Atlanta-based home improvement company Home Depot found a surprisingly accurate predictor of growth for the company in the form of an esoteric housing measure that combines new construction, broker commissions, improvements and several other indicators.
The measure, private fixed residential investment as a percent of GDP, worked remarkably well in forecasting growth. Until it didn't. In December, the company said it was stepping away from PFRI, as it is known, and returning to simply following GDP to predict growth. “Housing's just not as important as it has been,” said Carol Tomé, Home Depot's chief financial officer. “It's just not that relevant.”
CEO Frank Blake said the fact that Home Depot saw U.S. same-store sales grow 4.8 percent in 2010 — its first annual increase since 2006 — shows business can improve even while the housing market remains under stress.
“The current environment has caused us to rethink our approach to forecasting and recalibrate the elements of the economy to best correlate to our results,” Blake said in December. He said that just as Home Depot saw a disconnect through increased sales when the measure stayed low, there is a chance that continuing to use PFRI through the disconnect could later overstate the rate of recovery as its percentage rose faster than sales because it had originally fallen so far.
Tomé said Home Depot ran correlations against a number of metrics and determined PFRI to be the best before it began using the number. While she is happy with GDP for the time being, Tomé said she wouldn't be opposed to returning to PFRI. “The good thing about statistics is they always revert to the mean,” she said. “When it reverts to the mean, it's more meaningful.”