Furniture Insights/ Monthly Forecaster
from BDO Seidman August 2005
In June, new orders increased 3 percent over June 2004 according to our latest survey of residential furniture manufacturers. New orders in June were basically even with May 2005 orders. Just over 45 percent of the participants reported increased orders in June compared to 61 percent of the participants in May, 53 percent in April and 45 percent in March.
June results did mark the fourth consecutive month for increased orders compared to the same month in the prior year. In addition, the 3 percent increase over the prior year compares to a good June of 2004 when orders were up 10 percent over June 2003.
Year-to-date, new orders were 3 percent above last year’s first half of the year. Approximately 40 percent of the participants have reported increases year-to-date. This percentage is similar to the results for May and April. Last year, for the first half, new orders were up 11 percent over the first half of 2003.
Shipments and Backlogs.
Shipments in June were 9 percent higher than June 2004 levels and were 7 percent above May shipments. The increase over last year was somewhat surprising although some of the increase may have resulted from timing of shipments, especially certain imported products that may have been sold at the April market and are just now getting shipped.
Approximately 52 percent of the participants reported increased shipments in June compared to last year. This was up slightly over May results and about equal to April results.
Year-to-date, shipments are up 5 percent for the first half of the year compared to last year’s first half. For the year-to-date just over one-half of the participants have reported increased shipments. In the first half of 2004, shipments were up 7 percent over the first half of 2003.
With shipment levels exceeding new orders, backlogs fell 5 percent from May levels. Backlogs also declined from last June some 5 percent. The decline in backlogs may also be affected by some of the reasons mentioned in increased shipments.
Receivables and Inventories.
As would be expected with the increased shipments, receivables were 8 percent higher than June 2004 levels and were 1 percent higher than May. Both of these increases are in line, within reason, with the levels of shipments.
Inventories increased 3 percent in June compared to June 2004. Inventories were up 5 percent in May over the previous May so some of the increase in shipments may also have come from inventories. With shipments up 5 percent year-to-date, the 3 percent increase in inventories seems reasonable.
Payrolls and Factory Employees.
Factory payrolls increased 7 percent in June compared to June of 2004. In May, payrolls declined 1 percent compared to the prior year. Year-to-date, factory payrolls are now up 2 percent compared to last year.
The number of factory employees remained relatively stable in June compared to May, where employees were down 1 percent compared to April. Compared to June 2004, the employees were down 4 percent. As we have previously mentioned, it appears that the increase in business is being handled by fewer people, but those people seem to be working more hours.
The Conference Board announced that the U.S. leading index increased 0.1 percent in July, with the coincident index also increasing 0.1 percent. The lagging index increased 0.3 percent in July.
The leading index increased slightly after a 0.9 percent increase in June, keeping the index on an upward slope. The leading index has increased at a 2.2 percent annual rate over the last six months, down from a peak of almost 10 percent growth at the end of 2003.
The coincident index, a measure of current economic activity, increased slightly in July. This index has been increasing at a relatively steady pace of about 2.5 percent since the spring of 2003 and the strength continues to be widespread.
Six of the ten indicators that make up the leading index increased in July. The positive contributors—beginning with the largest—were average weekly initial claims for unemployment insurance (inverted), interest rate spread, stock prices, building permits, index of consumer expectations and manufacturers’ new orders for nondefense capital goods. The negative contributors were vendor performance, real money supply and manufacturers’ new orders for consumer goods and materials. The average weekly manufacturing hours held steady in July.
All four indicators that make up the coincident index increased in July, led by employees on non-agricultural payrolls and manufacturing and trade sales.
The Conference Board’s Consumer Confidence Index fell slightly in July, after increases in May and June. The index was at 103.2 in July, down from 106.2 in June. The report indicated that the slight dip was no cause for concern at this time. It noted that even the increase in fuel prices at the pump had done little to dampen consumers’ spirits. It will be interesting to see what the latest gas price increases have done to confidence.
The University of Michigan’s Consumer Survey was somewhat different. The Index of Consumer Expectations rose to 85.5, up from 85.0 in June, but well above the 75.3 in May. The July index was still significantly lower than July 2004’s index of 91.2.
This survey’s index of Consumer Sentiment was 96.5 in July, slightly ahead of the 96.0 in June, but well above the 86.9 in May. The Current Economic Condition Index was 113.5 in July compared to 105.2 in July 2004.
Richard Curtin, the Director of the University’s Survey said, “The highest overall level of consumer confidence was recorded during the past two months since the last economic downturn started nearly five years ago. High gas prices had a larger impact on the living standards of lower-income households.”
The availability of vehicle price discounts was mentioned more frequently when consumers were asked to explain their views on vehicle buying in July 2005 than at any other time in the fifty-year history of the surveys. In contrast, when asked about their views on home buying, high home prices were cited more frequently and low home prices less frequently than anytime in the past twenty years.
Existing home sales in July fell from June’s record rates, but prices continued to rise at double-digit rates, according to the National Association of Realtors (NAR). Total existing home sales— including single-family, town homes, condos and co-ops, dropped 2.6 percent to a seasonally adjusted rate of 7.16 million from a revised 7.35 million in June. Sales were 4.7 percent higher than the July 2004 pace.
Sales of single-family homes fell 2.3 percent and were 4.0 percent higher than July 2004. The median price of single-family homes was $217,900 in July—up 14.6 percent from last July.
David Lereah, NAR’s chief economist, said, “The level of existing home sales was the third highest on record. This is a big number any way you slice it, and housing is continuing to stimulate the overall economy.”
The report indicated that the growth in pricing seems to be a “rolling boom” moving from one metro area to another over time. He also noted that over the last four-and-a-half years of record home sales, no area that has experienced a substantial period of double-digit price growth has later seen a price decline.
Sales of new one-family houses in July 2005 were at a seasonally adjusted annual rate of 1,410,000, according to estimates released jointly today by the U.S. Census Bureau, up 6.5 percent over the June rate of 1,324,000, somewhat off-setting the decline in existing home sales. July results were 27.7 percent above the July 2004 estimate.
The median price of new houses sold was $203,800. Sales were up in the Northeast some 10.1 percent and 36.0 percent in the West with declines of 13.5 percent in the Mid-west and 3.5 percent in the South. The Mid-west was the only area where sales were down from a year ago.
Single-family housing starts in July were 0.5 percent above June 2005.
According to the Bureau of Labor Statistics, the number of unemployed persons, 7.5 million, and the unemployment rate, 5.0 percent, were essentially unchanged in July from June levels. Last July, the number of unemployed was 8.2 million and the unemployment rate was 5.5 percent.
Non-farm employment grew by 207,000 in July. Over the month, payroll employment rose in many service-providing industries.
Retail Sales and Consumer Prices
The U.S. Census Bureau reported that advance estimates of U.S. retail and food services sales for July, adjusted for seasonal variation and holiday and trading day differences, were up 1.8 percent from June and were up 10.3 percent over July 2004. These numbers were adjusted for the effects of incentives for automobile and other motor vehicle dealers (how is too complicated for this writing).
Retail trade sales were up 1.9 percent from June and up 10.7 percent above last year. Gasoline station sales were up 20.3 percent from July 2004 and sales of motor vehicle and parts dealers were up 17.9 percent from last year.
Sales at furniture and home furnishings stores were down 1.3 percent from June (on an adjusted basis), but were up 1.5 percent from July 2004. Year-to-date, sales at these stores were up 3.3 percent for the year. For the three months ended July, sales were up 4.3 percent over the same period a year ago.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in July. The July rate was 3.2 percent higher than July 2004.
On a seasonally adjusted basis, the index also increased 0.5 percent. Energy costs increased 3.8 percent in July after a 0.5 percent decrease in June. The index for food increased 0.2 percent, while the index for all items less food and energy increased 0.1 percent for the third consecutive month.
Durable Goods Orders and Factory Shipments
According to the U.S. Census Bureau advance estimates, new orders for manufactured durable goods decreased 4.9 percent in July following a 1.9 percent increase in June. Excluding transportation, new orders decreased 3.2 percent. Excluding defense, new orders declined 4.5 percent.
Shipments of manufactured durable goods decreased 0.1 percent in July. This followed two consecutive monthly increases. Fabricated metal products, down for the second consecutive month, decreased 1.2 percent.
These are unusual times in the industry, with overall results reasonable, but not necessarily great.
Unfortunately, as discussed in the results, these times are not necessarily good for all companies. With year-to-date shipments and orders up 5 percent and 3 percent respectively, yet only about 40 percent of the participants reporting increases, this means that some apparently are doing very well, yet others are not doing well at all.
We really need consumer confidence to remain high, yet between gas prices and the war, among other things, it is rather difficult for consumers to feel much better. The good news is that they seem to be relatively stable, in spite of all that is going on.
With furniture such a deferrable purchase, we really need consumers to feel better than they apparently do. Overall though, we need to keep in mind that lots of furniture is being sold. The key continues to be how to get your share.
We have been asked by several potential investors in the industry about what the best model is for both manufacturers and retail. If someone knows the best model out there, please let me know. I think we could make a lot of money selling that idea.
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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