with all the money you’re going to make in 2021. My advice: buy new equipment, fleet, buildings, vacation homes, etc., because the EBIDTA will be reduced. If you’re going to sell your business, do not do it in 2021. Your earnings will get crushed.”
Citing a complex formula that looks at the relationship between key leading indicators (i.e., retail sales, purchasing managers index, single-family housing starts, J.P. Morgan Global PMI and total industrial capacity utilization among them), Beaulieu said he believes conditions are ripe for distributors and retailers to prosper over the long haul. At the same time, he advises against using the stock market as a yardstick for economic growth. “The downturn in industrial production hasn’t really caught the attention of a lot of people because the stock market is doing well,” he said. “But that’s not a reliable measurement of the health of the economy. The reality is the stock market can go up while the economy goes down, and vice versa. These are two different things.”
With all the uncertainty surrounding the economy, Beaulieu still encouraged distributors to invest while the get- ting is good. “If you need more equipment, new products, training, new facility, etc., fix that now because you’re going to need it because you’re about to get busy,” he told attendees. He also encouraged managers to find the “Bassett Hounds” in their respective organizations—those things they have been doing for a long time but haven’t been productive. “Find the things that you’re wasting time and money on and eliminate them. This also applies to people in your organization who are no longer productive. You need to adapt; otherwise, you’re part of the problem.”
Then there’s the issue of tariffs—the proverbial thorn in the side of many floor covering distributors and retailers alike. Beaulieu cited research that shows exports have been declining since February 2019. “One of the reasons is the strong U.S. dollar, but it’s also because of a soft global market and our retaliatory tariffs against China,” he explained. “The tariffs have hurt a number of industries. Some people have benefited; for others it has been painful—it depends on who you are. The bottom-line impact is it has slowed down the economy. Exports to China have dropped like a stone; imports are also going to continue to decline.”
It’s an issue affecting many distributors in the industry. “To be honest, it’s kind of a mess right now,” said Dunn Rasbury, incoming NAFCD president and director of flooring for A&M Supply, Marietta, Ga. “On the surface lower costs would appear to be a good thing. However, both me and my vendors own a good deal of material at a much higher cost. This will make pricing strategy challenging at least in the near term. Looking at it from a positive viewpoint, the lower cost basis may make the category more attractive to a broader base of consumers.”
Beaulieu advised patience in seeking a resolution. Until the two countries can agree on how to roll back the tariffs, he suggested looking at new supply chains or new products. “In America’s negotiations with the Chinese it sounds like it’s going well, but underneath there are big problems that have not been solved yet. We want access to their markets, and we’re going to put retaliatory tariffs on them to enforce that. But China is a sovereign nation, and they won’t be told how to act.”
Looking beyond the short to medium term, Beaulieu is optimistic. “I’m really excited about the next decade—it’s going to be phenomenal for everyone people who are 22-30 years old. It’s going to be the decade of the millennial.”