What does Home Depot’s Growth Mean?
Home repair giant Home Depot recently announced that its 2nd quarter net income rose 14% from the previous quarter prompting an upward adjustment in expected earnings for the year. Compared to the anemic GDP growth of only 1.3% in the same quarter the promising Home Depot numbers could mean one or both following scenarios are true:
1) Since big box stores like Home Depot and Walmart (who also increased expected earnings) tend to be good indicators of consumer spending as a whole, consumer spending could be on the rise.
2) With the stale housing market, many homeowners are deciding to invest in their current homes to increase value or make the home more livable for the future.
Economists watch certain leading indicators to predict where the economy will go in the near future. Indicators such as unemployment, the stock market and housing starts are the traditional numbers that economists watch but certain industries and even retailers within the industry can signal an upcoming change in the economy. That is one question economists are asking now; is the increase in sales at Home Depot and similar stores a signal that consumers are regaining confidence in the economy and are beginning to open their wallets again?
In addition to Home Depot’s adjusted earnings projection, retailers such as Kohl’s, Macy’s and Nordstrom have all increased their projections in recent weeks. Obviously a one quarter increase can’t be considered a trend, but if consumer spending on durable goods continues to increase, an indicating trend may develop.
Another possible explanation for the increase in Home Depot’s growth in the last quarter is homeowners’ lack of confidence that they will be able to purchase a newer home in the future. Many see the stagnant housing market as a signal that it may be a good idea to improve their current living space as opposed to upgrading to a newer one. Low housing prices and high inventory may be scaring people away from putting their home on the market before making improvements.
In addition to homeowners, real estate investors have been picking up all the properties that the banks release and rehabbing them. Low sales prices mean investors can get the properties cheap, rehab them, and get them back on the market near the market value. The remodeling supplies used in these rehabs could also play a role in Home Depot’s increased sales. Hard money lenders are also seeing an increase in loan applications from real estate investors as more shadow inventory becomes available.
Whether Home Depot is seeing growth due to the confidence of consumers as a whole or lack of confidence in the housing market, any spending is good for the economy and you can bet economists will keeping a close eye on the numbers.