Pent-Up Demand in Key Sectors to Bolster Economy
By IBISWorld Analysts Natalie Everett and Eben Jose
The United States suffered through one of the longest recessions in the country’s history during the past five years. The collapse of the housing market crippled a financial system that had bet heavily on the notion that housing prices would never decline. Credit became scarce almost immediately after the crisis began, forcing many companies to go bankrupt or face significant layoffs. As a result, the US unemployment rate spiked to more than 10.0% in 2009, toppling consumer sentiment and disposable income. Lower income levels and crippled home equity lines caused demand for discretionary items to plummet. America became a country of minimalists as consumers looked for ways to make use of what they already owned and performed for themselves many services they used to pay others to do.
However, nearly five years after the start of the recession, the economy has begun to gain some positive momentum. The unemployment rate has dropped to 8.3% and consumer sentiment and disposable income levels are both increasing, albeit slowly. Due to the length and severity of the Great Recession, there has been an unusually high level of pent-up demand for certain consumer goods and services. These goods and services are typically more expensive – often costing tens of thousands or hundreds of thousands of dollars – and are discretionary in nature compared with staples such as food and gasoline. As a result, these big-ticket items experienced sharply declining sales in the four years to 2011. In 2012, however, industries producing these goods are expected to experience a jump in revenue as this pent-up demand is set loose.
IBISWorld has identified three sectors that consumers will soon flock to as a result of pent-up demand: Home Builders, New Car Dealers and Single Location Full-Service Restaurants. While the economic recovery has been slow, consumer demand for these industries’ products and services has already increased or will increase soon. Multiple factors, such as industry drivers and revenue projections, were used to identify the level of demand within each industry. A common characteristic of these industries is having products and services that are both expensive and easily substituted.
Homes and cars are costly investments for individuals, and many Americans avoided the expense of buying either over the past five years, preferring instead to stay in the homes they already owned and drive cars they already owned, or to choose rental options of either. Restaurants, too, suffered in the bad economy, with Americans stepping into their kitchens to make food rather than eating out.
Home Builders industry sets solid foundation
Driving the Great Recession was the subprime mortgage crisis, which caused fissures throughout the mortgage-heavy financial market and shook America – and the American Dream of owning a home – to its core. As a result, the industry reached an all-time low, with revenue dropping at staggering rates in 2007, 2008 and 2009 (23.2%, 28.9% and 29.5%, respectively) Now, though, home builders are in a prime position to grow: IBISWorld estimates that the Home Builders industry will rebound with growth of 11.1% and 15.7% in 2012 and 2013, respectively, as consumers’ economic worries give way to suppressed desires to own their own homes.
The strengthening of the $167.9-billion Home Builders industry portends success in several related industries, from home developers to manufacturers of furniture and appliances. Further, housing investment is crucial to the overall US economy, influencing the pace of economic growth for many other industries. The more homeowners there are, the brighter things will look in industries that depend on equity, such as New Car Dealers.
New Car Dealers industry revs up as consumer sentiment improves
During the Great Recession, Americans held on to the cars they already had rather than buying new ones. Because the industry is vulnerable to economic shifts due to its dependency on employment rates, consumer spending, financing rates and home values, new car dealers dealt with volatile revenue in the past five years that brought some industry giants, including General Motors and Chrysler, to their knees. For the industry overall, revenue fell an average of 5.0% annually in the five years to 2012, including precipitous drops in 2008 and 2009 of 15.1% and 28.0%, respectively. The industry’s trajectory will change in 2012, when an estimated 12.4 million new vehicles will leave dealers’ lots. That shift will result in 4.8% revenue growth during the year, resting at $510.0 billion. The industry can expect to have a strong 2013 as well, growing a further 7.0%. This growth is the result of many consumers who, when faced with the choice of either paying ever-increasing maintenance costs for older cars or handing in their keys for new ones, will choose the latter.
Growing demand for new cars will have a positive effect on industries related to the New Car Dealers industry as well. The clamor for new cars will ultimately result in revenue increases for the upstream manufacturing industries that create vehicle inputs, such as tires, rims, interior accessories, engines and other parts. Additionally, as the number of vehicles in the United States rises, so too does demand for after-market services such as car washes, spelling a bright future for the Car Wash and Auto Detailing industry.
In addition to New Car Dealers, other industries that offer durable goods will enjoy gains in 2012 and 2013. For example, Major Household Appliance Manufacturers can expect a modest revenue gain of 1.3% in 2012, and a further 1.1% gain in 2013.
Consumers will indulge in restaurant outings again
Consumers’ newfound confidence in the economy will be celebrated at restaurants across the country; as spending rebounds, so too will the Single Location Full-Service Restaurants industry, which has treaded water over the past five years with an average annual revenue growth rate of 0.1%. After years of eating at home to save money or choosing low-priced menu items when they did eat out, Americans are breaking out of their tight household budgets and visiting restaurants again, lifting industry revenue at an expected annualized rate of 2.7% over the five years to 2017. Alongside growing consumer sentiment, consumers are becoming more health conscious, so restaurants with healthy options will do well.
Industries that will likewise benefit from America’s renewed restaurant frequency include Chain Restaurants, Bars and Nightclubs and Fast Food Restaurants. Upstream industries that will fuel this fire include wholesalers of food products, such as Frozen Food Wholesaling, Dairy Wholesaling, Beef and Pork Wholesaling, Fruit and Vegetable Wholesaling and Wine and Spirits Wholesaling. Further upstream, food manufacturers such as those in the Frozen Food Production industry and growers are also expected to get a boost as a result of increasing demand for eating out.
Conclusion
Because consumption drives the American economy, it only stands to reason that consumer sentiment would be a main economic engine. Consumer sentiment is a strong driving force; the high level of uncertainty in the years after the recession beat out consumers’ underlying demand. However, hints that the tipping point – the point when consumer sentiment increases enough to open the floodgates for pent-up demand – are already showing in these three industries. This bodes well for the economy as a whole, as the housing, automobile and restaurant sectors make up a large swath of the economy, and growth of these sectors foreshadows further health in the US economy.
To download full research reports for the industries discussed in this article, click on the report titles below.
Home Builders, New Car Dealers, Car Wash and Auto Detailing, Major Household Appliance Manufacturers, Single Location Full-Service Restaurants, Chain Restaurants, Bars and Nightclubs, Fast Food Restaurant, Frozen Food Wholesaling, Dairy Wholesaling, Beef and Pork Wholesaling, Fruit and Vegetable Wholesaling, Wine and Spirits Wholesaling, Frozen Food Production
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