Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Stagflation Is Reshaping the Home Renovation Market
Transcript
- Lucas: So the May CPI came in at 4.2 percent annual — highest in three years — and that core number that strips out food and energy? Also up. But there's one corner of the economy where you really feel the pinch in a concrete way, and it's home renovation. Luna: Yeah, I've been hearing from friends — a kitchen remodel that was quoted at 40 grand two years ago is now pushing 55. And they're waiting months just to get on a contractor's calendar. Lucas: Exactly. And the data backs that up. The National Association of Home Builders' remodeling index has been sliding for four straight quarters. Meanwhile, the cost of materials — lumber alone is up 22 percent year-over-year, and that's after a drop from the pandemic peak. So you've got this perfect stagflation setup: high input costs, but the economy is growing at only about 1.6 percent real GDP. People have less real income to spend, yet the stuff they need to fix up their house keeps getting pricier. Luna: And it's not just lumber. I looked at the latest PCE data — that's the Fed's preferred inflation gauge — and the overall index is at 130.9. That's up from about 130.4 in March. But the services side, which includes contractor labor, is rising faster than goods. So you're paying more for the person doing the work, not just the plywood. Lucas: Right. And that labor piece is sticky. The JOLTS data from April showed job openings rebounded to about 7.6 million, and construction is one of the sectors that's been adding. But the pool of experienced remodelers hasn't grown that much. So you're seeing longer lead times — six months or more for a major renovation in many metro areas. And that's if you can get a bid at all. Some contractors are just turning down smaller jobs because they can make more on big projects. Luna: So what does that mean for the typical homeowner? Are people still pulling the trigger, or are they pulling back? Lucas: The data shows a split. The high-end market — think window replacements, roofing, structural work — is still moving, partly because those are often necessity-driven. But the discretionary stuff, like a full kitchen gut or a bathroom addition, is slowing. The Harvard Joint Center for Housing Studies projects that spending on improvements will grow only about 3 percent this year, down from 8 percent in 2025. In real terms, that's basically flat. People are either downsizing their project scope or postponing entirely. Luna: That echoes what happened in the late 1970s, right? I recall reading that during the 1978-1980 stagflation period, real spending on home renovations actually fell, even though nominal dollars kept rising. People shifted to smaller, more frequent projects rather than one big reno. Lucas: That's exactly the parallel. In the 1970s, you saw a boom in what the industry called 'minor maintenance and repair' — painting, caulking, small plumbing fixes — because homeowners couldn't afford the big stuff. And that's happening again. The data from Lowe's and Home Depot's recent earnings calls both mentioned that customers are trading down to cheaper materials and doing more work themselves. But even the DIY route has gotten expensive. A gallon of premium paint is now over 50 dollars in some markets. Luna: And if you're doing it yourself, you're also competing for time. The unemployment rate is at 4.3 percent, so most people who want a job have one. That means fewer hours to spend on a weekend project. So even DIY is constrained by the labor market. Lucas: Exactly. And that's the stagflation bind: you can't afford to hire someone, but you also can't afford the time to do it yourself, because wages are barely keeping up with inflation. Average hourly earnings are up about 3.2 percent year-over-year, but inflation is running at 4.2. So real wages are falling. That eats into disposable income, which is the fuel for renovation spending. Luna: One thing I'm curious about: are there any segments of the renovation market that are actually growing right now? Lucas: Yes — surprisingly, energy-efficiency upgrades. Things like insulation, heat pumps, and solar panels. Partly because of the IRA tax credits that are still in place, but also because people see energy costs rising. The wholesale energy market has been volatile — gold and silver are spiking, which is a flight to safety signal, but also reflects inflation expectations. So homeowners are thinking, 'If I can lock in lower energy bills by upgrading my attic insulation, that's a hedge.' That spending held up even in the 1970s. Luna: That makes sense. And it's a smart move in a stagflationary environment. You're reducing a fixed cost, which helps when real incomes are squeezed. Lucas: Exactly. And the other pocket that's still strong is insurance-driven replacements. With home insurance premiums up sharply — we talked about that in episode 48 — some insurers are requiring roof replacements or electrical upgrades to maintain coverage. So that's creating a floor under certain types of renovation spending, even as discretionary work slows. Luna: So if I'm a homeowner listening, what should I be thinking about right now? Is it better to do that small project now, or wait for prices to come down? Lucas: I think the honest answer is: waiting probably won't help much, because the structural drivers here — labor shortages, material costs tied to energy and logistics — aren't going away quickly. The 10-year breakeven inflation rate is at 2.31 percent, which suggests the market expects inflation to stay above the Fed's target for a while. So if you have a project that's truly necessary — like a leaky roof or a failing furnace — do it now, because costs are likely to keep rising. But if it's cosmetic, maybe scale it back. Do the painting yourself, save the kitchen gut for when the economy is on firmer footing. Luna: That's practical advice. And it lines up with what the data is saying — people are already doing that. The spending mix is shifting. Lucas: Yeah, and that shift has implications beyond the homeowner. Think about the firms that supply the renovation market. If demand softens, you could see margin compression at companies like Home Depot and Lowe's, but also at smaller specialty suppliers. And if the economy stays in this low-growth, high-inflation zone, we might see consolidation in the contracting industry — bigger firms buying up smaller ones to capture scale. Luna: Interesting. So the renovation market becomes another lens to watch for broader economic signals. If people stop doing even small projects, that's a bad sign. Lucas: Exactly. And that's why we track it. Speaking of which, if this kind of walking through the economy with us has made something click — honestly, if today was worth a coffee to you, that's the link: buy me a coffee dot com slash fexingo. It's how we keep the show ad-free and focused on the numbers that matter. Luna: Yeah, it really helps. And we appreciate every bit of support. It keeps us independent. Lucas: Alright, back to the renovation squeeze. One more number that stood out: the gold price hit 4,347 dollars an ounce — up almost 6 percent in five days. That's partly a stagflation hedge. But it also means that if you're a homeowner with an old gold necklace or coin collection, now might be a good time to sell and fund that renovation project. Luna: Ha, there's a practical takeaway. Liquidate the jewelry, fix the roof. Lucas: Exactly. Because the roof isn't going to get cheaper. So I think that's the bottom line: stagflation is reshaping the renovation market in real time — pushing people toward necessities, energy efficiency, and smaller projects, while the big discretionary jobs get postponed. And that pattern, as we've seen, has historical precedent. Luna: And for listeners, keep an eye on those JOLTS numbers and the PCE data. If contractor labor starts to loosen, that could signal a shift. Lucas: Good point. We'll be watching. Thanks for joining us.