“I tell my husband, ‘It’s like going fishing. You drink a little, talk a lot and bring something home.”
Susan Jean, proprietor of Painting with a Twist, Bentonville, Arkansas
In 2017, The New York Times ran a feature on entrepreneurship titled, “A Paintbrush in One Hand, and a Drink in the Other.” It highlighted a burgeoning hip startup industry — Paint & Sip studios. The premise: Mix art with alcohol for fun and keep it relatively affordable for the customers. More and more people were looking for experiences, and franchises like Bottle & Bottega, Pinot’s Palette and Wine and Design drew in would-be (tipsy) Van Goghs. One of the fastest growing chains, Painting with a Twist, was one of Entrepreneur magazine’s 50 fastest-growing franchises in 2017. Today, that ranking has descended to #440 out of 500 with 241 units in operation, down 19% in three years. Granted, the COVID-19 pandemic in 2020 took the wind out of its growth sails. That said, expansion had leveled off one year earlier, in 2019, at just north of 300 franchises.
As for paint companies of the traditional ilk, founded in 1866 and today with more than 60,000 employees in 4,438 chains in the U.S., Canada, the Caribbean, and Latin America and selling into more than 120 countries worldwide, its slogan is ‘Cover the Earth.’ You know this S&P 500 member by its ticker SHW.
Paint is the fundamental indicator by which to judge the U.S. housing sector. Before a seller lists a home, a bit of cosmetics is applied to freshen up the walls or the basement or garage floors. Sometimes brighter colors that were a favorite of the owner are painted over in neutral tones to make it easier on the eyes of the buyer traffic expected to traipse through an open house or scheduled appointment. Once a deal is sealed, more paint yet is purchased to the new owner’s liking. Paint is also a final product for home builders. Whether it’s the finishing touches on a single-family detached home, a high-rise condominium or an entire townhome community, paint is an essential element to completing these dwellings.
Wise Yodas rich in business cycle acumen know the importance of the housing market as a recession guide. Housing leads you into and out of periods of economic downturn because of the sector’s interest rate sensitivity. When rates get too tight at the end of a cycle, housing peaks and falls. Once in recession, a central bank cuts rates to support a turnaround. Recovery is thus built on housing being the first off the starting blocks. Paint must be meticulously monitored from a business cycle perspective. To achieve that, we transpose Sherwin-Williams’ stock price into a year-over-year (YoY) trend. As of this writing, SHW was down about 20% (green line). This bear-market designation illustrated by the green dashed line has foreshadowed every recession since 1990.
Granted, the lead was variable and long at times, but make no mistake, an SHW crash like this prompted economists to reach for their ‘gray crayons.’ Even our friends at Zelman & Associates, who have the best pulse on individual players in the space, were surprised: “Though we expected SHW to lower 2022 EPS guidance – our estimate was 5% below the midpoint of prior guidance – the reduction was worse than we anticipated. The majority of the cut to the outlook is due to weaker demand in North America DIY, Europe and China, with net input cost pressure only a modest incremental headwind.” No, this is not a supply chain disruption thing.
A constant in the aftermath of the 20-month expansion has been cycle compression. The same applies to mortgage rates. In 2022’s second and third quarters, the YoY change in Freddie Mac’s 30-year mortgage rate exceeded a 250-basis point increase (red line), unprecedented moves since the mid-1980s. Painting the combination of the mortgage rate shock alongside the bear market in SHW ups conviction for a recession to emerge even before today’s U.S. second-quarter gross domestic product (GDP) report goes public at 8:30 a.m. ET. The rate shock is behind notable downside surprises in housing data this week.
Taking the unexpected in turn, June new home sales fell 8.1% to a 590,000 seasonally adjusted annual rate; each of the prior three months were revised downward. Chalk up revisions to cancellations. Nonetheless, the -50.5% annualized decline in the six months ended June has so few precedents, you can count them on one hand: 1966 near recession, 1980 recession, 1981-82 recession, 2007-09 recession and 2010 payback from home buyer tax credit.
Pending total home sales collapsed 8.6% in June to the levels consistent with the last three recessions. The near-40% annualized plunge in the six months ended June was rivaled by the 2007 housing bust, 2010’s homebuyer tax credit hangover, and the COVID-19 flash recession.
Real estate agents’ offices dot America’s landscape. The decline in housing turnover exacerbated by spiking mortgage rates will generate an income shock to millions of households relying on this cash flow as a source of prime operating financing. While GDP will reflect the gravity of home sales’ decline via brokers’ commissions, this same depleted income mine will pull down income growth as the housing recession persists. We say this calls for grabbing a glass and painting a happier picture if only to distract from the bad economic news to come.