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Furniture Forecast From BDO Seidman - July 2005 - Factory Orders Up, Payrolls Down

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Furniture Insights/ Monthly Forecaster from BDO Seidman July 2005 New Orders. According to our most recent survey of residential furniture manufacturers, new orders increased 5 percent in May 2005 compared to May 2004. This marked the third consecutive monthly increase after slight decreases in January and February. Some 61 percent of our participants reported an increase in May over May of 2004. This 61 percent compares to 53 percent in April, 45 percent in March and 38 percent in February. Year-to-date, new orders were 3 percent higher than the first five months of last year. About 40 percent of the participants have reported increases for the first five months, similar to April results. Shipments and Backlogs. Shipments in May 2005 were 5 percent higher than May 2004 after a 5 percent increase in April. Year-to-date, shipments were 4 percent higher than the first five months of last year. Almost one-half of the participants reported increases in shipments in May, down slightly from the 53 percent in April. Year-to-date, 44 percent of the participants have reported increases. Backlogs increased slightly with the total orders ahead of shipment rates. Backlogs were even with April and down 1 percent from last May. Receivables and Inventories. Receivables increased 4 percent in May over May 2004 and fell 1 percent compared to April. Both changes were very much in line with the increase in shipments compared to last year and compared to April shipments. While we know there are some credit concerns out there, at least the levels of receivables compared to shipments continues to be in line. Inventories in May were 5 percent higher than May 2004 and 2 percent higher than April. April 2005 levels were 6 percent higher than April 2004. May of 2004 levels were flat compared to May 2003. Overall, inventory levels appear to be in reasonable shape. Payrolls and Employment. The decline in the number of factory employees continued in May with employment levels down 6 percent from last year, compared to a 4 percent decline in April compared to April 2004. The number of factory employees also fell 1 percent compared to April 2005. Factory payrolls were down 1 percent compared to May 2004, but down 7 percent compared to April. Some of the decline from April may relate to cutoff of fiscal periods for some participants who do not necessarily use the calendar month for their cutoff. Overall, the factory employment and payrolls are reasonably consistent with the prior month’s activities. National Economic Indicators In July, the Conference Board announced that the U.S. leading index of economic indicators increased 0.9 percent, while the coincident index increased 0.2 percent and the lagging index increased 0.3 percent in June. The leading index increased sharply after no change in May (revised). The leading index has increased at a 1.2 percent annual rate over the last six months. Seven of the ten indicators that make up the index increased in June—led by index of consumer expectations, vendor performance, real money supply, average weekly claims for unemployment (inverted), interest rate spread, stock prices and building permits. The negative contributor was manufacturers’ new orders for non-defense capital goods. All four indicators of the coincident indicators increased in June, while four of the seven components of the lagging index improved. The negative contributors to the lagging index were commercial and industrial loans outstanding and the change in CPI for services. Consumer Confidence The Conference Board’s Consumer Confidence Index fell slightly in June after an increase in May. The Index was 103.2 compared to 106.2 in May. The Present Situation Index decreased to 118.5 from 120.8 while the Expectations Index declined to 93.0 from 96.4 last month. Lynn Franco, the Director of The Conference Board’s Consumer Research Center, said, “This month’s decline in Consumer Confidence is no cause for concern. The overall state of the economy remains healthy and consumers’ outlook suggests no storm clouds on the short-term horizon.” The Director also indicated that while there is little to suggest a downturn in activity, there is also little to suggest a pickup. Housing Existing home sales recorded another record month in June, according to the National Association of Realtors (NAR). Total existing home sales, including single-family, town homes, condominiums and co-ops, rose 2.7 percent in June to a seasonally adjusted annual rate of 7.33 million, up from a revised 7.14 million in May. Sales were 4.4 percent above June 2004. Single-family home sales increased 2.4 percent to another record seasonally adjusted annual rate of 6.37 million. June’s rate was 3.2 percent above June 2004. The median single-family home price was $218,600 in June, up 14.5 percent from June 2004. David Lereah, NAR’s chief economist, said home sales were expected to ease slightly from peaks reached over the last couple of months. “Just when you think sales activity is ready to settle into a more sustainable pace, the housing market continues to surprise,” he said. “We’ve been expecting sales to remain at historically high levels, but this performance underscores the value of housing as an investment and the importance of homeownership in fulfilling the American dream.” Sales of new one-family houses in June were at a seasonally adjusted annual rate of 1,374,000, up 4.0 percent from the revised May rate and were 14.0 percent above the June 2004 rate, according to the U.S. Census Bureau. The median price for new homes was $214,800. Privately-owned housing starts were at a seasonably adjusted annual rate of 2,004,000 in June. This was even with the May 2005 estimate and was 9.7 percent above the June 2004 rate. Single-family housing starts in June were 2.5 percent below the May 2005 estimate. Employment According to the Bureau of Labor Statistics, non-farm employment increased by 146,000 in June. The unemployment rate continued to trend downward, reaching 5.0 percent in June. For the month, payroll employment grew in several industries, especially professional and business services and health care. The unemployment rate has been dropping since February 2005. It is now 1.3 points lower than its most recent high in June of 2003. The number of unemployed persons is down by 1.7 million since June 2005. Retail Sales and Consumer Prices According to the U.S. Census Bureau, advance estimates of U.S. retail and food services sales for May indicated a decrease of 0.5 percent from April, but an increase of 6.4 percent over May 2004. Total sales for March through May were up 7.1 percent from the same period a year ago. Retail trade sales declined 0.5 percent from April, but were 6.3 percent ahead of May 2004. Gasoline station sales were up 13.4 percent from May 2004 and sales of non-store retailers were up 11.9 percent from last year. On an adjusted basis, the report indicated that sales at furniture and home furnishings stores were up 0.9 percent over May and up 4.2 percent over June 2004. Year-to-date, sales at these stores were up 3.6 percent. Unfortunately, only one category that is tracked separately— hat being sporting goods, hobby, book and music stores—had lower growth than the furniture and home furnishings stores. Their growth was 2.0 percent. The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in June. The June level was 2.5 percent higher than in June 2004. On a seasonally adjusted basis, the CPI-U was unchanged in June following a 0.1 percent decrease in May. Energy costs declined for the second consecutive month—down 0.5 percent in June. The index for all items less food and energy, increased 0.1 in June, the same as May. Durable Goods Orders and Factory Shipments New orders for manufactured durable goods increased 1.4 percent in June after a 6.4 percent increase in May, according to advance estimates from the U.S. Census Bureau. Excluding transportation, new orders increased 2.6 percent. Excluding defense, new orders increased 0.9 percent. Computers and electronic products, up four of the last five months, had the largest increase. Shipments of manufactured durable goods declined slightly, falling 0.1 percent in June after three consecutive monthly increases. Machinery had the largest decrease at 0.8 percent. Summary The results for this month seem to indicate some encouraging trends. The trend of more companies reporting positive monthly year-over-year results seems to be a good thing. Over 60 percent of the participants reported increased orders, compared to 53 percent in April, 45 percent in March and 38 percent in February. If this trend continues, we should begin to see more positive year-to-date results. Some are the participants are reporting fairly significant increases. These results also do not reflect the impact of some plant closings, which included some dropped products, although they do include the impact of those who are importing more products. Therefore, it is not possible to tell at this time what the impact of improved orders is having on production. In our talks with people in the industry, the “average” answer is business is ok. But some are doing much better than ok, some are ok and others are not doing well at all. This results in an overall “ok” industry for now. Our projection for the rest of the year indicates somewhat slower growth, but that compares to better results in the last half of 2004 than the first half. Let’s hope that the good news from overall retail sales converts to good news at retail furniture sales. 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.