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BDO Seidman Releases January 2005 Forecast

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Monthly Forecaster January 2005 A Publication of BDO Seidman, LLP New Orders. November results were somewhat more encouraging according to our latest survey of residential furniture manufacturers. New orders in November 2004 increased 1 percent over November 2003 and were 1 percent higher than October 2004 orders. November 2003 new orders were 3 percent higher than November 2002. This would put November 2004 orders 4 percent higher than November 2002. Year-to-date, the increase in new orders fell to 6 percent above the first eleven months of last year, down from 7 percent last month. In November 2004, 50 percent of our participants reported an increase in orders over last year while the other half was in the negative. This was up from October results where only 37 percent of the participants reported an increase. Year-to-date, 60 percent of the participants have reported increased orders over last year. Shipments and Backlogs. In November 2004, shipments were 2 percent higher than November 2003. Shipments fell 3 percent from October levels but that is somewhat normal. November 2003 shipments were 4 percent higher than November 2002. November 2004 shipments were almost 6 ½ percent higher than November 2002 levels. Year-to-date, shipments were 5 percent above 2003 levels, down from a 6 percent year-to-date increase in October. Just less than half (48 percent) of our participants reported an increase in shipments for the month. Year-to-date, just over half of the participants have reported an increase in shipments. For some, the results have been much better as 35 percent of the participants are up 10 percent or more. Backlogs increased again in November, up 2 percent over November 2003 levels. Backlogs were up 2 percent over October levels as well, as shipments were slightly below new orders. Receivables and Inventories. Receivables were down 1 percent from November 2003 levels and 3 percent from October 2004. The receivable levels have been below the increase in shipments most all year. It appears that, except for the occasional bankruptcy, most companies are keeping their receivables under control. Inventory levels fell 2 percent from October but remained 13 percent above November 2003 levels. In October, inventories were 12 percent higher than October 2003 levels. We have discussed this before relating to case goods imports, but we have also seen that many of the upholstery participants have ordered more fabric, leather and imported cut and sewn packages recently that are causing inventory levels to increase in these companies as well. Payrolls and Employment. Factory payrolls fell 1 percent in November compared to November 2003. This was the first decrease in factory payrolls compared to the prior year since a decrease in December 2003 compared to December 2002. The number of factory employees decreased 4 percent from last November and fell 1 percent from October 2004. The 4 percent decline was similar to last month’s 4 percent decline. While the number of employees has been down most of the year, as we have discussed before, the reduction in payrolls was unusual. Still, payrolls are 4 percent higher year-to-date over last year, reasonably in line with the increase in shipments. National The Conference Board announced that the U.S. leading index increased 0.2 percent, the coincident index increased 0.3 percent and the lagging index remained unchanged in December. The leading index increased again after a revised 0.3 percent increase in November after falling 0.3 percent in October. Four of the ten indicators increased in December with one remaining steady. The positive contributors were consumer expectations, stock prices, real money supply and average weekly initial claims for unemployment insurance (inverted). The leading index now stands at 115.4. It has increased 0.9 percent in the six months ended December 2004 with six of the ten components advancing. All four of the coincident indicators increased in December. Gross Domestic Product (GDP) Real gross domestic product (GDP) increased 3.1 percent in the fourth quarter, according to advance estimates by the Bureau of Economic Analysis. This followed a 4.0 percent increase in the third quarter. The major contributors were personal consumption expenditures (PCE), equipment and software, private inventory investment and government spending. These were partially offset by a decrease in exports and an increase in imports. The decrease from the third quarter was attributed to a decline in the increase of PCE (from 5.1 percent to 4.6 percent), the decline in exports (down 3.9 percent versus an increase in the third quarter of 6.0 percent), and the increase in imports. Consumer Confidence The Conference Board’s Consumer Confidence Index improved in December to 102.7 up from 90.5 in November. The expectations index also improved to 100.7 up from 87.4. Early reports for January indicated a slight increase in the overall index to 103.4, with the present situation index up to 110.9 from 105.7, but the expectations index declined to 98.4. The report indicated that consumers’ short-term outlook remained favorable, which should mean that the economy will continue to expand through the first half of the year. The University of Michigan’s Survey of Consumers also increased in December. The Index of Consumer Sentiment increased to 97.1, up from 92.8 and compared favorably to December 2003’s index of 92.6. The Expectations Index was 90.9 in December, up from 85.2 in November and slightly ahead of last year’s 89.8. “Consumers have shown a remarkable degree of resilience throughout the past year and as a consequence their behavior has added a good deal of stability to the overall economy,” according to Richard Curtin, the Director of the University’s Survey. “While consumers expect some improvement during the year ahead, they anticipate only modest increases in employment during 2005,” Curtin said. Housing Existing single-family home sales fell 3.3 percent in December to a seasonally adjusted annual rate of 6.69 million units, down from November’s rate of 6.92 million according to the National Association of Realtors (NAC). December’s level was 5.0 percent higher than December 2003. The final results for 2004 reported another record in existing home sales. Sales for the year were 6,675,000 existing home sales compared to 6,100,000 in 2003 — a 9.4 percent increase. David Lereah, the NAR’s chief economist, said a decline in December was expected. “Our sense was that November sales were the peak for the current housing cycle, but activity remains strong. There is no sign of a downturn. Home sales will continue at historically high levels, and 2005 is expected to be the second-best year on record for the housing market.” According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed rate mortgage was 5.75 percent in December, compared with 5.88 percent in December 2003. The average 30-year rate for all of 2004 was 5.84 percent, the second lowest average since Freddie Mac started tracking rates in 1971. Inventory levels fell 11.7 percent in December, representing a 3.9-month supply. Lereah said, “In fact, the month’s supply of homes available for sale is the lowest on record.” New home sales data for December was not available at press time. Single-family housing starts in December were at an annualized rate of 1,678,000. This was a 13.1 percent increase over the November results. An estimated 1,953,400 housing units (multi-units and single-family) were started in 2004. This is 5.7 percent above the 2003 figure of 1,847,700. Employment Both the number of unemployed persons, 8.0 million, and the unemployment rate, 5.4 percent, were unchanged in December. The changes among the major groups of workers also showed little change for the month. The number of long-term unemployed — those unemployed 27 weeks and over — was similar to November. This group accounted for 20.2 percent of the total unemployed. The total non-farm payroll employment rose by 157,000 in December. This increase followed a gain of 137,000 in November. Retail Sales and Consumer Prices According to the Census Bureau, advance estimates of U.S. retail and food service sales for December, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, increased 1.2 percent from November and were up 8.7 percent over December 2003. Total sales for the year were expected to be up about 8 percent. Total sales for the fourth quarter were up 8.2 percent over the same period a year ago. Retail trade sales were up 1.3 percent from November and were 8.8 percent above last December. Gasoline station sales were up 21.8 percent over last December and sales of nonstore retailers were up 14.3 percent. For the year, motor vehicle and parts dealers were up 5 percent and were up 4.3 percent over November and 8.9 percent over December 2003. Building materials and garden equipment and supplies dealers were up 14.7 percent for the year. Sales at furniture and home furnishings stores were up 6.4 percent over December 2003 and up 2.2 percent over November. For the year, sales at these stores were up 7.0 percent over 2003. The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.4 percent in December before seasonal adjustments, according to the Bureau of Labor Statistics. The December level of 190.3 was 3.3 percent higher than in December 2003. On a seasonally adjusted basis, the CPI-U decreased 0.1 percent in December, following a 0.2 percent increase in November. The index for all items less food and energy rose 2.2 percent for all of 2004, rising 2.0 percent in the fourth quarter. Overall, except for energy and related transportation costs, the impact of inflation has not been that bad, except for those who are fighting deflation on their own pricing. The 2.2 percent increase in all items less food and energy compares to 1.1 percent in 2003, 1.9 percent in 2002 and 2.7 percent in 2001. Durable Goods Orders and Factory Shipments New orders for manufactured durable goods in December increased 0.6 percent according to the Department of Commerce advance report. This followed a 1.8 percent increase in November. Excluding transportation, new orders increased 2.1 percent. Computers and electronic products had the largest increase, at 6.4 percent after declining the last 2 months. New orders for 2004 were 11.6 percent above last year. Shipments of manufactured durable goods increased 2.1 percent in December and was at the highest level since the series was first stated on a NAICS basis in 1992. December’s increase followed a 0.1 percent decrease in November. Shipments were 10.5 percent higher than last year. Transportation equipment had the largest increase in dollars, up 3.3 percent after three consecutive decreases. Through November, the latest data available, shipments of furniture and related products were up 7.4 percent, with orders up 8.3 percent. Summary Based on recent conversations, we would have to say that business is rather mixed. Some have noted that December and January have been somewhat slower than expected, while others have indicated that December and January seem to be pretty good. Profitability has been hurt this past year by a combination of factors, mostly related to imports. Loss of business by domestic manufacturers due to increased imports has hurt productivity. In addition, the imported products have put pricing pressures on most manufacturers. We believe that many domestic manufacturers have made substantial changes in capacity, which should provide for better productivity in the year to come. This should help profitability somewhat. The question is whether that will be enough to offset the pricing pressures. Retail has also been impacted by the effects of imports. Selling a bedroom or dining room at reduced prices, even with decent margins, has reduced gross profit dollars. As it takes the same floor space, sales and administrative personnel, warehouse and delivery among all the other fixed costs, the deflated prices have impacted retailer profitability as well. Let’s hope the economy in general continues to bump along nicely in 2005 while the industry sorts out the impact of all of this. The last thing we need is to have the economy tank. The good news is that most economists seem to believe that 2005 should be a decent 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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