Slower Growth Ahead for Appliances

Since the financial collapse, the Federal Reserve has increased the money supply by about a factor of five and held short-term interest rates near zero. These unprecedented actions have led to a sharp rebound in the housing market and, consequently, an improvement in appliance production.

However, at the time of this writing, the Federal Reserve had only one more month left in its “quantitative easing” program. And it has stated that it will likely raise short-term rates sooner than many expect. This is likely to have significant consequences for the housing and appliance markets.

The real 10-yr Treasury bond rate, which is the interest rate less inflation, is still less than half of what it was at the end of 2009. And, the real rate has been falling throughout 2014. But, ultimately, fluctuations in the housing market and appliance manufacturing are driven by the change in the real rate, not the level of the rate itself.

From February 2012 to July 2013, the year-over-year change in the real 10-yr Treasury rate increased from -388 basis points to +209 basis points. Historically, this is a very large swing in the interest rate over an almost 18-month time period. Since changes in interest rates lead changes in housing permits and residential construction spending by about 12 months, the rate of growth in housing permits and real residential construction spending has slowed dramatically since the summer of 2013. But since July 2013, the year-over-year change in the real 10-yr Treasury rate has been falling. 

The falling change in interest rates should be a positive sign for the housing market. Yet there is no evidence yet of acceleration. 

Another important leading indicator of appliance production is real household appliance spending. Since 2010, annual appliance spending has grown every month from September 2012 to April 2013. But the peak rates of growth were less than half the peak rates of growth from 1998 to 2004. So, appliance spending has been improving, but not in an extraordinary way. Currently, annual appliance spending is growing at a flat rate and appears poised for slower growth in the upcoming months.

Current appliance production levels still are significantly below any time since 1994. However, the current annual growth rate in appliance production is one of the strongest since 1994. But, because housing permits and residential construction spending have been decelerating for some time, and appliance spending looks like it will start decelerating soon, appliance production is likely to grow at a decelerating rate for most of 2015.