Manufacturers’ Perspective: State of the Economy

Chad Moutray is the chief economist for the National Association of Manufacturers and develops forecasts for the manufacturing sector. He previously worked as the chief economist and director of economic research for the Office of Advocacy at the U.S. Small Business Administration where he researched the value of entrepreneurship on the U.S. economy and economic factors that impact small business owners.

As part of its annual Market Measure report, Hardware Retailing talked to Moutray about the state of the economy as it pertains to manufacturers and the home improvement retailing sector.

 

Hardware Retailing (HR): Have you observed economic trends that directly impact the home improvement retail sector?

Chad Moutray (CM): One of the things I continue to see is that, first and foremost, the U.S. economy is strengthening from the manufacturing industry. The overall economy is turning a corner because the overall labor market and job growth are strong.

The home improvement sector is improving regarding existing homes and buying new homes. Housing stats have been decent, especially for single-family units.

Whether you’re staying in your current home or buying a new one, home improvement plays into that, from replacing the fridge or doing a complete kitchen overhaul. All of these things bode well for home improvement and overall retail sales in that sector.

At the same time, the retail sector is going through very dramatic changes. When I talk to manufacturers in that space, they’re struggling with online versus brick and mortar. Retail sales have been strong year over year, but when you dig into the data, a lot of the benefits are flowing to nonstore retailers. This is also true in the home improvement segment.

Manufacturers that sell into that space are trying to navigate those waters. They sell online, but a lot of their products also go through department stores. I see it accelerating, that pace of change regarding e-commerce. The companies that succeed have the right combination of both of those environments.

HR: What do current economic indicators say about the end of 2017 and going into 2018? What does that mean for consumers?

CM: In the first half of this year, we saw really strong growth in consumer and business spending, where businesses were spending on infrastructure and equipment spending. In the second quarter, we have 3.1 percent growth in that area.

In the second half of this year, we had the hurricanes, which will mean negative impacts in August and September. I think the effects from the hurricanes will subtract about half a percentage point. It’s going to take a long time to recover from the hurricanes and the wildfires in California. Puerto Rico and the U.S. Virgin Islands were devastated, so it’s going to take a long time for us to dig out of that problem. However, the recovery from the hurricanes will create an uptick in the fourth quarter, as you see people making home improvement purchases, like replacing home appliances and drywall. We will see that in the September and October data and definitely in the fourth quarter.

Overall manufacturing activity is up, and manufacturers are upbeat about performance. In a recent survey, 90 percent of manufacturers were optimistic about their own sales.

For this year, the U.S. gross domestic product (GDP) will be about 2.2 percent, and I think it will grow to 2.5 percent this year. If tax reform is passed, I think we can get closer to 3 percent.

HR: How might the current economic state affect small businesses in 2018? GDP, etc.

CM: Overall, I think optimism in small business mirrors manufacturers. Small business owners are pretty upbeat relative to the economy. For this sector, optimism on the policy side is huge. Tax reform and regulations are big concerns for small business owners.

To note, though, small businesses are obviously smaller, so a rising tide really helps them. The growth of the global economy is helping to shift those attitudes in a positive way.

HR: What do you think will happen to consumer optimism going into 2018?

CM: I continue to see consumer optimism to be strong next year. Consumers react to pocketbook issues: Is the economy strong, how is the job market?

I project holiday sales this year will continue to be good. Right now, the stock market is high, but you never know what might knock it off. I predict that consumer spending and consumer optimism will stay in 2018 where it is in 2017.

HR: What do you think economic conditions in the U.S. will look like in 2018?

CM: In lieu of policy changes, like tax reform, I think 2018 will look similar to 2017. We’ve had 2.1 percent economic growth since the Great Recession in 2007-2008.

This year, we will see about 2.2 percent growth and I think we will see roughly 2.5 percent growth in 2018.

I believe that we can do better than 2.5 percent with policy changes, like tax reform and stimulus from infrastructure spending. Any policy changes enacted this year or early next year will help boost economic conditions.

I think many trends from 2017 will continue, such as consumer and business spending and exports. All of those are positive, but I think it can be more positive with policy changes that can move us in the right direction.