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BDO Seidman Releases February 2005 Furniture Forecast

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Monthly Forecaster January 2005 A Publication of BDO Seidman, LLP New Orders. According to our latest survey of residential furniture manufacturers, new orders increased 3 percent in December over December 2003, following a 1 percent increase in November over November 2003. With the exception of decreases in September and October, our survey has indicated an increase in orders over the prior year every month since June of 2003. The 3 percent increase was even more impressive considering that new orders in December 2003 were up 10 percent over December 2002 levels. The December new orders would then be 13 percent higher than December 2002 levels. New orders were 12 percent lower than November, but that decrease is somewhat normal for the November to December comparison. For the year 2004, new orders were 6 percent higher than 2003. While 2003 orders were down 2 percent, most of that decrease occurred in the first five months, when business was terrible. For the year, 56 percent of our participants reported an increase in orders — down slightly from the 60 percent in November year-to-date. Even though new orders were up 3 percent in December, less than 40 percent of the participants reported an increase in December alone. Shipments and Backlogs. December was a very good shipping month as well, with shipments 9 percent higher than December 2003. Shipments were 2 percent higher than November, which has not happened since 1999, according to our survey. For the year, shipments were up 6 percent over 2003. Similar to orders, 56 percent of our participants reported an increase in shipments in 2004 versus 2003. Some 30 percent of the participants reported an increase of 10 percent or more, while 16 percent reported a decrease in shipments of 10 percent or more. With shipments higher than total new orders, backlogs dropped 7 percent from November. Backlogs were 1 percent lower than December 2003 levels. Receivables and Inventories. Receivables increased 5 percent over December 2003 levels, very much in line with the 6 percent increase in shipments for the year. Receivables actually fell 3 percent from November levels even with the 2 percent increase in shipments. With only two big bankruptcies for the year, most companies seem to be in pretty good shape with their receivables. Inventories fell 2 percent from November as would be expected with the increase in shipments. Inventories were 11 percent higher than December 2003 levels — down from a 13 percent increase in November over November 2003. With orders and shipments up 6 percent, the 11 percent increase in inventories is not all that out of line considering the higher levels of imported finished goods and raw materials (such as fabrics and cut and sewn goods) that many are carrying. Payrolls and Employment. Interestingly, factory payrolls were up 9 percent in December over both December 2003 and November 2004. While payrolls have been up a great part of the year, this seems to be an abnormal increase. Year-to-date, payrolls were up 5 percent, not much out of line with the 6 percent increase in shipments. We might have expected payrolls to be a little lower with imported goods and better productivity with more orders and shipments, but we suspect that the improvements were likely offset by lack of productivity at many of the plants that are downsizing. The number of factory employees was down 5 percent from last December and fell 1 percent below November levels. Interestingly, some one-third of our participants actually had an increase in the number of factory employees. Those with an increase of employees had a 13 percent increase in the number of employees. This increase occurred primarily at the participants that had an increase in shipments of 10 percent or more. National: Reports from the twelve Federal Reserve districts indicated that economic activity continued to expand from late November through early January. Eleven of the twelve districts characterized activity as expanding. The Cleveland District characterized their economic activity as mixed. Consumer spending increased in most districts since the last report, with only Cleveland, Dallas and New York reporting that sales were mixed. Economic Indicators: The Conference Board announced that the U.S. leading index fell 0.3 percent while the coincident index remained unchanged. The lagging index increased 0.3 percent in January. The decrease in the leading index declined in January, but that followed increases of 0.3 percent in the previous two months. In addition, there was more widespread strength in the leading indicators in recent months, with weakness concentrated in vendor performance and interest rate spread. Four of the ten indicators that make up the leading index increased in January. The positive contributors — beginning with the largest — were average weekly manufacturing hours, real money supply, building permits and manufacturers’ new orders for non-defense capital goods. The negative contributors were led by vendor performance, consumer expectations, stock prices, interest rate spread and manufactures’ orders for consumer goods and materials. Consumer Confidence: The Conference Board’s Consumer Confidence Index, after improving in January, fell slightly in February. The index fell to 104.0 from 105.1 in January. The Present Situation Index increased to 116.4 from 112.1 in January. The Expectations Index declined to 95.7 from 100.4 last month. “Although expectations cooled this month, consumers are more optimistic today than they were a year ago,” said Lynn Franco, Director of the Conference Board’s Consumer Research Center. “Just as important, consumer confidence about current economic conditions, including the labor market, continues to gather momentum. Despite recent fluctuations, both present and future indicators point toward continued expansion in the months ahead.” Housing: Existing home sales, revised with an “improved” methodology, were essentially flat in January, but remained at historically high levels, according to the National Association of Realtors (NAR). David Lereah, the NAR’s chief economist, said, “A slight decline in single-family home sales was offset by a record monthly level of condo sales, which just came off its ninth consecutive record year.” NAR has updated its modeling system. One of the main reasons is that in 1968 when the existing-home sales series was created, condo’s were not much of an important market share. The updated version revised its benchmark year of 1999. The changed model has revised single-family home sales from 6,675,000 reported for 2004 to 5,964,000. The 2004 results would remain a record, as all the years from 1999 to 2004 were revised. The main thing this will change is our mindset that anything over 6 million is a good year for existing home sales. New home sales in December rose 0.1 percent above the revised November rate. The sales at a seasonally adjusted rate of 1,098,000 was 2 percent below the December 2003 estimates. In 2004, there were 1,183,000 new houses sold compared to 1,086,000 during 2003, setting a new record. This represented an 8.9 percent increase over 2003. It wasn’t too long ago that 900,000 units was considered a very strong year. All regions were up for the year. The increases were: Northeast 5.1 percent; Midwest 10.6 percent; South 6.8 percent and West 12.4 percent. Single-family housing starts in January 2005 were at a rate of 1,760,000, up 2.7 percent above December rate of 1,713,000. This rate was 12.5 percent ahead of January 2004. Employment: Non-farm payroll employment increased by 146,000 in January and the unemployment rate decreased to 5.2 percent, according to the Bureau of Labor Statistics. Both the number of unemployment persons and the rate dropped in January. The 5.2 percent rate was down from 5.7 percent in January 2004. The number of long-term unemployed — those unemployed 27 weeks or more — was essentially unchanged. Retail Sales and Consumer Prices: According to the U.S. Census Bureau, advance estimates of U.S. retail and food services sales for January, adjusted for seasonal variation and holiday and trading day differences, indicated a decrease in sales of 0.3 percent from December, but were up 7.2 percent over January 2004. Sales for the quarter ended January 2005 were up 7.6 percent over the same period a year ago. Retail trade sales were down 0.4 percent from December, but were 7.1 percent above last January. Gasoline station sales were up 17.3 percent over last year and sales of building material and garden equipment and supplies dealers were up 14.1 percent over last year. On an unadjusted basis, sales at furniture and home furnishings stores declined 0.2 percent, but less than the decline at electronic and appliance stores where the decrease was 1.2 percent. As we noted last month, sales at these stores for the year ended December 2004 were up 7 percent. Consumer prices (the Consumer Price Index for All Urban Consumers — CPI-U) increased 0.2 percent in January before seasonal adjustment. The January level of 190.7 was 3 percent higher than January 2004. On a seasonally adjusted basis, the increase was 0.1 percent following no change in December. A 0.2 percent decrease in the index for food at home was offset by a 0.5 percent increase in food away from home. Energy costs declined by 1.1 percent following a 1.3 percent drop in December. Durable Goods Orders and Factory Shipments: New orders for manufactured durable goods in December increased 1.1 percent, up from the earlier estimates of 0.6 percent. Computers and electronic products increased 6.8 percent after two consecutive decreases. For the year, new orders for all manufactured durable goods were up 11 percent. Shipments of manufactured durable goods in December increased 2.3 percent over November. This was the highest level since the series began in 1992 and followed a 0.2 percent increase in November. For the year, shipment of durable goods increased 10.3 percent. In the furniture and related products sector, new orders in December were 10.4 percent higher than December 2003. Year-to-date, new orders were up 8.4 percent. Shipments for furniture and related products in December increased 12.9 percent over December 2003 and increased 7.8 percent for the year. Summary: Overall, the year 2004 was a pretty good year for the industry’s growth. While we continued to see factory closings, the industry as a whole did pretty well with a 6 percent increase in shipments and orders. We suspect the number of items shipped would show an even larger increase as more imported product was shipped at lower prices. Not everyone in the industry would think 2004 was a good year, however, as many companies continued to downsize production in order to attempt to balance production capacity with orders for domestic goods. The overall growth for imported wood products grew at a 13.6 percent rate for the year. The final year’s estimate of shipments at $26.1 billion was certainly better than the last couple of years. Yet that number is still 3.5 percent lower than the year 2000 results. These numbers are not totally comparable to the industry as a whole as so many more retailers are now importing directly and not going through the traditional purchasing from domestic manufacturers or domestic importers. But, it does indicate the difficulties domestic producers and importers have had over the last few years. As we have said before, business has been mixed as shown in our survey. We hope that some of the momentum gained in 2004 will continue into 2005. 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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