A Common Indicator of Residential Improvements is Broken

By / 12 months ago

While new residential construction activity captures the lion’s share of attention, residential improvements expenditures have actually been a more important end use for wood products since the housing market crashed in 2007. Forest Economic Advisors (FEA) estimates show residential improvements accounted for 36% of lumber and wood panel usage from 2007-2014, compared to 29% going to new residential construction. So it is of no small concern that the main indicator of residential improvements activity has become so far detached from reality that it cannot be trusted to give a realistic depiction of residential improvements activity. As a result, FEA has adopted a new indicator for the sector that better reflects what we are seeing in the marketplace. Starting in September we will be using a concept from the National Income and Product Accounts as our primary end-use indicator for this sector.

The US Census Bureau used to publish fairly reliable data on residential improvements expenditures in a quarterly report called “Residential Improvements and Repairs.” This was also called the C50 report. Back around the middle of the last decade, the Census Bureau lost funding for the report and asked many major industry players if they would be willing to fund this report and they were denied. As a result, the Census ceased publication of this report after the release of the 2007 Q4 data.

With few places left to turn, we and most other folks who analyze the industry, started deriving residential improvements expenditures from the Census Bureau’s “Value of Construction Put in Place” report—also called the C30 report. This report does not include a breakout for residential improvements expenditures, so we derived our residential improvements estimate by taking total residential construction expenditures and subtracting off single-family construction and multi-family construction. The residual gives an estimate of nominal residential improvements expenditures.

The C30 Indicator Plunged in 2014 but Actual Repair and Remodeling Expenditures Almost Certainly Did Not
Evidence from a wide range of sources tells us that residential improvements activity did not in fact plunge in 2014 but rather it likely rose at least slightly or tracked sideways. For example.

• Wholesale sales of “Lumber & Other Construction Materials” rose steadily in 2014 increasing by 7.6% from 2013 Q4 to 2014 Q4. To be sure some of this increase was attributable to the increase in new construction, but housing starts did not rise by nearly enough to account for this increase.

• Retail sales of “Building Materials and Supplies Dealers” rose steadily in 2014 increasing by 7% from 2013 Q4 to 2014 Q4. Moreover, if we dive deep into the consumer spending data from the National Income and Product Accounts we see that consumption of “Tools and equipment for house and garden” rose by 5.8% from 2013 Q4 to 2014 Q4 on a nominal basis and by the same 5.8% on a real basis. The majority of these purchases were almost certainly tilted toward improvements on existing homes as opposed to new construction.

Pages 1 2 3

Brendan K. Lowney

Brendan K. Lowney is a Principal of Forest Economic Advisors, LL C. As FEA ’s macroeconomist, he interprets and forecasts the North American and international economic landscape.