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Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

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Monthly Results

New Orders

New orders for September 2010 were 3 percent below new orders in September 2009, according to our recent survey of residential furniture manufacturers and distributors. This was the first decline in new orders comparing month over the same month of the previous year since September 2009. September 2009 orders were 10 percent lower than September 2008 orders. From most of the conversations we had during September, the results were not a total surprise.

As has been the case recently, the results for the month by participant varied quite a bit, with some participants showing some nice gains, while some were off significantly. For the month, some 66 percent of the participants reported lower orders compared to last year.

Year-to-date, the new orders were still up 6 percent. Some 60 percent of the participants have reported increased orders through September, down from 67 percent reported last month. At this time last year, new orders were off 18 percent from the same period in 2008.

Shipments and Backlogs

Shipments in September were up 6 percent compared to September 2009, when they were off 14 percent from September 2008. As with last month, we suspect some of the shipments increase relates to arrival of imported products. Approximately 59 percent of the participants reported increased shipments for the month. Year-to-date, shipments were up 8 percent over the same period a year ago.

Shipments for the first nine months of 2009 were 19 percent below the same period in 2008. Shipments were up over last year for approximately 74 percent of the participants.

Backlogs fell 3 percent from August reflecting the fact that shipments exceeded orders. Backlogs remained 7 percent
higher than September a year ago, down from an 18 percent increase last month.

Receivables and Inventories

Receivables increased 2 percent over August, which was not out of line at all with the 4 percent increase in shipments. Receivables were up 13 percent over last September, out of line with the 6 percent increase in shipments, but were down
from a 15 percent increase reported last month. Inventories increased 1 percent over August and were 18 percent higher than September 2009. This was up from a 14 percent increase reported last month.

From what we have heard, the increase is most likely caused by management seeing increased orders in the spring and
summer, adjusting order rates for imports, then business began to fall off again. Inventory levels will need to be watched closely in the coming months.

Factory and Warehouse Employees and Payrolls

The number of factory and warehouse employees was flat with August and up 2 percent from last September. August
employees were 2 percent higher than August 2009. September 2009 employees were 17 percent lower than September 2008.

Factory and warehouse payrolls were up 4 percent over last September and were 11 percent higher year-to-date. Last year, payrolls were 20 percent lower year-todate than the same period in 2008.

National

Consumer Confidence

The Conference Board Consumer Confidence Index®, which had improved in October, increased further in November. The Index now stands at 54.1 (1985=100), up from 49.9 in October. The Present Situation Index rose to 24.0 from 23.5. The Expectations Index increased to 74.2 from 67.5 last month.

Lynn Franco, Director of The Conference Board Consumer Research Center said: “Consumer confidence is now at its highest level in five months, a welcome sign as we enter the holiday season. Consumers’ assessment of the current state of the economy and job market, while only slightly better than last month, suggests the economy is still expanding, albeit slowly. Expectations, the main driver of this month’s increase in confidence, are now at the highest level since May (Exp. Index, 84.6). Hopefully, the improvement in consumers’ mood will continue in the months ahead.”

Consumers were more optimistic about the short-term outlook than in October. Those anticipating an improvement in business conditions over the next six months rose to 16.7 percent from 15.8 percent, while those anticipating business conditions will worsen declined to 12.1 percent from 14.4 percent. nConsumers were also more upbeat about future job prospects. Those expecting fewer jobs in the months ahead declined to 18.8 percent from 22.3 percent, while the percentage expecting more jobs rose to 15.5 percent from 14.5 percent. The proportion of consumers expecting an increase in their incomes increased to 10.6 percent from 9.7 percent.

Thomson Reuters/University of Michigan Surveys of Consumers

According to the Thomson Reuters/ University of Michigan Surveys of Consumers, “the economic news heard by consumers about jobs grew significantly more favorable in November. Unfortunately, the favorable job news only had a small impact on how consumers expected the overall unemployment rate to change in the year ahead. The majority of consumers anticipated the jobless rate to remain stuck at its current high level throughout the year ahead.”

The report also noted that the personal finances of consumers remained quite bleak in November. Nearly twice as many consumers reported that their finances had worsened rather than improved during the past year, with onein- three reporting declines in household income. There has been some small improvement since the cyclical low point.

Income gains were reported twice as frequently this November compared with a year ago, although the frequency of income gains have remained unchanged for the past 4 months. The larger problem was that just 25 percent of all households expected their finances to improve during the year ahead, down from 29 percent last nNovember. The majority of households expected no income increase during the
year ahead in November, for the 23rd consecutive month, an all-time record.

Households with incomes above $75,000 held the same dismal outlook for their finances, showing no improvement in their financial expectations for the year ahead. Holiday sales will be based, more than ever, on the availability of discounts as consumers continue to cope with their dismal financial circumstances.

The Sentiment Index was 71.6 in the November 2010 survey, up from 67.7 in October and 67.4 in November of 2009. The Sentiment Index was higher than anytime since June, but was lower than in any survey during the first half of 2010. While both components improved over the month earlier reading, the entire yearover- year gain was in the Current Conditions Index (up by 19.3 percent). The Expectations Index, a component of the Index of Leading Economic Indicators, worsened during the past year (-2.6 percent).

Gross Domestic Product (GDP)

Real gross domestic product – the output of goods and services produced by labor and property located in the United States – increased at an annual rate of 2.5 percent in the third quarter of 2010, (that is, from the second quarter to the thirdquarter), according to the “second” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.7 percent. The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, nonresidential fixed investment, exports, and federal government spending that were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

Leading Economic Indicators

The Conference Board Leading Economic Index® (LEI) for the U.S. increased again in October, with the financial components making the largest positive contributions. The six-month change in the index stands at1.6 percent (about a 3.3 percent annual rate) through October 2010, down from 4.6 percent (a 9.4 percent annual rate) for the previous six months. In addition, the strengths among the leading indicators have only been slightly more widespread than the weaknesses in recent months.

The Conference Board Coincident Economic Index® (CEI) for the U.S., a measure of current economic activity, also increased in October.

Employment contributed positively to the index for the first time since this May. The six-month change in the coincident economic index has slowed to 0.6 percent (a 1.2 percent annual rate) in the period through October 2010, down from 1.4 percent (a 2.8 percent annual rate for the previous six months).

Six of the ten indicators that make up The Conference Board LEI for the U.S. increased in October. The positive contributors – beginning with the largest positive contributor – were interest rate spread, stock prices, real money supply, average weekly manufacturing hours, index of consumer expectations, and building permits. The negative contributors – beginning with the larger negative contributor – were index of supplier deliveries (vendor performance) and manufacturers’ new orders for nondefense capital goods. The average weekly initial
claims for unemployment insurance (inverted) and manufacturers’ new orders for consumer goods and materials held steady in October.

Housing: Existing-Home Sales

According to the National Association of Realtors®, existing-home sales, which are completed transactions that include singlefamily, townhomes, condominiums and coops, declined 2.2 percent to a seasonally adjusted annual rate of 4.43 million in October from 4.53 million in September, and are 25.9 percent below the 5.98 million-unit level in October 2009 when sales were surging prior to the initial deadline for the first-time buyer tax credit.

Year-to-date there were 4.149 million existing-home sales, down 2.9 percent from4.272 million at this time in 2009. nSingle-family home sales declined 2.0 percent to a seasonally adjusted annual rate of 3.89 million in October from 3.97 million in September, and are 25.6 percent below the 5.23 million surge in October 2009. The median existing single-family home price was $171,100 in October, which is 0.5 percent below a year ago. Lawrence Yun, NAR chief economist, said the recent sales pattern can be expected to continue. “The housing market isexperiencing an uneven recovery, and a temporary foreclosure stoppage in some states is likely to have held back a number ofcompleted sales. Still, sales activity is clearly off the bottom and is attempting to settle into normal sustainable levels,” he said.

“Based on current and improving job market conditions, and from attractive affordabilityconditions, sales should steadily improve to healthier levels of above 5 million by spring of next year.”

The national median existing-home price for all housing types was $170,500 in October, down 0.9 percent from October 2009. Distressed homes accounted for 34 percent of sales in October, compared with 35 percent in September and 30 percent of sales in October 2009.

Regionally, existing-home sales in the Northeast declined 1.3 percent to an annual pace of 750,000 in October and are 27.2percent below the surge in October 2009. The median price in the Northeast was $240,200, which is 1.9 percent higher than a year ago.

Existing-home sales in the Midwest slipped 1.1 percent in October to a level of 940,000 and are 32.4 percent below the tax credit rush one year ago. The median price in the Midwest was $139,500, down 3.6 percent from October 2009.

In the South, existing-home sales fell 3.4 percent to an annual pace of 1.71 million in October and are 24.0 percent below the year-ago surge. The median price in the South was $148,700, down 0.7 percent fromOctober 2009.

Existing-home sales in the West declined 1.9 percent to an annual level of 1.03 million in October and are 21.4 percent below the sales rush in October 2009. The median price in the West was $209,300,which is 4.8 percent below a year ago.

New Residential Sales

According to the U.S. Census Bureau News, sales of new single-family houses in October 2010 were at a seasonally adjusted annual rate of 283,000. This was 8.1 percent below the revised September rate of 308,000 and was 28.5 percent below the October 2009 estimate of 396,000.

The median sales price of new houses sold in October 2010 was $194,900; the average sales price was $248,200. The seasonally adjusted estimate of new houses for sale at the end of October was 202,000. This represents a supply of 8.6 months at the current sales rate. New home sales were down in three of the four regions of the country with only sales in the South up (3.1 percent).

Housing Starts

According to the release from the U.S. Census Bureau News, privately-owned housing starts in October were at a
seasonally adjusted annual rate of 519,000. This was 11.7 percent below the revised September estimate of 588,000 and was 1.9 percent below the October 2009 rate of 529,000. Single-family housing starts in October were at a rate of 436,000; this was 1.1 percent below the revised September figure of 441,000.

Housing starts in October were actually higher in the Northeast, but were lower in all other regions compared to last October.

Retail Sales

The U.S. Census Bureau announced that advance estimates of U.S. retail and foodservices sales for October, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, increased 1.2 percent from the previous month, and 7.3 percent above October 2009. Total sales for the August through October 2010 period were up 6.3 percent from the same period a year ago. According to the report, retail trade sales were up 1.3 percent from September 2010, and 7.7 percent above last year. Auto
and other motor vehicle dealers sales were up 14.7 percent from October 2009 and nonstore retailers sales were up 13.5 percent from last year.

Sales at furniture and home furnishings stores were down almost 1 percent from September but were up 2.9 percent from October 2009. Year-to-date, sales at these stores were up 2.2 percentover last year.

Consumer Prices

The U.S. Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in October on a seasonally adjusted basis. Over the last 12 months, the all items index increased 1.2 percent before seasonal adjustment.As has frequently been the case in recent months, an increase in the energy index was the major factor in the all items seasonally adjusted increase. The gasoline index rose for the fourth month in a row and accounted for almost 90 percent of the all items increase; the household energy index rose as well. The food index rose slightly in October with the food at home index unchanged.

The index for all items less food and energy was unchanged in October, the third month in a row with no change. The indexes for shelter and medical care rose, but these increases were offset by declines in an array of indexes including new vehicles, used cars and trucks, apparel, recreation, and tobacco.

Over the last 12 months, the index for all items less food and energy has risen 0.6 percent, the smallest 12-month increase in the history of the index, which dates to 1957. The energy index has risen 5.9 percent over that span with the gasoline index up 9.5 percent. The food index has risen 1.4 percent, with both the food at home index and food away from home index rising the same 1.4 percent.

Employment

Nonfarm payroll employment increased by 151,000 in October, and the unemployment rate was unchanged at 9.6 percent, according to the U.S. Bureau of Labor Statistics. Since December 2009, nonfarm payroll employment has risen by 874,000. The number of unemployed persons,
at 14.8 million, was little changed in October. The unemployment rate has been essentially unchanged since May.

Durable Goods Orders and Factory Shipments

New orders for manufactured durable goods in October decreased 3.3 percent, according to the U.S. Census Bureau. This decrease, down two of the last three months, followed a 5.0 percent September increase. Excluding transportation, new orders decreased 2.7 percent. Excluding
defense, new orders decreased 2.1 percent.

Transportation equipment, also down two of the last three months, had the largest decrease, 5.2 percent. This was led by defense aircraft and parts, which decreased $1.6 billion. Shipments of manufactured durable goods in October, also down two of the last three months, decreased 0.9 percent. This followed a 0.1 percent September increase. According to this report, new orders in September for furniture and related products increased 4 percent over August and were 9.5 percent higher than September a year ago. Year-to-date, orders for this category were up 2.3 percent. Shipments year-to-date for this category nwere up 1.3 percent.

Summary

Last month, we noted that after business had shown signs of improvement through July, business had fallen off somewhat in August and September. The results of our survey seemed to validate that. With the first decline in orders, comparing current month to prior year, since September 2009, the results nwere disappointing but not unexpected. It will be interesting to see what the October results show, but based on comments at Market, we do not expect to see a lot of improvement, other than possibly timing of Market orders.

Consumers continue to be somewhat pessimistic, especially in light of most of the national news. Maybe if we could stop
all national news for a few weeks, we would all feel better. At least the latest consumer confidence reports show some improvement. And, retail sales in general seems to be picking up, at least somewhat.

From initial reports, Black Friday was pretty good. The initial reports indicated that electronics were selling very well with many stores running out of certain hot nproducts before the end of the day. Unfortunately, a lot of those products are eating up a lot of consumers’ disposable
income, which could (should) be used for furniture.

We do need to remember that furniture is still selling, just not enough to go around the whole industry. Some public companies are reporting improved results or at least some black numbers at the bottom of the page. It does appear that most companies have “right sized”
themselves for current volume levels, and some are reporting nice growth. So all is not doom and gloom as much as it seems like it.

We have said it all too often over the last couple of years, but the key in today’sworld is to hang in there. Most feel that 2011 may be more of the same as 2010. Let’s hope that the September results were not the beginning of more declines.

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This Furniture Insights® newsletter report has been re-published with the permission of Smith Leonard PLLC an independent member of the BDO Seidman Alliance.

Firm Profile: Founded in 1930 by BDO Seidman, LLP, the High Point, North Carolina practice was recently acquired by four individuals who have spent the majority of their 100+ year careers building the existing practice. Beginning January 1, 2007, Smith Leonard PLLC became an independent member of the BDO Seidman Alliance. Partners are Ken Smith, Darlene Leonard, Jon Glazman and Mark Bulmer. Among the firm's 32 employees are 18 CPAs.

Service Area – Smith Leonard concentrates primarily in the Triad, but also services companies with domestic locations throughout North Carolina, Virginia, South Carolina and Texas.

Smith Leonard has an extensive network of international relationships that helps service their clients’ needs throughout the world with locations in Asia, Europe, South America, Mexico and Canada. These companies range in revenue size of $2 million to $300 million.

Practice Concentration – The majority of the client base is composed of manufacturing and distribution companies.

Many of its clients are either furniture manufacturers, distributors or suppliers to the furniture industry. Smith Leonard also services companies in retail, transportation, insurance, not-for-profit entities and employee benefit plans. Smith Leonard offers a full range of accounting and consulting services including audits, compilations, reviews, tax planning and compliance. The partners and staff of Smith Leonard also assists clients in mergers, acquisitions, business consulting, cash flow projections, and tax outsourcing. Individual clients benefit from extensive experience in family wealth services including estate tax planning.

The firm continues to produce monthly and annual statistics for the furniture industry. For more information call (336) 883-018 or e-Mail: ksmith@smithleonardcpas.com

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