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Monthly Forecaster: December 2004 Residential Furniture Industry Report From BDO Seidman

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New Orders. October was not as good a month for residential furniture manufacturers as the last several months were for the industry. According to our latest survey of these companies, new orders were 3 percent lower than October 2003. New orders increased 7 percent over September. While orders were down 3 percent in October, the comparison is to a strong October 2003 when orders were 9 percent higher than October 2002. This means that October 2004 order rates were still 6 percent higher than October 2002. For the month of October, only 37 percent of our participants reported an increase in new orders leaving 63 percent of the participants with a decrease in orders. Year-to-date, new orders are now up 7 percent for the first ten months, compared to an 8 percent increase through the first nine months. Still, some 63 percent of the participants have reported an increase in new orders. Through October, 30 percent of the participants have reported an increase of 10 percent or more. Shipments and Backlogs. Shipments in October were just slightly higher than October 2003 registering less than a _ percent increase. October shipments were 3 percent lower than shipments in September. Year-to-date, shipments remained 6 percent higher than the first 10 months of 2003. Similar to new orders, 58 percent of the participants have reported an increase in shipments and 37 percent have reported an increase of 10 percent or more. Backlogs were down slightly from September with shipments slightly higher than orders. Backlogs are now 3 percent higher than October 2003, down from a 6 percent increase in September over September 2003 comparisons. Receivables and Inventories. Receivables were 1 percent higher than October 2003 levels and were 2 percent higher than September 2004 levels. Receivables continue to appear to be in good shape when compared to shipments, which were flat with October 2003, but are up 6 percent year-to-date. Inventory levels fell 2 percent from September, but remain 12 percent higher than October 2003, the same as the increase in September. We know that some upholstery companies have increased their fabric and leather levels to ensure availability. Also, some case goods companies are carrying more finished goods to better service their customers. Also, more imported products are increasing the inventory levels. Payrolls and Employment. Payrolls in October were even with October 2003, but fell 3 percent from September levels. Year-to-date, payrolls are 5 percent higher than October 2003. Employment fell again in October with the number of factory employees falling 1 percent from September levels. The number of employees is now 4 percent lower in October than in October 2003. With payrolls up and employment down, these results continue to suggest that employees are working more hours as factories continue to adjust to current conditions. National The Conference Board announced that after five consecutive months of declines, the U.S. leading index increased 0.2 percent in November. The report indicated that the weakness in the leading indicators has also become somewhat less widespread. One month does not set a trend, but there is speculation that the recent weakness was only a pause in the rising trend since the recent decline was not large enough, and did not persist for long enough, to signal an end to the current economic expansion. Six of the ten indicators increased in November. The positive contributors in order from largest to smallest were stock prices, real money supply, average weekly claims for unemployment (inverted), index of consumer expectations, manufacturers' new orders for non-defense capital goods, and manufacturers' new orders for consumer goods and materials. The coincident index increased again in November and the strength of the coincident index continues to be widespread. All four of the indicators increased again in November. The index increased 0.1 percent in November after increasing 0.4 percent in October. During the six months ended November, the index has increased 0.9 percent. Gross Domestic Product (GDP) Real GDP-the output of goods and services produced by labor and property located in the U.S.-increased at an annual rate of 4.0 percent in the third quarter, according to revised estimates released by the Bureau of Economic Analysts. The final release was higher than the previous estimates of 3.7 percent. The 4.0 percent increase followed a 3.3 percent increase in the second quarter. The major contributors to the increase were personal consumption expenditures, equipment and software, exports, government spending, and residential fixed investment. These contributors were partially offset by a negative contribution from private inventory investment and an increase in imports. The acceleration in real GDP growth in the third quarter over the second quarter reflected acceleration in personal consumption expenditures and a deceleration in imports offset partially by private inventory investment and a deceleration in residential fixed investment. Consumer Confidence The Conference Board's Consumer Confidence Index declined again in November. The index fell to 90.5 down from 92.9 in October. The Expectations Index fell to 87.4 from 92.2, while the Present Situation Index increased to 95.2 from 94.0. Lynn Franco, Director of the Conference Board's Consumer Research Center, indicated that although intentions to spend for the holiday season were encouraging, “Looking beyond the holidays, the continuing erosion in expectations suggests consumers do not feel the economy is expected to gain major momentum in early 2005.” The early report for December looked much more promising with the overall index increasing to 102.3 in December. The expectations index increased to 99.9 from 90.2 in November and the Present Situation Index increased to 105.9 from 96.3. This seems to end the year on a higher note for consumers. The University of Michigan's Surveys of Consumers was somewhat better in November rising to 92.8 from October's level of 91.7. The Expectations Index rose to 85.2 in November from 83.8 in October. The survey indicated that consumers expect most of their wage gains to be offset by inflation, primarily energy costs. While they do not expect energy costs to continue to rise, they also do not believe prices will decline any time soon. The report also indicated that consumers expected a slower overall pace of economic growth during 2005, and as a result anticipated only small additional declines in the national unemployment rate. The report also indicated that vehicle buying plans declined in November to their lowest level in three years. This was the lowest rate since the zero rate plans were introduced following 9/11. Housing According to the National Association of Realtors (NAR), low interest rates helped the market for existing single-family home sales to set the highest monthly pace on record in November. Existing-home sales increased 2.7 percent to a seasonally adjusted rate of 6.94 million units, up from a revised 6.76 million units in October. November's pace was 13.2 percent above the 6.13 million-unit level in November 2003. The previous record was 6.92 million in June 2004. David Lereah, NAR's chief economist said, “Our forecast for the housing market is for a continuation of strong home sales, although down a little from the record-setting pace of 2004. We think slower sales will help create a better balance between home buyers and sellers, but with light inventories of homes available for sale, price appreciation hasn't slowed yet.” The national median existing-home price was $188,200 in November, up 10.4 percent from November 2003. Inventory levels rose 2.1 percent to a 4.3-month supply at current sales prices. Existing home sales were up in all regions except in the Northeast where sales declined 1.3 percent. Sales in the West were up 6.5 percent. Sales of new one-family homes in November 2004 were at a seasonally adjusted rate of 1,125,000 according to the U.S. Census Bureau. This rate was 12.0 percent below the revised October rate of 1,278,000, but was 3.6 percent above the November 2003 estimate. The median price for new homes was $206,300. Sales of new one-family homes were down in all regions except for the South. Single-family housing starts in November were at a rate of 1,424,000. This represents a 5.6 percent decline from the October starts of 1,508,000. Employment Employment rose again in November, and the unemployment rate fell back to 5.4 percent from 5.5 percent in October. Non-farm payroll employment increased by 112,000 in November, with job gains in several service-providing industries. The number of unemployed persons, 8.0 million, was down slightly from 8.1 in October. The unemployment rate has been either 5.4 or 5.5 percent in each month since July. Retail Sales and Consumer Prices The Census Bureau released its advance estimates on U.S. retail and food services sales for November indicating an increase of 0.1 percent from October and 7.2 percent over November 2003. Sales for the 3 months September to November were up 7.8 percent over the same period a year ago. The September to October 2004 percent change was revised from plus 0.2 percent to plus 0.8 percent. Retail trade sales were up 0.1 percent from October and were 7.2 percent above last year. As with the last several months, gasoline station sales were up substantially (24.0 percent) from last November reflecting increases in gasoline prices. Sales of building materials and garden equipment and supplies were up 12.8 percent over last year. Sales at furniture and home furnishings stores were almost even with October sales, but were up 4.7 percent over last November on an adjusted basis (adjusted for seasonal variation and holiday and trading day differences). For the eleven months ended November, sales at these stores were up 7.1 percent over last year. The Consumer Price Index for all Urban Consumers (CPI-U) increased 0.1 percent in November according to the Bureau of Labor Statistics. The November level was 3.5 percent higher than in November 2003. Energy costs, which increased 4.2 percent in October, increased 0.2 percent in November, with household fuels increasing 2.5 percent while the index for motor fuels decreased 1.8 percent. The index for all items less food and energy advanced 0.2 percent in November, the same increase as in October. Deceleration in the indexes for shelter and household furnishings and operations were largely offset by a larger increase in the index for new vehicles and an increase in the index for telephone services. For the eleven months ended November, the CPI-U increased at a rate of 3.7 percent seasonally adjusted. This compares to an increase of 1.9 percent for all of 2003. Excluding food and energy, the CPI-U increased at a 2.3 percent seasonally adjusted rate for the eleven months of 2004 after an increase of 1.1 percent in all of 2003. Durable Goods Orders and Factory Shipments According to the U.S. Census Bureau, new orders for manufactured durable goods in October decreased 1.1 percent from September levels when they were up 0.2 percent. Computers and electronic products, down after two consecutive increases, had the largest decrease, $2.4 billion or 6.5 percent. Shipments of manufactured durable goods in October, up four of the last five months, increased 0.1 percent. Computers and electronic products increased 2.8 percent and machinery increased 1.8 percent. New orders for furniture and related products increased 0.4 percent over September and increased 3.3 percent over October 2003. Year-to-date, orders for these products increased 8.1 percent. Shipments of furniture and related products were up 0.3 percent over September and were up 3.5 percent over October 2003. Year-to-date, shipments were up 7.3 percent over the first ten months of 2003. Summary The comparisons to the prior year for new orders and shipments continue to reflect changes in the industry that are now occurring and those that occurred last year. In 2003, shipments were down about 5.5 percent in the first half of the year, following a relatively weak first half of 2002 and a terrible first half of 2001. In the second half of 2003, shipments increased 3 percent over 2002. In 2002, shipments in the second half were up 3 percent over 2001. This means that the second half of 2004 is compared to much better results in 2003 versus the first half of the year. Accordingly, we are expecting the fourth quarter to report increased shipments of about 3 to 4 percent. While not as exciting as the 7 percent increase in the first half of the year, when looking at the real numbers, the increases as a percentage will be much tougher to achieve in the second half. As we have noted before, with the deflation in the industry, especially in case goods and now more and more in upholstery, it is difficult to tell what the increase in the industry really is. We believe unit sales are up much more than dollars, but with lower import prices, as well as lower domestic pricing in order to compete, the increase in dollars is not as large as it would have been in years past. Here's to a better 2005 for all in the industry. Happy New Year! About BDO Seidman: BDO Seidman, LLP is a national professional services firm providing assurance, tax, financial advisory and consulting services to private and publicly traded businesses. For more than 90 years, the company has provided quality service and leadership through the active involvement of our most experienced and committed professionals. BDO Seidman serves clients through more than 35 offices and 250 independent alliance firm locations nationwide. Their Furniture Industry Services practice publishes Furniture Insights®. For more information go to http://www.bdo.com.

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