Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

Monthly Results 

New Orders

New orders for residential furniture manufacturers and distributors in July 2009 were 16 percent lower than July 2008, according to our recent survey. The 16 percent decline was the same as the 16 percent decline we reported in the June 2009 versus June 2008 comparison.  July 2008 orders were 10 percent below June 2007. According to the survey some 73 percent of the participants reported lower orders. This means, for some good news, 27 percent reported higher orders than last year. This compares to the 15 percent reporting increases last month.

Year-to-date, new orders remained 20 percent lower than last year’s first seven months, the same as the results in June. For the year-to-date, 93 percent are reporting lower orders, the same as last month. 

Shipments and Backlogs 

Shipments in July were 19 percent lower than July 2008, the same as reported last month. Shipments were 18 percent lower than June, but that is normal with the combination of July normally being a slower sales month plus most participants taking off at least a week for the July 4^th vacation.

Year-to-date, shipments remained 20 percent lower than last year. July 2008 shipments were 8 percent lower than the first seven months of 2007. 

Backlogs were actually up 6 percent over June and are now only 13 percent below last year. This compared to a 21 percent decline comparing June 2009 to June 2008. 

Receivables and Inventories

Surprisingly, receivable levels fell 25 percent from July 2008 levels, a bit more than expected. But, receivables were down 10 percent from June 2009, even with 18 percent decline in shipments, month over month. Most likely, some of these results were related to timing of shipments and collections.

Inventories were flat compared to June levels but were 22 percent lower than July 2008. It appears that there has been a lot of focus on lowering inventories to create or conserve cash or reduce borrowing levels.  

Factory and Warehouse Employees and Payrolls

The number of factory and warehouse employees was 20 percent lower than in July 2008 and fell 1 percent from June levels. In June, the numbers were 19 percent lower than the year before. It appears that companies are continuing to adjust the number of employees to current volume levels.

Payrolls were 17 percent lower than July 2008 and off 18 percent versus June, again reflecting vacation schedules. Payrolls year-to-date were 22 percent lower than the same period a year ago, down slightly from 23 percent last month. 

National 

Consumer Confidence

The Conference Board Consumer Confidence Index®, which had improved in August, slipped slightly in September. The Index now stands at 53.1 (1985=100), down from 54.5 in August. The Present Situation Index decreased to 22.7 from 25.4. The Expectations Index declined to 73.3 from 73.8 last month.

Lynn Franco, Director of The Conference Board Consumer Research Center said: “Consumer Confidence, which had improved in August, retreated slightly in September. The Present Situation Index decreased, as consumers viewed both current business conditions and the labor market less favorably than last month. While not as pessimistic as earlier this year, consumers remain quite apprehensive about the short-term outlook and their incomes. With the holiday season quickly approaching, this is not very encouraging news.”

Consumers’ assessment of current conditions was less favorable in September. Those claiming business conditions are “bad” increased to 46.3 percent from 44.6 percent, while those claiming conditions are “good” increased to 8.7 percent from 8.5 percent. Consumers’ appraisal of the job market was also less favorable. Those claiming jobs are “hard to get” increased to 47.0 percent from 44.3 percent, while those claiming jobs are “plentiful” decreased to 3.4 percent from 4.3 percent.

Consumers’ short-term outlook was also slightly more pessimistic. Those anticipating an improvement in business conditions over the next six months decreased to 21.3 percent from 22.2 percent, while those expecting conditions to worsen decreased to 15.0 percent from 15.2 percent. 

Reuters/University of Michigan Surveys of Consumers

The Reuters/University of Michigan Surveys of Consumers was a bit more optimistic. According to their report, “Improving economic conditions have increasingly convinced consumers that the recovery has begun, although few consumers anticipated any quick fixes to the dismal state of their own finances.” “Consumers were more optimistic about prospects for the national economy, inflation, and the unemployment rate, although most consumers thought their own finances would remain problematic for some time,” said Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers. “After fearing a slide into the abyss of an economic depression in December, consumers voiced the first signs that the depression threat had ended in April, and by September concluded the recovery had begun. Nonetheless, consumer spending will remain in low gear for an extended period of time.” Curtin pegged the growth of total personal consumption expenditures at just 1.6 percent during 2010, well below the typical rebound in spending during the first year following a recession.

 The Index of Consumer Sentiment was 73.5 in the September 2009 survey, up from 65.7 in August, reversing the entire decline since last September and rising to the highest level since the start of 2008. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, was 73.5 in September, up from 65.0 in August, and the highest level recorded since the September 2007 survey. The Current Economic Conditions Index rose to 73.4 in September, up from 66.6 in August and the highest level since last September’s 75.0.

The key factor that will hold back the usual upsurge in consumer spending is the dismal state of consumer finances. “A majority of consumers judged their finances to have worsened in each of the past twelve months, with a record number of consumers reporting income declines in September,” according to Curtin. Six-in-ten families expected no income increases at all. Even lower inflation did not brighten real income prospects as just 13 percent expected inflation-adjusted income increases during the year ahead. Moreover, declines in home values, pension and investment accounts has made even those who have not suffered income declines more cautious spenders. The desire to decrease their debt and increase their savings remains the dominate motivation of nearly all consumers. 

Gross Domestic Product (GDP)

Real gross domestic product – the output of goods and services produced by labor and property located in the United States – decreased at an annual rate of 0.7 percent in the second quarter of 2009, (that is, from the first quarter to the second quarter), according to the “third” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP decreased 6.4 percent. In the second estimate released last month, the decrease in real GDP was 1.0 percent. The GDP estimate released is based on more complete source data than were available for the “second” estimate issued last month.

The decrease in real GDP in the second quarter primarily reflected negative contributions from private inventory investment, nonresidential fixed investment, residential fixed investment, personal consumption expenditures (PCE), and exports that were partly offset by positive contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

The much smaller decrease in real GDP in the second quarter than in the first primarily reflected much smaller decreases in nonresidential fixed investment and in exports, an upturn in federal government spending, a smaller decrease in private inventory investment, an upturn in state and local government spending, and a smaller decease in residential fixed investment that were partly offset by a much smaller decrease in imports and a downturn in PCE.  

Leading Economic Indicators

The Conference Board Leading Economic Index™ (LEI) for the U.S. increased 0.6 percent in August, following a 0.9 percent gain in July, and a 0.8 percent rise in June.

“Since reaching a peak in July 2007, the LEI fell for twenty months – the longest downtrend since the mid 1970s – but it has been rising since April and its gains have become very widespread,” says Ataman Ozyildirim, Economist at The Conference Board. “The six-month growth rate of the LEI continues to accelerate. At the same time, the downtrend in the coincident economic index, measuring current economic activity, seems to be stabilizing, with the index flat so far this quarter.”

Ken Goldstein, Economist at The Conference Board said:  “The LEI has risen for five consecutive months and the coincident economic index has stopped falling. Taken together, this suggests that the recession is bottoming out. These numbers are consistent with the view that after a very severe downturn, a recovery is very near. But, the intensity and pattern of that recovery is more uncertain.” 

Housing 

Existing-Home Sales

Existing-home sales in August gave back some of their strong gain in July but remain above year-ago levels, according to the National Association of Realtors®.

 Single-family home sales fell 2.8 percent to a seasonally adjusted annual rate of 4.48 million in August from a level of 4.61 million in July, but are 2.5 percent higher than the 4.37 million-unit pace in August 2008. The median existing single-family home price was $177,500 in August, down 12.1 percent from a year ago.

Existing-home sales – including single-family, townhomes, condominiums and co-ops – declined 2.7 percent to a seasonally adjusted annual rate of 5.10 million units in August from a pace of 5.24 million in July, but remain 3.4 percent above the 4.93 million-unit level in August 2008. In the previous four months, sales had risen a total of 15.2 percent.

Lawrence Yun, NAR chief economist, said the tax credit is working. “Home sales retrenched from a very strong improvement in July but continue to be much higher than before the stimulus. The first-time buyer tax credit is having the intended impact of bringing buyers into the market, allowing them to take advantage of very favorable affordability conditions,” he said. “Some of the give-back in closed sales appears to result from rising numbers of contracts entering the system, with some fallouts and a backlog contributing to a longer closing process, but the decline demonstrates we can’t take a housing rebound for granted.”

An NAR practitioner survey shows first-time buyers purchased 30 percent of homes in August, and that distressed homes accounted for 31 percent of transactions; both were unchanged from July.

“The recent trend shows broad improvement in most of the country, but with an expected rise in foreclosures over the next 12 months we need to maintain a healthy level of ready buyers to absorb the inventory. An extension of the tax credit is critical to preserve incentives for financially qualified buyers to enter the market,” Yun said.

“When home prices show sustained gains, credit will become more widely available to other sectors because Wall Street will be able to price risks confidently. Stable home values will also allow more families to purchase consumer products and provide a strong boost for the broader economy.”

He added that many buyers had been on the sidelines during the past few years, waiting for signs of stabilization. “Now that the market is showing some momentum, we have an opportunity to achieve a more rapid and broader stabilization in home prices. Extending and expanding the tax credit also would help to keep other families from becoming upside down in their mortgages or risk foreclosure,” Yun said.

Total housing inventory at the end of August fell 10.8 percent to 3.62 million existing homes available for sale, which represents an 8.5-month supply at the current sales pace, down from a 9.3-month supply in July. Unsold inventory totals are 16.4 percent lower than a year ago.

The national median existing-home price for all housing types was $177,700 in August, down 12.5 percent from August 2008. Distressed properties continue to downwardly distort the median price because they generally sell for 15 to 20 percent less than traditional homes. 

New Residential Sales

Sales of new one-family houses in August 2009 were at a seasonally adjusted annual rate of 429,000, according to estimates released jointly by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 0.7 percent above the revised July rate of 426,000, but is 3.4 percent below the August 2008 estimate of 444,000.

The median sales price of new houses sold in August 2009 was $195,200; the average sales price was $256,800. The seasonally adjusted estimate of new houses for sale at the end of August was 262,000. This represents a supply of 7.3 months at the current sales rate, down significantly from the over 10-month’s supply earlier this year. 

Housing Starts

According to the U.S. Census Bureau, privately-owned housing starts in August were at a seasonally adjusted annual rate of 598,000. This is 1.5 percent above the revised July estimate of 589,000, but is 29.6 percent below the August 2008 rate of 849,000.

Single-family housing starts in August were at a rate of 479,000; this is 3.0 percent below the revised July figure of 494,000. The August rate for units in buildings with five units or more was 115,000.  

Retail Sales

The U.S. Census Bureau reported that advance estimates of U.S. retail and food services sales for August, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $351.4 billion, an increase of 2.7 percent from the previous month, but 5.3 percent below August 2008. Total sales for the June through August 2009 period were down 7.6 percent from the same period a year ago.

Retail trade sales were up 3.0 percent from July 2009, but 6.0 percent below last year. Gasoline stations sales were down 26.7 percent from August 2008, reflecting lower prices at the pump, and building material and garden equipment and supplies dealers were down 13.6 percent from last year.

Sales at furniture and home furnishings stores were down 12.8 percent in August from August 2008. Year-to-date, sales at these stores were down 13.7 percent, similar to last month’s 13.6 percent. 

Consumer Prices

On a seasonally adjusted basis, the Consumer Price Index for all Urban Consumers (CPI-U) rose 0.4 percent in August, according to the Bureau of Labor Statistics. The index has decreased 1.5 percent over the last 12 months on a not seasonally adjusted basis.

The 0.4 percent seasonally adjusted increase in the CPI-U was driven by a 9.1 percent rise in the gasoline index. This increase accounted for almost the entire advance in the energy index and over 80 percent of the overall increase. Despite the August increase, the gasoline index has fallen 30.0 percent over the last 12 months. 

Employment

The U.S. Bureau of Labor Statistics reported nonfarm payroll employment continued to decline in August (-216,000), and the unemployment rate rose to 9.7 percent. Although job losses continued in many of the major industry sectors in August, the declines have moderated in recent months.

In August, the number of unemployed persons increased by 466,000 to 14.9 million, and the unemployment rate rose by 0.3 percentage point. The rate had been little changed in June and July, after increasing 0.4 or 0.5 percentage point in each month from December 2008 through May. Since the recession began in December 2007, the number of unemployed persons has risen by 7.4 million, and the unemployment rate has grown by 4.8 percentage points. 

Durable Goods Orders and Factory Shipments

According to the U.S. Census Bureau, new orders for manufactured durable goods in August decreased $4.0 billion or 2.4 percent. This was the second decrease in the last three months. This followed a 4.8 percent July increase. Excluding transportation, new orders were down slightly. Excluding defense, new orders decreased 2.4 percent.

Shipments of manufactured durable goods in August, down following two consecutive monthly increases, decreased $2.4 billion or 1.4 percent. This followed a 2.2 percent July increase.

Transportation equipment, also down following two consecutive monthly increases, had the largest decrease, $0.9 billion or 2.0 percent to $42.1 billion.

According to the full report issued by the U.S. Census Bureau, shipments of all furniture and related products were down 18.8 percent in July versus July 2008. Shipments in this category year-to-date were off 20.5 percent, similar to our survey. Orders were also off 20.9 percent. 

Consumer Credit

The Federal Reserve statistical release projected that consumer credit outstanding decreased at an annual rate of 10.4 percent in July, with revolving credit down 8.0 percent. The 10.4 percent annual rate compared to a estimated decrease of 7.4 percent in June and 4.2 percent in May.

Summary

There was some good news this month. Even though the Consumer Confidence Index was down slightly, the Reuters/ University of Michigan report was much more optimistic. Let’s hope their survey was the right one.

The results this month were, while down as expected, showed some signs of progress with the number of participants reporting increased orders for July over July 2008 improving to 27 percent up from 15 percent last month.

Several company executives we have spoken with seem to feel that we may have hit bottom over the last few months as orders appear to be stabilizing somewhat. It may be too early to tell, but at least it seems that way. On the other hand, we have not heard much about business picking up other than an occasional week here and there.

We did a short speech on the industry recently at a Rotary Club luncheon. I noted to them that based on our surveys over the last several years and annualizing current year-to-date, a company that did $100 million in 2005, would be down to $66 million by the end of 2009. That is just based on average. If you were not one of the ones growing slightly or losing at a lower rate, you would be even smaller.

That requires a lot of adjusting. We believe that most well run companies have just about completed their downsizing. Most people could not imagine the severity of the slump when all of this started. Accordingly, there has been a lot of red ink in the last two years. 

Hopefully, most have adjusted and we really have hit bottom. While it will be a while before we see great gains, we believe those who can hang on, will be rewarded as business slowly recovers. We have just got to see consumers loosen up a bit.

It really is amazing to talk to people about holding off on spending. Those who can afford it keep telling me that they are not spending anyway. For those of you who keep telling me to give more positive news, here is some. I spent money last month buying me a new range finder for golf. It’s great. For those who do not play golf or already have a range finder, take some of your dollars and buy some furniture. (Ok, a weak attempt at some humor.)

   We heard pre-market was very good for most. Here’s hoping that the work that was put into it turns into a good October High Point Market. We hear that inventories at retail are low and floor samples need replacing. Let’s hope that adds up to a bit of buying at market.

  (R) Revised