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issue: January 2005 APPLIANCE Magazine

53rd Annual Appliance Industry Forecasts
North America - A Steady Climb


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by Jill Russell, Associate Editor

The U.S. economy seems to be back on track for 2005 after waiting it out for 3 years. After a recession in 2001, slight growth in 2002, and only moderate growth in 2003, the pace finally accelerated in 2004, resulting in a strong and steady year.

Set for a strong yet softened pace, 2005 will carry through on what 2004 established. After the re-election of U.S. President George W. Bush and the Republican majority in both the House and Senate, the U.S. economy experienced strong growth in the third quarter, which is expected to continue through the end of the year and at a somewhat softened pace in 2005.

At the end of 2003, future expectations were optimistic in favor of a higher gross domestic product (GDP), employment rates, and a continued “boom” in the housing industry. And 2004 delivered, although in moderation. Up until the re-election of President Bush at the end of third quarter, uncertainty plagued the economy, hindering growth.

Leading economic indicators fell 0.3 percent in August and an additional 0.1 percent in September as the presidential election intensified. Consumer confidence, according to The Conference Board, experienced an unexpected drop to 90.5 in October from 96.7 in September, its lowest level since July 2003. The manufacturing industry was also taking a hit, battered by a string of hurricanes that hit the southern U.S., disrupting industrial production, including gas and oil, in the Gulf of Mexico. Instead of the 0.1-percent increase as originally forecast, orders for durable goods actually fell 0.3 percent after rising 1.9 percent in July. The decline was short-lived, as industrial production registered a 0.1-percent increase in September. And after the re-election of President Bush, any previous hesitance finally gave way and confidence pushed through. Consumer spending increased 3.2 percent in the third quarter while business spending increased 5.2 percent, helping to push the economy into an upswing that is expected to carry into the fourth quarter and the beginning of 2005.

According to the most recent data available, the Department of Commerce estimated third-quarter GDP grew marginally to an annual rate of 3.9 percent. Additionally, unemployment rates fell to 5.5 percent in October, compared to the original forecast average of 5.4 percent by the U.S. Department of Labor. To keep up with the rate of growth, the Federal Open Market Committee raised interest rates for the fourth consecutive time by 0.25 percent to total 2 percent. The change was expected by analysts and is said to be to scale with market growth. “Output appears to be growing at a moderate pace despite a rise in energy prices,” the Committee said in a statement.

A Glimpse Ahead

Forecast to end on a high note, 2004 U.S. GDP is anticipated to hit a 4.4-percent growth rate. With what seems to be a full economic recovery en route, 2005 is anticipated to be a more subdued version of what was seen in the past year with a 3.4-percent growth rate, still the third strongest year since 1984, as forecast by the University of Michigan’s (U-M) annual economic outlook.

According to Saul H. Hymans, professor of Economics at U-M, the election results and the economic surge that followed has laid the foundation for another strong and steady year in 2005. “The long, acrimonious presidential election campaign generated lots of uncertainty and the decisiveness of the outcome…generated, among other motions, a deep sigh of relief. Whether that relief turns out to be enduring rather than ephemeral remains to be seen,” he said. This, according to the U-M research, is a good sign for 2005. “In combination with the already strong economy, this suggests that continued economic expansion is the presumptive path as we head into 2005,” Mr. Hymans said.

U-M’s research also forecast that federal interest rates, as already seen in 2004, are unlikely to continue providing stimulus to the previously slow-to-start economy. Mr. Hymans attributes this to the war in Iraq and the large budget deficit as well as the fact that tax cuts first introduced in 2001 are, for the most part, in place. U-M forecasts the Federal Reserve will move rates up by 200 to 250 basis points over the next 2 years in order to keep up the growing economy’s momentum.

Strong consumer demand and increased job rates are expected to help spur growth, while slightly less activity in the housing sector and minor increases in inflation rates will collectively maintain a positive year of growth in 2005.

Housing Records Abound

Dodging a dive and speculation of a bubble, the U.S. housing industry registered a record-breaking year in 2004, helping the appliance industry build and maintain a steady and growing market. According to participating economists at the National Association of Home Builders’ (NAHB) Construction Forecast Conference, the record level achieved in 2004 is expected to continue well into 2005.

After slight declines in September, attributed to the string of hurricanes that battered the southern U.S., new housing starts for 2004 are expected to increase by 5 percent to 1.95 million units.

However, with the Federal Reserve looking to increase rates, it is speculated that although the housing bubble might not burst, it will certainly start to slowly deflate. David Seiders, chief economist for NAHB, is expecting 2005 housing rates to land in the range of 1.872 million, down 4 percent from 2004. Mr. Seiders primarily attributes this to higher interest rates combined with a higher GDP growth, higher household income, and lower unemployment rates.

“We’re going to be operating at near record levels, certainly for single-family housing, but it is going to be difficult to maintain the pace that we posted in 2004,” he said. “I view it as a very, very positive housing forecast.”

Although new housing starts are expected to decline, Mr. Seiders is anticipating that the residential remodeling segment, and with it the appliance industry, will grow strongly in 2005. He forecasts that with the combination of a rising rate of home equity (totaling approximately $9 trillion) and low interest rates, even after increases, will create an incentive for homeowners to remodel and upgrade in 2005. As of press time, the residential market was expected to total $200 billion in 2004. “People really feel that their houses are great investments, and it is encouraging them to do a lot of additions, alterations, and remodeling,” Mr. Seiders said. “I think the incentive to remodel and upgrade is still going to be there, and people certainly do have the equity on tap. It may feel like a slight decrease, but not much for the appliance market.”

The Crystal Ball

As material costs hit the industry hard in 2004, companies worked to absorb them. Manufacturers increased productivity, restructured facilities and management, and focused on increasing product innovation. But as 2005 approaches, despite attempts to curb costs, the appliance industry finds itself as having no choice but to pass a portion of the price to consumers.

Optimistic for expanded growth, experts agree 2005 will simulate 2004 on a smaller scale. Sure and steady, this year will hopefully expand upon the growth previously set and keep up the momentum, for the most part, until 2006.

53rd Annual Appliance Industry Forecast
 
North America
 
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