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Paddling Hard but Moving Slow: Increasingly, That's LBM's Outlook for the Rest of 2024

After years in which dealers struggled from crisis to crisis, a slew of public reports and economic indicators suggest we can expect many more months of muddling along. Our surfing metaphor of two years ago has given way to the paddleboard, where the only way to speed up is to paddle harder.

Core organic sales were essentially flat at Builders FirstSource during its first quarter, and the 6% sales gain in base business sales that it forecasts for all 2024 comes in good part from acquisitions. Beacon also is predicting mid-single-digit revenue gains this year, again largely from acquisitions. Meanwhile, The Home Depot predicts total sales growth of only 1% in the 12 months ending next January, and that's in part because FY2024 includes a 53rd week of sales.

Why the placid pace? We're done with the COVID shocks, and lumber prices aren't on a roller-coaster path any longer. Single-family gains are partly offset by declines in multi-family work. Custom home work is steady, though, as one dealer put it, more plans are coming in but homeowners are taking a longer time to authorize construction. Meanwhile, the home improvement frenzy of recent years has been supplanted to signs that people are thinking twice before they decide on bigger purchases.

More recently, conditions are sluggish because the Federal Reserve appears increasingly likely to refrain from cutting its lending rates until fall at the earliest, and make fewer cuts this year than previously expected. That's because the inflation rate isn't receding at the Fed's hoped-for pace. Reports of price hikes "were higher than I think anybody expected," Fed Chair Jerome Powell said May 14. "What that has told us it that we'll need to be patient and let restrictive policy do its work ... keeping policy at the current rate for longer than had been thought."

Powell spoke a day before the federal Labor Department announced that the Consumer Price Index rose 3.4% in April from a year earlier and 0.3% from March. Both are lower numbers than we've seen so far this year, but one month's worth of data is not enough on its own to persuade the Fed to ease up.

Some economists, and a lot of speculators on Wall Street had been looking forward to rate cuts as early as mid-year. Once the Fed moves, mortgage rates (at 6.99% as of May 15, according to Mortgage News Daily) are expected to start a steady march downward, thus opening the door to millions more Americans to buy homes. Remodelers are expected to benefit from a sales surge, too, because the year after a home purchase is one of the biggest for repair and remodeling expenditures.

That increasing pressure--"like holding a beach ball underwater"--can't happen until the Fed acts. Until then, people won't move. A lukewarm economy will be the status quo.

In a sense, the housing industry is one of its worst enemies with regard to helping inflation drop enough for the Fed to act. Housing costs (including rent, mortgages, upkeep, and utilities) constitute nearly half of the Consumer Price Index. The Fed had expected its rate increases would slow the economy enough that builders and landlords would be forced to trim their prices. It hasn't happened. In the two years between April 2022 and April 2024, the Consumer Price Index excluding food and energy has risen 9.3%. The CPI for housing has risen 12.3%.

The latest Producer Price Index, which measures costs before they hit the retail sector, suggests more increases are coming. The PPI's "inputs to residential construction" index stood 2.77% higher in April than it did in the same month a year ago. It's a far cry from the double-digit increases seen in 2021 and 2022, but it's still pushing inflation in the wrong direction.

"[S]helter costs continue to put upward pressure on inflation, accounting for nearly 70% of the total increase in all items excluding food and energy," the National Association of Home Builders "This ongoing elevated and uneven inflation is likely to keep the Federal Reserve on hold and delay rate cuts this year."

One bright spot involves single-family building permits. During the first quarter of this year, 241,311 were issued. That's 25.9% above the number issued in the opening quarter of 2022. Builders FirstSource cited in particular the rise in single-family residential revenue for helping it in its first quarter.

Analysts at companies like Zonda and John Burns Research & Consulting also have pointed out that the American public is seeing an ever-greater split in activity between its wealthier and poorer groups. Credit-card balances in the first quarter were 13.1% higher than they were a year ago, the New York Federal Reserve Bank reported. Meanwhile, the San Francisco Fed says just about all the COVID relief money built up during the epidemic has now been spent.

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