Recent quarterly reports from the country's largest home-improvement retailers were better from an operational standpoint, but the results don't indicate an end to the housing slump or the sluggish economy.

Home Depot (NYSE: HD) and Lowe's (NYSE: LOW) have both focused on cutting costs and improving internal operations to maintain margins in the face of lower sales. Throughout the recession, Home Depot has maintained a slower expansion pace, a smaller workforce, and a focus on supply-chain improvement to keep costs down.

Lowe's has worked on improving its technology to better align its inventory, staffing, and pricing with regard to sales. This focus has helped the company maintain healthy margins even as sales have failed to be buoyant. Lowe's made the strategic decision to invest in and implement new technology as it lacks visibility on when an economic recovery will be significant enough to boost sales.  

Some ugly words
Neither companies' executives were able to provide any commentary about when they expect a sustainable economic or housing recovery to begin. "Our third-quarter sales were impacted by the continued sluggishness of the economic recovery, driven by ongoing uncertainty in employment and housing," said Lowe's CEO Robert Niblock on his company's conference call. "As we've seen over the past several quarters, consumers are not yet willing to consistently take on larger discretionary home-improvement projects. They remain cautious and continue to rationalize the scope of their projects or, in many cases, delay projects until they have better clarity about their personal financial situations, the value of their homes, and the overall macroeconomic outlook."

Sure, we've heard similar commentary from many companies over the past year, and we're all aware that the economy will take some time to recover from the recession. What's more worrisome is that Niblock also said he was starting to see inflation in commodity prices and that Lowe's was going to pass the costs onto the consumer.

Home Depot CEO Frank Blake also said that commodity inflation, specifically for copper, was figuring in significantly to the company's results.  When asked whether he sees this trend continuing into the future, he said, "At this point we'd say it probably continues." Increasing prices coupled with a sluggish economy is never a good sign.

More importantly for companies levered to housing is that housing prices have not yet stabilized, even with the inflation Niblock and Blake see in other areas of the economy. In fact, Niblock believes that housing prices will continue to decline into 2011.

What this means for home improvement
Unless you're in the market to buy a house, declining home prices aren't good. They've been falling ever since the housing bubble burst, and an October survey from Credit Suisse showed that 96% of consumers think it isn't a good time to sell their home.

When consumers don't believe that the prices of their homes are going to increase, and that the economic environment is not conducive to selling, they're unlikely to invest in such an asset by upgrading or renovating it. This attitude clearly is hitting the bottom line at Lowe's and its top competitor, Home Depot, but it's also hurting companies such as flooring expert Lumber Liquidators (NYSE: LL) and Masco (NYSE: MAS), which focuses on upscale cabinet and faucets.

Look elsewhere
In addition to these headwinds, the current quarter and the first quarter of the year are traditionally the slowest for the home-improvement industry, as home repair and redecoration are more often performed in the warmer months.

With muted earnings over the next few months and a lack of visibility regarding home prices and an economic recovery, I think capital is better used in other sectors of the market. Investors who want to maintain some exposure to the home-improvement space would be better suited to look at more diversified retailers. Sears Holdings (Nasdaq: SHLD), hhgregg, (NYSE: HHG), and even Target (NYSE: TGT) offer exposure to home improvement and should also receive the benefit of holiday seasonality over the next couple of months.

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Fool contributor Andrew Bond owns no shares in the companies listed. Home Depot and Lowe's are Motley Fool Inside Value recommendations. Masco is a Motley Fool Income Investor recommendation. Lumber Liquidators is a Motley Fool Rule Breakers recommendation. The Fool owns shares of Lumber Liquidators. You can follow Andrew on Twitter @Bond0 or on his RSS feed. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.