By Steve Kline, Jr. , Director of Market Intelligence from Gardner Business Media
From: Plastics Technology
Issue: May 2014
From September 2005 to February 2013, the annual rate of change in appliance production contracted. Year over year, the U.S. manufactured fewer and fewer appliances. This nearly eight-year recession in appliance production was primarily the result of a housing market that began to soften as early as the fall of 2004—long before the housing bubble was on almost anyone’s radar—and secondarily the result of offshoring of appliance production to take advantage of cheap foreign labor.
However, both of those trends have been reversing themselves over the last couple of years. Since February 2013, in fact, appliance production has grown at a significantly accelerating rate. Annual growth recently peaked at 7%, which is the fastest rate for appliance production since August 2004. Certainly, the reshoring of manufacturing has played a role in this resurgence. General Electric and others have brought appliance manufacturing facilities back to the U.S. for a number of reasons, including better integration of design and manufacturing, rising costs of foreign labor, higher quality of U.S. manufacturers, and reduced supply-chain bottlenecks.
But the most significant reason for strong growth in appliance production has been healthy improvement in the housing market. Since the absolute bottom in January 2011, housing permits generally have been growing at the fastest rate since the early 1980s. At the peak in January 2013, housing permits were growing at an annual rate of more than 32%. While annual growth in housing permits remains historically strong, it has decelerated consistently since the peak in January 2013. Even with the extremely strong growth in housing permits, actual numbers of housing permits have barely recovered to the typical pre-recessionary level from the early 1970s to the early 1990s.
The annual rate of change in appliance production has grown at a slower rate the last two months. This trend is likely to continue throughout 2014. The end result is that appliance production will likely grow in the low single digits this year.
This slower growth in appliance production will be the direct result of a weakening housing market, which is likely to occur for a number of reasons. First, relative interest rates cannot fall very much from this point. A dramatic decrease in interest rates was the reason for the recent boom in housing permits. But because rates are already so low, the same level of decline in interest rates cannot happen again.
Secondly, new household formation is not favoring further growth in the housing market. Today’s youth are waiting longer to get married. And many of them are far in debt, thanks to student loans, and cannot possibly afford a mortgage.
Thirdly, a significant reason for the rebound in the housing market was financial firms taking advantage of nearly free money to buy properties that they would then rent. This was quite common in the 2004-2008 bubble markets. But these financial firms are pulling back dramatically on their purchases of real estate.