Strategic Exchange: Strong housing market provides hope for continued economic growth – Nov 2019

By Kemp Harr

If the pace of business we’re seeing in October continues, we might actually have a strong fourth quarter with flooring sales. Some of you may have noticed that Mohawk stock jumped up almost 11% after its lackluster third quarter performance was announced. This optimism in the market was probably more of a signal by the equity market that conditions had bottomed out than any single revelation of greatness from Mohawk’s quarter-ending remarks. Interface’s stock value also climbed that same day by over 8%.

Some of the enthusiasm in the market could be stemming from the forecasts within the housing sector. With unemployment at a 50-year low, mortgage rates a point below where they were last year and worker wages on the rise, the demand for housing is increasing. In fact, sales of new homes in September were 15.5% higher than the same month last year.

It is also worth noting that the Architecture Billings Index for September rose to 49.7-just a hair under 50. Geographically, the majority of the country showed growth with the exception of the Northeast. And from a segment perspective, housing and mixed practice were strong, but institutional and industrial were soft. During September, both the new projects inquiries and design contracts were positive with scores of 59 and 54.4, respectively.

Consumer sentiment ticked up 2.5% in October to 95.5, which the survey’s chief economist, Richard Curtin, said is quite favorable in light of the squabbling in Washington, D.C. and the economic drag from the tariffs.

Speaking of Chinese tariffs, hopefully you noticed that the threatened escalation from 25% to 30% for the $250 billion of goods that includes floorcovering was postponed indefinitely. There is also a chance that rigid core LVT could get an exemption based in the argument that there is not enough production in the rest of the world to satisfy the global demand. We’ll keep you informed.

FEI GROUP ACTIVITY
I was invited to spend a couple of days at the FEI Group’s (formerly FloorExpo) annual meeting in mid-October. This group of flooring contractors, focused on the single family and multifamily builder and apartment replacement market, are fighting margin erosion but are otherwise healthy and growing. As usual, this meeting was more about sharpening skillsets than issues related to floorcovering. One key lesson to the group was that they’d find greater success if they started their day with an attitude of gratitude.

It’s worth noting, as we look at the Top 100 Retail listing in this issue, that one of FEI Group’s members, Artisan Design Group, is growing exponentially with the help of private equity money. Last year, this member was number eight on the list with $400 million in sales, and this year, the group is number five on the list with $860 million in sales. The firm is growing by buying up the other members one by one. At this point, everybody involved seems to be happy because the companies that have joined the group are now part of a bigger entity, they’ve maintained their local brand presence, and the owners have been paid for part of the equity they’ve built over the years in their business.

We are seeing similar consolidation within commercial contractors and among distributors as well. Some are being funded by private equity and others are using more traditional loans. It is too soon to tell how all this will shake out, but there is no denying that these bigger entities have more buying power and could even start sourcing their own products. The key to the success of these bigger firms is how they staff the local branches when the founding entrepreneurs ride off into the sunset.

CALIFORNIA AB729
Last month, California signed into law AB729, which revises the state’s carpet stewardship program in a few significant ways. Most prominently, the new law mandates the development of differential assessments that increase fees on carpet types that bring a higher financial burden to the stewardship plan. The idea is to increase the assessment on carpet types that are more challenging to recycle.

The target of these differential assessments is mostly PET, which accounts for 60% of carpet recycled in California and has until recently had virtually no end-use markets for the post-consumer recycled material. So as things stand now, the beneficiaries of this differential assessment, in terms of manufacturers, are mills that only make nylon carpet.

This new law comes at a pivotal moment in carpet recycling in California, with a range of technologies on the verge of coming online to create high-value streams of PET reclaimed from carpet, along with the development of attractive end-use markets. And all of these developments derive from grants and subsidies funded from the carpet assessments managed by CARE (Carpet America Recovery Effort). If these technologies and end-use markets deliver on their promises, post-consumer PET carpet could become a high-value recycled material. So it is conceivable that by the time differential assessments are enacted, it will be nylon that faces higher assessments. Stay tuned!

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

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