For clues about the vitality of home improvement, ignore the rest of retail

Las Vegas -- To take a broad look at the U.S. economy at the moment is to walk away with some fairly discouraging conclusions.

But according to Cleveland Research's Mark Herbek, that's the wrong approach to take if you're in the business of building supply and home improvement retail.

During an educational session here at the National Hardware Show, Herbek discussed the disparity between the home improvement end market and U.S. retail in general, and he advised retailers to plan for growth in the next two to three years.

Currently, the U.S. economy is contracting on several fronts, according to Herbek. There's been a contraction in the industrial end market since June of 2014 that's only just beginning to experience an uptick over the past 45 to 60 days. However, industrial activity impacts employment and, in turn, consumer spending, and the environment is still a challenging one.

Additionally, spot freight demand is below what we saw in 2014 and 2015, and rising capital goods inventory is often the next shoe to drop, prompting executives to make decisions to spend and expand less.

"There's no better read on the U.S. economy than watching how much the trucks and trains are moving across the U.S.," he said.

Herbek also touched on the positive state of unemployment, though he noted that most of the jobs being added are jobs that pay significantly less than the average wage, which is a sign that employment is about to roll over.

With S&P 500 earnings on the downswing, and consumer confidence contracting over four consecutive months, things don't necessarily seem encouraging for retail.

However, home improvement is on the opposite trajectory. Though total brick and mortar U.S. retail saw 0.4% growth in Q4 of 2015, brick and mortar growth for home improvement was up 6.2% that same quarter.

For ecommerce, home improvement is growing 25% per year, versus about 15% for the economy at large.

In view of 2016 so far, the industry is outpacing expectations. Last year the average building supplier saw 6% growth, and the expectation for this year was around 5.4%. Core building products are up 6.4% so far, and even though April's 2% growth rate is down from the first quarter's 12% pace, May, June and July are expected to be strong months for the industry.

Herbek noted that we're still 30% below a normalized growth rate in housing, and that the recovery has gone on largely without the help of entry-level buyers. However, household debt is at an all-time low, and home prices are back to an optimal appreciation rate of 4-5%.



Herbek's advice for retailers who wish to capitalize on these headwinds? Invest in digital and bring in a fresh set of eyes. Many suppliers are dedicating between 37% to 51% of their resources to growing online marketing, and 84% of the recent quarter was driven by online in total U.S. retail. What's more, a third-party associate who audits existing programs and assortments can drive double-digit comp improvements and better train sales associates.