With policy changes and labor concerns, the big thing on people’s minds is what is in store for the future of the landscaping industry? During an educational session at The Texas Nursery Landscape Association’s 64th annual Nursery/Landscape Expo in San Antonio, Charlie Hall, PhD, professor and Ellison chair, Department of Horticultural Sciences, Texas A&M University, shed some light on the subject.
He provided attendees with a candid look about the current state of affairs for the green industry. He said that while the keyword from his talk last year was “uncertainty,” this year it is “greater uncertainty.”
“There are some things that have happened since last year that have affected the dynamics with which we are operating,” said Hall.
Some positive signs and some headwinds factored into his presentation. Though, he said, “If we can position ourselves correctly in the marketplace we can make money in spite of what the economic conditions are.”
He referenced research that since the Great Recession, the industry has 16 percent less growers. Retail at garden centers is also down 3 percent. Meanwhile there are 10 percent more landscaping companies than prior to the Great Recession. He attributes the landscape company growth to easy entry and exit.
He said consumption in 2017 projected out to 2018 and 2019 is slowing down but continues to go up. Sales of flowers, seeds and potted plants in 2017 were higher than before the recession. Weather has been shown to influence purchases and the bad weather in the Midwest and Northeast in the spring affected sales. He said he wants people to view the industry as a necessity no matter the weather and pointed out that even during the recession, people still bought “i-gadgets” and other items they wanted.
He cited a survey from the National Gardening Association on participation in gardening and landscaping that has shown the highest numbers to date of those investing in landscaping and gardening at 95 million households spending $503 per household.
While the highest spending category is married 45-to-64-year-olds, 18-to-34-year-olds are spending more than ever before. “They are buying a whole lot of houseplants and succulents. Heath and well-being benefits really resonate with them,” noted Hall.
Millennials outweigh Baby Boomers now with 84 million millennials versus 76 million Baby Boomers. “The Boomers are why we are in the room to begin with. The fact that this group [millennials] is showing interest in what we do, that’s a very good thing,” he said.
Generation X, though, has 11 million fewer people and this age group is currently in its prime landscaping years.
“Do-it-for-me” landscape sales’ compound growth rate is almost 13 percent, according to Hall. He attributes that to Baby Boomers who want to do a lot less for themselves but still want to be surrounded by landscapes and gardens.
The NGA survey listed money for the first time as one of the top three factors why people aren’t investing in gardening and landscapes. “What that tells me is we are not conveying our value proposition in a way to overcome that price objective.”
Hall said costs our increasing, but pricing isn’t, causing profits to be squeezed. He created a green industry price index of 121.7, meaning where we were right when recession ended, our costs have increased 21.7 percent. Prices have not creating margin compression. Freight rates June 2018 over June 2018 have gone up 9.5 percent increase alone, when it had been about e percent.
Hall talked about the unemployment rate, at 3.9 percent, which he calls “ridiculously low” and what economists would call an unnatural unemployment rate. “Most people who are looking for a job have a job, that’s why it is so hard for us to find labor.”
Wages are up 2.7 percent, but the consumer price index also went up the same amount meaning no gains. Labor force participation is about 92.9 percent. “We have 6.8 million jobs that are not being filled right now, non-farm jobs, when you include that it is 15 million jobs,” Hall said.
While Hall said he did not take a political stance, he did talk policies when he said, “We do not need to build a wall, we need to charter busses coming from Mexico and Latin America because we need 15 million jobs to be filled, and we don’t have 15 million people that are willing to fill those jobs right now.”
He also referenced when Russia closed its borders. “Russia imploded because it ran out of young people.” China, he says is on the same path. “China’s one-child policy altered its demographics and unless they import people they too will run out of people to support their infrastructure.”
Hall addressed housing as well saying much of the growth in housing projected in the next 20 years is to fill the ethnicity changes within the country that are already a driving force in the housing industry. “If you want housing to dry up, you close the border,” he warned. And of course if housing slows, it won’t bode well for the industry.
“If we don’t build houses, we don’t put turfgrass, flowers, shrubs and trees around those houses. This is very important for the future of our country,” says Hall.
Housing appears to be in great demand. A leading housing market index is up, home prices up, and there is a strong lack of inventory, according to Hall. The country has about two months of inventory in the pipeline according to Hall’s estimation. Housing starts are at 1.3 million when they should be at 1.5 million, but due to trade barriers lumber prices have gone up.
“Homebuilders have the same horrific time finding labor as we do,” Hall says. Freight costs also are going up and there is a shortage in that sector too by about 100,000 workers.
Still, the financial sector is faring well, he said. “Banks aren’t feeling much financial stress. There’s not a lot of negatives, consumers are still spending, business investment is going up,” Hall said.
For every dollar in CapEx it is a four-to-one return to the economy. When we spend money as a consumers, it has a two-to-one impact. These tax breaks that are encouraging investment are going away in about 10 years. “We are subbing short-term growth for long-term sustainability,” Hall said. “We cannot continue making strategic investments in our companies and not realizing what the implications are.”
Inflation is at 2 percent right now, which is the trigger that most people look at, Hall told attendees, because that is when the Federal Reserve increases rates. He expects two more rate hikes before the year is out.
When determining when the next recession is going to start, Hall says he looks at the St. Louis Financial Stress Index, which is not showing a lot of financial stress. He also looks at the Chicago Fed National Activity Index.
He also said when the gap between 10-year treasury bonds and treasury notes lowers and the curve inverts, it signals a recession. However, compared against the Federal Funds Rate, the point at which the Federal Funds Rate intersects the lowest point of the 10-year treasury bonds, since the last recession, signals that a recession is imminent between 17 to 34 months. That occurred in December of 2017.
“Now and next spring, things are going to be pretty good.” He says by the next expo in 2019, there is 25 chance of recession. He gives it about a 50-50 chance by the 2020 expo and an 80 percent chance by the 2021 expo, three years from now. “There’s some pretty good evidence,” he said. “Start getting prepared. If the Federal Reserve gets too antsy about inflation and starts raising interest rates to quickly, that might throw us into recession.”
The other way we may enter recession, according to Hall is trade ware effects, which he says are the “pitfalls of protectionist policies.”
“We are a globalized economy, and when you start protecting borders artificially with trade barriers and nontariff trade barriers, you artificially affect how the market is structured and people will find an alternative place to buy what they need. Then when you lower them, they’ve already found an alternative and won’t come back,” Hall explains.
“The person that ends up paying the most is Mr. and Mrs. Consumer.” Other factors that could affect the economy would be if OPEC deal with Russia falls apart or if there is another housing bubble burst. The U.S. might also feel a recession in China or Europe.