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Furniture Forecast From BDO Seidman Reports 3-4% Increase In Shipments This Year

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Furniture Insights/ Monthly Forecaster from BDO Seidman New Orders. New orders were off slightly in January 2005 compared to January 2004 according to our most recent survey of residential furniture manufacturers. New orders declined 1 percent from last year, but new orders were up 5 percent from December 2004 levels. January order rates are normally higher than December. This 5 percent increase compares to an 8 percent increase last year and a 5 ½ percent the year before comparing January to December. The slight decline in January 2005 compared to January 2004 was not all that bad since January 2004 orders were 11 percent higher than January 2003. Some 40 percent of our participants reported an increase in orders over the prior year. This continues the trend of mixed results among our participants. Shipments and Backlogs: Shipments in January increased 6 percent over January 2004 when shipments were only up 1 percent over January 2003. Shipments fell 10 percent from December levels, but that is fairly normal for those two-month comparisons, although the decline this year was a little more than the last two years. Slightly less than one-half of our participants reported an increase in shipments in January compared to last year. Backlogs increased 3 percent over December levels and decreased 4 percent compared to last year. The increase in backlogs was due to the level of new orders exceeding shipments for the month. Receivables and Inventories. Receivables increased 5 percent in January compared to January 2004 levels. This was in line with the 6 percent increase in sales. Receivable levels dropped 2 percent compared to December levels even though shipments were down 10 percent in the same comparison. It is not easy to make these comparisons every month as the timing of payments fluctuates, especially around holiday periods. We believe the year-to-year comparisons are more appropriate. Inventories, increasing 1 percent over December levels, were up 10 percent compared to January 2004. In December, inventories were up 11 percent over December 2003. The increase in inventories, higher than increases in sales, is mostly attributed to the amount of imported product being held, plus the tendency by many companies to carry more inventory in order to better service customers. Payrolls and Employment. Factory payrolls were 5 percent higher than payrolls in January 2004. In December, payrolls were 9 percent higher than the previous year. For the year, payrolls were 5 percent higher in 2004 than in 2003 so the 6 percent increase appears in line. The number of factory employees was down 6 percent in January compared to January a year ago, and was down 1 percent compared to December. The number of employees was down 5 percent in December compared to a year ago. As we have discussed before, the decrease in factory employees results from plant closings, as well as adjustments related to more imported products being sold, reducing domestic production needs. National: The Beige Book report issued in March indicated that the economy has continued to expand at a moderate pace since the last report. All twelve Federal Reserve Districts indicated that the economic activity has increased. The Richmond District did report some deceleration of growth, while Dallas noted some acceleration. Brisk growth was reported in the New York and San Francisco Districts. Consumer spending was reported as steady to up moderately, with some districts noting sluggish auto sales. Travel and tourism was characterized as strong. Nearly all Districts reported continued expansion in manufacturing activity. Gross Domestic Product (GDP): Preliminary estimates of the growth in gross domestic product (GDP) for the fourth quarter of 2004 indicated an increase of 3.8 percent. This compares to a 4.0 percent growth rate in the third quarter and advance estimates of 3.1 percent. The major contributors to the increase in the GDP were personal consumption expenditures (PCE), equipment and software and private inventory investment. Imports, a subtraction in the calculation of GDP, increased. Real GDP increased 4.4 percent in 2004 compared to an increase of 3.0 percent in 2003. The major contributors for all of 2004 were PCE, equipment and software, exports, residential fixed investment, private inventory investment and federal government spending, offset by an increase in imports. Economic Indicators: The Conference Board announced that the U.S. leading index increased 0.1 percent in February. The coincident index increased 0.4 percent and the lagging index increased 0.4 percent as well. The leading index, which had declined 0.3 percent in January, had been on a rising trend from early 2003 to the middle of 2004. Then it declined slightly for the next five months, but had been increasing slightly since October. There appears to have been an equal mix of strengths and weaknesses among the components. Five of the ten indicators that make up the leading index increased in February. The positive contributors were average weekly initial claims for unemployment insurance, stock prices, real money supply, vendor performance and manufacturers’ new orders for consumer goods and materials. During the six-month span through February, the leading index increased 0.1 percent with five-out-of-ten components advancing. Consumer Confidence: The University of Michigan’s Survey of Consumers is not available yet for March, but its February results were similar to that of the Conference Board’s Consumer Confidence Report. In that report, rising interest rates were expected by three quarters of the consumers, so the recent increase should not have a major negative impact. Unfortunately, the report indicated that buying attitudes toward homes, vehicles and large household durables (not defined, but assumed to include furniture) all declined slightly in February. For houses and vehicles, the blame was not placed on rising interest rates, but instead on higher prices. Housing: Existing home sales declined slightly in February, but remained above last year’s February results according to the National Association of Realtors (NAR). Home prices rose at double-digit rates. Single-family home sales fell to a seasonally adjusted rate of 5.94 million units from 5.96 million, a 0.3 percent decline, but were 5.5 percent ahead of February 2004 levels. Sales for all existing homes, including condos and coops fell 0.4 percent, but were 6.1 percent ahead of last year. David Lereah, NAR chief economist, noted the housing market appears to be settling down. “In essence, home sales were surging at unprecedented levels for most of last year,” he said. “The cooling we expect in sales this year means we’ll be transitioning from a white-hot housing market into a very strong market that still favors home sellers, but should become more balanced as the year progresses.” Total housing inventory levels rose 10.7 percent at the end of February representing a 4.2-month supply following a record low 3.8-month supply in January. Offsetting the decline in existing home sales was an increase in new residential sales in February. According to the U.S. Census Bureau, sales of new one-family homes increased 9.4 percent over the revised January rate. The seasonally adjusted rate of 1,226,000 was 5.2 percent above the February 2004 rate. All regions reported an increase in sales over January. Compared to last year’s February results, the South was up 15.5 percent, but all other regions were down slightly. Single-family housing starts in February were at a seasonally adjusted rate of 1,775,000. This was 0.3 percent above January 2005 and was 16.7 percent ahead of February 2004. Employment: According to the Bureau of Labor Statistics, non-farm payroll employment increased by 262,000 in February while the unemployment rate increased slightly to 5.4 percent. Job growth occurred in both goods-producing and service-providing industries. In February, both the number of unemployed persons, 8.0 million, and the unemployment rate, 5.4 percent, returned to their December levels after falling in January. The unemployment rate had been in the 5.4 to 5.5 percent range during each of the last six months of 2004. Retail Sales and Consumer Prices The U.S. Census Bureau announced that advance estimates of U.S. retail and food services sales for February, adjusted for seasonal variation and holiday and trading day differences, increased 0.5 percent from January and 7.7 percent from February 2004. Total sales for the quarter were up 8.2 percent over the same quarter last year. Retail trade sales were up 0.4 percent from January and up 7.7 percent from last year. Gasoline station sales were up 16.4 percent (no surprise) and sales of building materials and garden equipment and supplies dealers were up 13.1 percent. Sales at furniture and home furnishings stores, adjusted, were up .7 percent over January and up 5.2 percent over February 2004. For the two months ended February, sales at these stores, not adjusted, were up 2.5 percent. For the two months, all categories listed increased, except for sporting goods, hobby, book and music stores, which decreased 5.6 percent. The Consumer Price Index for all Urban Consumers (CPI-U) increased 0.4 percent in February, on a seasonally adjusted level, according to the Bureau of Labor Statistics. The February 2005 level was 3.0 percent higher than in February 2004 and followed a 0.1 percent increase in January. The energy index, which had substantial declines in the previous two months, increased 2.0 percent in February, accounting for almost all of the increase in the overall CPI-U. The food index increased 0.1 percent, the same as January. As with January, a 0.2 percent decrease in the index for food at home was offset by a 0.3 percent increase in food away from home. The index for all items less food and energy, which increased 0.2 percent in each of the preceding four months, advanced 0.3 percent in February. Larger increases in the indexes for shelter and medical care more than offset a smaller rise in the index for new vehicles and a decline in the index for apparel. Durable Goods and Factory Shipments: The U.S. Census Bureau announced in their advance reports that new orders for manufactured durable goods increased 0.3 percent in February compared to a 1.1 percent decrease in January. Excluding transportation, new orders decreased 0.2 percent. Transportation increased primarily due to nondefense aircraft and parts. Shipments of manufactured durable goods decreased 1.6 percent after four consecutive increases. Transportation equipment, down five of the last six months, had the largest decrease at 2.9 percent. The final report for January indicated that new orders for furniture and related products increased 3.4 percent over January 2004 while shipments in this category increased 7.0 percent over the previous year. Summary: January results were in line with most of the recent conversations we have had with company representatives. Some companies are doing reasonably well, while others are not. It is really a mixed bag of results. We continue to hear of more layoff announcements. As we have discussed, most of these announcements come from companies heavy into imports that are trying to size their domestic production to levels they believe make the most sense. Business at retail seems to be moving along reasonably well, although some have said that early March was a little slower. The Feds have increased rates again, but most consumers seemed to expect that. Unfortunately, the stock market has been volatile lately and gas prices are really beginning to have some negative impact, especially at the lower end of the market. Weather has also been a negative factor over much of the nation this year. Let’s hope that spring brings good weather and a better feeling for consumers. Pre-market was somewhat mixed, but hopefully retail sales will pick up and buyers at Market will arrive in good buying moods. Our latest forecast continues to indicate a 3 to 4 percent increase in shipments for the year 2005 over 2004, not really much change from the last forecast. Hopefully it is conservative. 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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