Times Have Changed: With Talks of a Possible Recession, Risk Is Subjective

By Michael Collins

Now that concerns over the pandemic no longer dominate daily headlines, a primary concern seems to be the state of the economy. J.P. Morgan Chase estimates that roughly two-thirds of total U.S. gross domestic product (GDP) is driven by personal consumption. With talk of a possible recession looming, it makes sense to check in on typical U.S. consumers and whether they are running out of steam. Consumers entered the Great Recession deeply in debt and generally overextended on real estate they could not afford. The consumer landscape looks much different today. In early 2022, U.S. total household excess savings amounted to $2.5 trillion, according to JPM Chase. While household debt increased significantly during 2022, that was mostly driven by a strong increase in mortgage activity because of low interest rates. There are signs that excess consumer cash is starting to fall and credit card debt is starting to climb, but the words “starting to” need to be emphasized. If consumers had entered the Great Recession in such strong shape, the outcome may have been very different.

So why are recession fears so prevalent today? The National Association of Business Economics recently surveyed economists and learned that nearly
three-quarters of them predict the U.S. will experience a recession next year. Roughly one in five believe we may already be in a recession now. The historical rule of thumb of two quarters of GDP contraction alone is not sufficient to make a recession official. Whatever our risk of slipping into recession next year, we seem unlikely to do so during 2022.

Know Thyself

What should companies be doing in the face of undeniable economic challenges, such as increasing interest rates and record high inflation? One recommendation we would make is for every door and window manufacturer to understand what has driven their revenue growth over the past two years. There are various groups to whom fenestration manufacturers may need to explain their financial performance. Such discussions will be more productive if business owners are armed with a breakdown showing how much increased units sold contributed to revenue growth, versus price appreciation. Bear in mind, these groups understand that swiftly passing price increases along to customers is by no means easy. However, they are more likely to accept the future sustainability of earnings if it can be demonstrated that unit volume increases were a key part of historical growth.

Residential construction always proceeds at a different pace in each region of the country. Some regional door and window suppliers have reported that their builder customers seem to be pausing for breath and deciding how many homes to build in 2023. In many areas, though, the slack that creates in sales has been quickly snapped up by remodeling customers. As we approach the later stages of the business cycles, some acquirers begin to gravitate toward manufacturers with exposure to the residential remodeling or commercial segments, to diversify beyond residential construction.

Michael Collins is an investment banker and a partner in EquiNova Capital Partners. He specializes in mergers and acquisitions in the door and window industry.

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DWM Magazine

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