Baby boomers, carpet share, U.S. investments, and wool

Strategic Exchange

By Kemp Harr

The second quarter GDP number is out and, as many economists predicted, the estimated 4% growth is in huge contrast to the revised negative 2.1% number we saw for the first quarter. So this is good news and confirms that the debilitating winter weather—a factor beyond our control—was most likely the biggest contributor to the drastic swing from the positive reading for the fourth quarter (+2.6%) to the ups and downs we’ve experienced this year. 

So if you couple this positive GDP news with 6.1% unemployment, the highest consumer confidence reading since 2007, the best auto sales since July of 2006 at nearly 17 million units, and the lowest gasoline prices in four years at about $3.50 per gallon, one would think that everything is aligned for robust floorcovering sales.

But when I attended the summer Carpet One and Flooring America convention in early August, I learned that the nationwide pace of flooring sales is still tepid and in many cases softer than the pace we experienced a year ago. Naturally, there were pockets of growth in areas where the economy has been bolstered by energy exploration, recovering real estate, and a resurgence of manufacturing but, by and large, sales are softer than anticipated.

There are several economic theories on why the housing market and other big-ticket items are slow to kick in to a faster rate of growth—many of which are generational or age oriented. 

THE BABY BOOM GENERATION IS NO LONGER IN THE LEAD
For years, the large mass of baby boomers (born between 1946 and 1964), which makes up about 28% of the total U.S. population, has been the leading influence on multiple factors that influence the economy. During that 19-year period, the fertility rate in the U.S. was consistently above 3%, peaking in 1957 at 3.71%. It fell below 3% in 1964 and has never reached that level again—thanks in part to the advent of the birth control pill. 

So for over 30 years, this wide surge of population moved along the timeline. According to census data, the largest age group in 1973 was 15 years old, ten years later in 1983 the largest age group was 24, in 1993 it was 33, and in 2003 it was 43. Last year, however, the leading age group by population fell down to 23. So this mass of humanity that has out-numbered all other age groups is losing its leadership within the workforce to the Millennials. In fact, last year the first baby boomer reached the revised official U.S. retirement age of 67. 

This younger age group that now forms the most populous group is part of the Gen Y or Millennial generation, born between 1980 and 2002. While there are no hard and fast rules, many social science experts will tell you that the Millennial generation has different priorities. They attend school longer and enter the workforce at a later age. And at this stage of their life, they are less likely to settle down, get married, buy a home, or have children. Many are disenchanted with the level of debt this country has amassed in the last six years, and many of them realize that matters are only going to get worse as more and more of this massive boomer population seeks retirement support from the Social Security system and healthcare support from Medicare.

To make matters worse, these Millennials are borrowing unprecedented amounts of money in the form of student loans, so they’re saddled with an average student debt load of over $25,000. According to the Consumer Financial Protection Bureau, Americans owe $1.4 trillion on school loans, 67% of which is owed by people under 40. 

Not only is this group a little older to settle down, but many of them are also choosing to rent versus buy when they finally do graduate or leave their parents’ home. This behavioral pattern is part of the strategy that motivated the Blackstone Group to invest $8 billion in the last two years to buy 43,000 homes at distressed pricing and turn them into rental properties. Blackstone’s plan is to profit from this generation’s propensity to rent. The investment firm’s strategy is to generate rental income until it can sell the homes for a profit.

The elevated student loan issue will prolong this trend to rent versus own, since most mortgage lenders want to see a clean balance sheet before they are willing to approve a first mortgage. Many in this age category also see home ownership as a restriction on freedom. Being geographically unsaddled allows these young professionals to move around and focus on pursuing the career opportunities that provide the highest earning potential.

All this doesn’t help our industry, since renters usually accept whatever interior finish the landlord provides, while homeowners are more likely to upgrade. So this takes an emphasis off of flooring upgrades that exist when an owner inhabits a property.

And from a consumption standpoint, since this generation is technology-dependent, much of their disposable income goes toward gadgets that they use to buy products over the Internet. And according to Jason Dorsey, a generational speaker who spoke on this topic at the Carpet One meeting early this month, they prefer texting to any form of communication that requires eye contact. They also prefer to communicate with pictures and video and would rather read bulleted text than sentences in paragraph form.

MASS RETIREMENTS ARE STUNTING ECONOMIC GROWTH
A second age related hit that the economy is taking relates to the wide number of well-paid people who are beginning to retire en masse. In 2007, 66% of Americans either had a job or were actively seeking work. Today, that number is 62.8% – the lowest level since 1977. Not all of these people have retired, but it is one of the biggest contributing factors. According to Pew Research, 10,000 baby boomers will turn 65 every day for the next 16 years. In fact, by the time all the baby boomers have reached 65 in 2030, 18% of the population will be over 65. Today, that number is 14%. Granted, many boomers will continue to work, but the point is that a large portion of the population is getting to that age where they dial back and start to downsize. This most likely won’t bode well for floorcovering sales.

IMPACT OF INCOME INEQUALITY ON THE ECONOMY
One final phenomenon that’s hurting this post-recession economy is income inequality. In early August, Standard and Poor’s released a study that said “extreme income inequality” serves as a drag on long-run economic growth. The study referenced a 2013 Congressional Budget Office report showing that after-tax average income soared 15.1% for the top 1% from 2009 to 2010 but grew less than 1% for the bottom 90% over the same time period. While this was right in the middle of the last recession, which may not be a good time to take a read, we’re all seeing an era where the best paying jobs require higher skill sets. 

In the study, S&P recommends against “extreme policy measures” like taxing the rich and spreading the wealth through social programs. Instead, it suggested that a better solution would be to raise the education levels of workers, because highly trained workers earn more. It concluded that boosting the income levels of middle and lower-earning Americans through education would add to their purchasing power and lift the entire economy.

CONTINUED U.S. INVESTMENTS IN FLOORCOVERING
Those of you who follow the news on FloorDaily have no doubt heard about the two recent announcements by foreign flooring companies that are investing to expand in Cartersville, Georgia. The biggest is Beaulieu International Group (BIG), which has committed to spend $200 million to build a campus-type headquarters that will include a new cushion sheet vinyl plant. This company’s name can easily be confused with Beaulieu of America, but they have been two separate companies since 1978, although both companies are owned by heirs of Roger DeClerck. the Belgian industrialist who started the original company in 1959. 

BIG’s plan, according to CEO Geert Roelens, is not to compete with the products that Beaulieu of America sells (carpet and LVT) but to enter the market initially with sheet vinyl and then with fibers for hygiene products like baby wipes and diapers. When finished, this campus will employ 350 skilled workers. BIG already has a presence in the U.S. with its polypropylene factory in Louisiana called Pinnacle Polymers.

A second recently announced floorcovering investment for Cartersville comes from Surya, which has decided to invest $30 million on a corporate office and distribution center. According to Surya, the company plans to build a one million square foot distribution facility and a 53,000 square foot office. This expansion (Surya already has one facility in Calhoun, Georgia) will create 200 new jobs over the next few years. Surya is an India-based supplier of area rugs and other soft goods for the home furnishings market. Surya got its start selling imported textiles to Macy’s department store in 1976.

CARPET CONTINUES TO LOSE SHARE
Another nugget of information that I picked up at the Carpet One/Flooring America meeting earlier this month relates to carpet’s continued loss of popularity in the residential retail sector versus the new hard surface alternatives. While unquantifiable at this point, almost everyone I spoke with talked of the rising interest among consumers for resilient, hardwood and ceramic tile flooring. Much of this is attributed to visual developments in the resilient category and the competitively priced (and thinner) engineered hardwood products that have been developed in the last few years. Ceramic tile that looks like distressed wood is also very popular today.

It was also interesting to note that sales of ultra-soft carpet are not as robust as many carpet producers anticipated. Soft carpet is still very popular but the styles that are selling best aren’t the ones that pushed the development envelope down to 4 denier per filament that also show footprints the worst. People in the industry are now starting to remember why Marglen’s trackless textured carpet was so popular.

THE PRINCE OF WALES AND WOOL
I’m always amused to see how giddy the Brits are about their royalty, but at the same time I do find it interesting that England’s heir to the throne takes a special interest in the success of the wool market. In June I was invited to attend an event that Prince Charles hosted to mark the five-year anniversary of his Campaign for Wool. This initiative was started to help sheep farmers and the wider wool industry by educating consumers on the benefits of buying natural products instead of synthetic substitutes. 

In the five years since he launched this campaign, sheep numbers in Britain and Australia have picked up after years of continuous decline, and the price of wool has tripled, thanks to an increase in demand.

NeoCon got in the way of me making the trip but I understand that Prince Charles, who is now 65, dug a hole in his garden and buried a wool sweater, all while wearing a wool suit and tie. The plan is to dig the remains up in October to prove that wool degrades while synthetic materials fester for decades. 

I must admit, by the way, that I do have wool carpet in my home office and it is one of the coziest rooms in the house.

Related Topics:Carpet One, Surya, Beaulieu International Group