Will the new tax reform law extend the cycle of economic growth? Strategic Exchange - Jan 2018

By Kemp Harr

So, we now have a reformed tax law, and it will have an impact on the flooring business. Let’s get to that in a minute. But first, we need to compare this new tax law with Reagan’s tax reform back in 1986. The most noteworthy difference is the lack of bipartisanship. Thirty-one years ago, our nation took two years to work through the tax reform process, and it passed with yea votes from both parties. This is in stark contrast to what happened last month, where there were zero yea votes from the other side of the aisle.

We saw a similar situation back in 2010 when the Affordable Care Act (Obamacare) was passed. The biggest issue with this lopsided approach to legislation, as we’ve seen with the ACA law, is when there is no compromise, the opposing side immediately sets their agenda to defeat or repeal the law. It is almost laughable for analysts to project the ten-year ramifications of a law in today’s political environment, because the opposition will surely prevail in changing it long before a decade passes.

The biggest salt in the wound of this current tax reform legislation is SALT-state and local taxes. Restricting the ability to deduct these taxes disproportionately impacts the earners in left-leaning states, and this will be enough of a catalyst to ensure a high level of energy toward repealing and reforming this new tax law. These are interesting times.

So, let’s focus for a minute on what this new tax law might mean to us in the flooring business. Do we sell more flooring during times of economic prosperity? One could assume the answer to that question is yes. But will this prosperity be felt across all income levels? Certainly, that is a big part of the debate. And what about this $3 trillion of overseas profits that can be repatriated now that the tax has been lowered to 14%? If that happens, what benefit, if any, will we feel? We may have to wait and see, but the consensus among the executives I’ve polled is that a tax cut of any magnitude is good, because more cash will be available to spend in other areas. It will be hard for us to sort out the truth from the rhetoric as the impact from this law unfolds-especially since it doesn’t have the support of both parties in Washington.

As we enter the ninth year of recovery since the last recession, we all have to wonder when this cycle of growth will end. To better understand where the U.S. economy stands today, let me share with you an excerpt from our economist Santo Torcivia’s most recent Market Monitor Report:

SANTO TORICIVIA’S ECONOMIC OUTLOOK
As hard as it may be in these politically contentious and polarizing times, if we simply focus on the facts, we should agree the economy is doing well, and things are in place for 2018 to be a slightly better year.

The facts that support this outlook are as follows:
• The Index of Leading Economic Indicators has risen faster over the first three quarters of this year than any time in the last two years, and consumer confidence is very high;
• Real GDP growth has exceeded expectations the last two quarters of this year, increasing 3.0% in Q2 and 3.2% in Q3 versus the prior quarter, despite disruptions by two major hurricanes;
• Housing starts, household growth, consumer spending, consumer income and employment all have exhibited strong growth this year; and
• Tax cuts, once enacted, should increase domestic investments and consumer spending in 2018, as should hurricane rebuilding efforts during next year.
Factors exerting a positive force on the U.S. economy are and will continue to be as follows:
• Consumer spending represents two thirds of the U.S. economy; real spending is growing 2.7% in 2017 and will continue to grow above 2% in 2018 through 2023 as tax cuts, wage growth, and employment gains (especially in manufacturing) enhance consumer spending;
• Employment growth is up 1.6 million jobs (+1.3%) since year-end 2016 with manufacturing creating 140,000 jobs (+1.1%) over the same period; employment growth is gaining from increased investment in on-shoring, economic expansion, and pent-up hiring demand;
• Housing starts are growing 1.4% in 2017 to 1.2 million units, and 2018 should see an increase of 9.2% to 1.3 million units, with starts again favoring single-family units. Housing growth is returning to the traditional 1.4 million units per year, which equates to annual household growth in the U.S.;
• Existing home sales-buoyed by continued affordable interest rates, rising employment and wage increases, and rising home prices-will continue to turn over at above-average rates of about 4.9 million units annually this year and throughout the next five years;
• Commercial construction (inflation adjusted value of non-residential building starts) is increased 1.1% in 2017 versus the prior year and is forecasted to grow only 2.9% in 2018, before rebounding in 2019; following this near-term slowdown, the strongest growth in 2018 will be in offices, education, amusement and recreation, and transportation buildings;
• Government spending in the near-term is expected to rise, as will the deficit, based on the significant increase in proposed spending by the president for infrastructure, defense, border security and storm relief; this type of spending will produce a stimulus to economic growth and fund storm relief;
• Reduced government regulations by the Trump Administration, cancelling many of the Obama Administration’s executive orders regarding energy, manufacturing, immigration and other areas;
• Inflation over the next five years will rise slightly but remain manageable at less than 3.0%; and,
• The final numbers for 2017 are expected to show accelerated global growth of 3.4%, the result of lower energy prices and increasing world trade.

Issues that will restrain economic growth in the U.S. in the near-term and could pose a threat to continued economic growth are as follows:
• The threat of global terrorism;
• The lack of healthcare reform;
• Global trade disruptions in reaction to changes in tariffs and trade agreements;
• Rising interest rates;
• Rising energy costs; and,
• A weakened U.S. dollar due to the huge government deficit.

SHAW LAUNCHES ANDERSON TUFTEX BRAND TARGETING A SPECIFC TYPE OF CONSUMER
It’s no secret that a few of Shaw Industries’ top executives are retiring, and many of the roles-especially on the residential sector-are changing. It was announced over two years ago that Tim Baucom was taking the lead role in driving Shaw’s residential business. Since that time, he has been building out his team, and it now appears that Shaw has aligned its salesforce and marketing efforts behind three core retail brands: Shaw Floors, Coretec and the new Anderson Tuftex.

You may recall that both Anderson and Tuftex have a heritage of their own in the flooring business. Tuftex is a West Coast carpet mill founded by Leo Cook in 1969. It was acquired by Queen in 1994 and became part of Shaw in 1998. Anderson Hardwood Floors was founded by Andy Anderson in North Carolina in 1946. Shaw bought Anderson in 2007. It is important to mention this because many of the products sold under this new brand will be manufactured at these legacy facilities.

Prior to launching this brand, Tim pulled together a group of four leaders-headed by Carrie Edwards Isaac-who have been working together for the past nine months to research the market, develop a strategic plan and brand position, train the salesforce, develop the right products and pull together a merchandising plan.

This new brand, which launches this month, will be sold into the marketplace by the former Tuftex sales force. As the ad in the opening pages of this issue reveal, the tagline for the brand is “Designed with Intention. Crafted with care.” The website that communicates the consumer promise for this brand goes live on January 8.

The hardwood and carpet products in the collection have been aesthetically designed to coordinate with each other by product designers who are focused solely on this brand. The products sold under this brand will not be available through Shaw Floors, and the price points are different. Shaw Floors pricing is low to middle price points, and Anderson Tuftex is middle to high-end. On the hardwood side, in addition to engineered construction, the brand also offers three solid collections. With carpet, the fiber systems sold under this brand are a mix of Anso and Stainmaster.

From a merchandising standpoint, the carpet will be sold on existing fixtures with new signage; the hardwood will be sold on new displays that will ship out in March.

A ton of time and research went into the positioning of this brand. Refreshingly, it is not trying to be all things to all people, but is specifically targeted to one profile type of consumer, which the brand team calls the “passionate pursuer.” The brand team worked with two separate firms, Ideo and U-30, to conduct both quantitative and qualitative research on consumers that fit this profile to refine their trigger points in the flooring selection process.

One of the more revealing aspects of the research is how different the consumers’ perceptions and trigger points are versus how most of the trade sees things. It will be interesting to see if Shaw can help dealers close more sales by sharing their findings on the five different types of consumers, what makes them different, and how they want to be sold.

One thing I learned by listening to the Anderson/Tuftex presentation: put a price tag on the product. Otherwise, the consumer thinks you are changing your price based on what she’s wearing, the car she’s driving or the part of town she lives in.

If you have any comments about this month’s column, you can email me at kemp@floorfocus.com.

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