The economy can be a scary thing to small business owners. Few truly understand it, but most have at least a vague notion that they should pay attention to it. Those fortunate enough (and old enough) to have survived through the recession of the early 1990s are aware of its power, and those in business after 9/11 can testify to its fragility. But hardly anyone can say they understand what makes it tick.
That's particularly true in the remodeling industry, about which no expert seems willing or able to make projections. It's hard to blame them; only recently has residential remodeling been recognized as its own sector of the housing industry, so there's little data from which to make historical comparisons and accurate predictions.
In recent months, this magazine has been as guilty as anyone for adding to the confusion. Ever since Hurricane Katrina wreaked her havoc on the Gulf Coast, newswires have been humming with report after report on some aspect of the economy — gas prices, consumer spending, employment rates. In an effort to keep our readership informed, we reported on some of those.
But indexes and indicators are measured monthly and weekly, and even daily, and often change from report to report. As a monthly magazine, REMODELING is ill-positioned to keep its readers up to speed on all the developments.
We do recognize the importance of these developments, though. To that end, we'd like to devote some space to economic projections for 2006. Again, there is admittedly no foolproof way to tell how these projections — if true — will affect the remodeling industry specifically, but by putting the information in some historical context, we can take an educated guess.
The projections come from a 2½-hour conference call conducted by the Homeowner Alliance in early January. The call, done roughly every six months, featured five economists from organizations in some way related to the housing industry: David Seiders from the National Association of Home Builders; Frank Nothaft from Freddie Mac; David Lereah from the National Association of Realtors; Paul Merski from the Independent Community Bankers of America; and David Berson from Fannie Mae.
Reasonable Regression As you're surely aware, the housing industry — and in particular, remodeling — has enjoyed a very prosperous couple of years, growing at a pace that isn't sustainable in the long run. The bad news is that 2006 is shaping up to be the year that growth drops off. The good news is that while it's true that all good things must come to an end, that end doesn't need to be a sudden, violent one. Lereah, echoing the sentiments of the group, put it best: “It's important to note that while [the housing boom] is winding down, it's winding down to healthy levels of activity.”
That is, while the expected drop of certain aspects of the market will be severe as compared to last year's levels, taken in historical context, they are quite strong. In many cases, in fact, they'd represent the third-strongest year on record — behind 2004 and 2005. So, as Berson said, “It will be a down year for housing, but it won't be a down year for housing” Making sense yet?
The Big Picture Before looking at specific indicators that may lend a clue as to the near future of remodeling, it's useful to get a look at the landscape of the economy as a whole. Coming into 2006, Merski — whose overall projection, it should be noted, was probably the most optimistic of the five — classified the United States economy as “a juggernaut.” Conventional wisdom says that a strong economy is a positive sign for non-essential service industries like remodeling. It's particularly encouraging this year, as the economy seems strong despite the ongoing war in Iraq and the devastation of Hurricane Katrina and the resulting oil scare.
GDP. Seiders projected the Gross Domestic Product (GDP) to increase 3.6% in 2006 from 2005, while Merski's year-over-year prediction was 3.8%. Both of these figures are a bit higher than the aggregate projection of 53 forecasters surveyed by Blue Chip Economic Indicators in early January. Final GDP data for 2005 was not available as of press time, but the Blue Chip year-over-year projection between 2004 and 2005 was 3.6%. So if the GDP — a telling metric of a country's economic health — is going to slow down, it will likely do so only slightly, with no great damage done to the economy.
Unemployment. In December, the unemployment rate in the United States dropped to 4.9%, putting the average for the year at 5.1%. That compares favorably with the 5.5% average of 2004. And, although their conference call was conducted prior to the release of the December 2005 unemployment data, both Seiders and Merski had projected the 2006 rate declining, to as low as 4.8% in Merski's case. Another good sign.
The Fed. The federal funds rate is an area of uncertainty heading into 2006, due in large part to the January retirement of Alan Greenspan, who has served as chairman of the Federal Reserve since the summer of 1987. As of press time, it was unclear if his replacement, Ben Bernanke, would continue the trend of 13 straight increases to the federal funds rate, a strategy used to combat inflation.
With the rate at 4.25% at the time of the Homeownership Alliance conference call, Seiders and Nothaft predicted an increase to 4.5% at the end of January, with Nothaft observing that the consensus among economists was that the rate would max out at no higher than 5%. Merski concurred, but mentioned the fear of some that the new chairman would “overshoot the mark” looking to fight inflation, which could “choke off some of the economic growth that I think will sustain the housing market in 2006.”