Strategic Exchange: The trade war, the economy and the future of NeoCon - July 2019
By Kemp Harr
We seem to be getting mixed signals on where the economy and the flooring business are headed from a growth perspective. One minute, we’re learning that the S&P 500 has reached a new record high, and the next minute we’re hearing the manufacturing data is softening in the U.S., the Eurozone and China. Some folks are predicting a recession at the end of 2019, and others say it’s just going to be a slowdown.
When you look at the big picture, the last ten years have provided moderate but steady growth. The last recession was painful. In the 18-month period from December 2007 to June 2009, Americans lost $7 trillion worth of assets in real estate and stock portfolios. It is estimated that the collective net worth of America fell to $50 trillion at the bottom of that recession. But now, ten years later, the Federal Reserve estimates the balance sheet for Americans totals $109 trillion-a gain of roughly 118%. Economies tend to cycle, and last month, the U.S. entered the longest period of economic expansion on record.
In the flooring business so far this year, we’re hearing that sales for the big boxes and category killers are down versus last year (with the exception of Costco and Floor & Decor), but most of the top 250 independent retailers are seeing growth. This trend is hard to explain, but I’d like to think consumers see the value in buying local.
When it comes to product, carpet unit sales for the first half of 2019 are down almost 10%, but LVT, ceramic and even hardwood are growing. One theory I recently heard attributes carpet’s decline to the residential market’s transition toward great-room formats, which feature fewer walls between kitchens, living spaces and dining spaces and, typically, a unified hard surface flooring solution throughout. Why, then, don’t the mills pivot their approach, positioning serged broadloom as a custom rug solution to be used atop hard surface flooring?
One huge factor that’s going to affect both the growth of the economy and certain segments of the flooring business is what happens with trade between the U.S. and China. As we approached the G-20 summit meeting in Japan between President Xi and President Trump late last month, both leaders seemed to be accentuating the friendly feelings they held for each other. Whether they can parlay that into a productive resolution will be interesting to see. We had to go to press with this issue prior to the meeting on June 29th.
Two of the major dynamics in the equation are these: the pride and competitive nature of the Chinese people, who don’t want their country to appear to have compromised from a position of strength; and President Trump’s current campaign for another four-year term as U.S. president. There is reason to hope that these factors may create incentive for the parties to resolve their differences. When it comes to flooring, a 10% tariff is not a game changer, but a 25% tariff could be enough to disrupt where people choose to source products from.
One interesting factoid related to this topic: In the last 75 years, only two U.S. presidents failed to get re-elected for a second term, Jimmy Carter and the first George Bush. It’s a safe bet that Donald Trump’s chances of re-election will be closely tied to the outcome of this trade war as well as the growth of the economy-and many agree that a failure to resolve this trade war will drive the U.S. economy into a recession.
THE FUTURE OF NEOCON
The energy level at the NeoCon show for contract interior finishes in Chicago in early June was the strongest it’s been in years. We’ve been watching the Architecture Billing Index hover around 50 for the past couple of months, which would seem to indicate flatness in the market. However, the gap between when plans are drawn and when interior finishes are purchased can extend well beyond a year, and the billing index has been over 50 for all but four months in the last three years-indicating steady growth in revenues within architectural firms.
Several designers I spoke with during NeoCon told me that if they had more designers, they could get more done, so the lack of available labor is affecting the A&D community as well. A few flooring manufacturers at NeoCon lamented about how the exuberance at the show wasn’t reflected in their order rate, which has been relatively flat for the first half of the year. Two potential theories to explain the gap are: one, the continued shift to polished concrete, which doesn’t require a floorcovering; and two, a volume shift to a wider base of flooring importers.
While the energy around NeoCon seems to validate the significance of this annual show, we were surprised to hear that Herman Miller is following Knoll’s decision to leave the Mart. Knoll left before this year’s show, after being a tenant for 50 years, and opened a showroom designed by Gensler in Chicago’s trendy new Fulton Market in the West Loop, which is about a mile away from the Mart. The former Knoll space on the 11th floor was large, but Byron Morton, the Mart’s vice president of leasing, told me they quickly filled the space with three new tenants.
On the last day of the show last month, Herman Miller announced that it would leave its massive space on the 3rd floor after 80 years of loyalty to the building. Herman Miller’s new Chicago home will also be in the Fulton Market district, and the firm plans to create a space that works both as a showroom for its contract furniture products and also as a retail space for its consumer products.
There are those in the design community who have watched what Milan has done with envy and think NeoCon should become a city-wide, week-long event that serves as more of an inspiration and less of a product show. But others point to the grand staircase, the new boardwalk and the 55,000 attendees at the Mart and ask, What happens if we dilute that energy?
If you have any comments about this month’s column, you can email me at firstname.lastname@example.org.
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