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Furniture Forecast From BDO Seidman - September 2005 - Pre Hurricane Shipments & New Orders Up

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Furniture Insights/ Monthly Forecaster from BDO Seidman August 2005 New Orders. According to our recent survey of residential furniture manufacturers, new orders in July fell slightly compared to July 2004, dropping 1 percent. July 2004 orders were 6 percent higher than July 2003 orders, so the July 2005 comparison was to a decent month in 2004. New orders in July were 13 percent lower than June 2005, but a decline from June to July is somewhat normal. Only 36 percent of the participants reported increases in orders, comparing the month of July 2005 to July 2004. This compares to 45 percent in June, 61 percent in May and 53 percent in April when comparing year-over-year results. Year-to-date, new orders were just under 2.5 percent ahead of last year. Some 43 percent of the participants have reported increases in new orders year-to-date. This percentage is in line with the last few months. Again, we have wide swings in percentage increases and decreases with a number of participants reporting considerable double-digit declines, while others are reporting reasonably good increases. Shipments and Backlogs. Shipments in July 2005 were 5 percent higher than July 2004 shipments. July 2004 shipments were 2 percent higher than the year before. Some 45 percent of the participants reported increases in shipments in July compared to 52 percent in June. Year-to-date, shipments remained 5 percent higher than 2004, the same as the results through June. Some 47 percent of the participants have reported increases, down slightly from just over half last month. In July 2004, shipments year-to-date were 7 percent higher than the previous year. Backlogs rose 2 percent over June levels, but were 9 percent lower than July 2004. The decline from last year is the result of year-to-date shipments exceeding orders. Receivables and Inventories. Receivables levels increased 4 percent in July over July 2004, in line with the increase in shipments for the month. The 4 percent increase is also in line with the 5 percent increase in year-to-date shipments. Inventories increased 1 percent in July from June levels and also increased 1 percent over July 2004. Inventory levels in June were 3 percent higher than June 2004. With orders up 2 percent and shipments up 5 percent, the 1 percent increase in inventories appears to be in line. Payrolls and Factory Employees. Factory payrolls declined 4 percent in July compared to July 2004 and fell 19 percent compared to June. Some of the July comparisons can change from year-to-year depending on when the July shutdown occurs and when vacation pay is recorded. Year-to-date, factory payrolls are up 1 percent over 2004 payrolls. In June, the year-to-date payrolls were 2 percent higher. The number of factory employees fell 3 percent in July compared to July 2004. A 1 percent decline was reported in comparing July to June. These results were fairly similar to the results in the last few months. National The Bureau of Economic Analysis issued the final report for the gross domestic product for the second quarter of 2005. The report indicated that the real gross domestic product increased at an annual rate of 3.3 percent in the second quarter. This compared to an increase of 3.8 percent in the first quarter. The deceleration in real GDP growth was attributed to a downturn in private inventory investment that was partially offset by a downturn in imports and acceleration in exports. Economic Indicators The Conference Board reported that the U.S. leading index decreased 0.2 percent in August, while the coincident index increased 0.2 percent and the lagging index declined 0.1 percent. The leading index fell slightly for the second consecutive month, as the July index was revised from a slight increase to a small decrease. In August, the main negative contributor was the index of consumer expectations. Five of the ten indicators that make up the leading index increased in August—led by interest rate spread, manufacturers’ new orders for non-defense capital goods, manufacturers’ orders for consumer goods and materials, real money supply and stock prices. The negative contributors—beginning with the largest—were the index of consumer expectations, vendor performance and building permits. Consumer Confidence The bad news just released from the Conference Board was that the Consumer Confidence Index fell significantly in September. After an increase in August to 105.5 from July’s level of 103.2, the index fell to 86.6 in September. The Present Situation index fell from 123.8 to 108.9 while the Expectations index fell to 71.7 from 93.3 in August. “Hurricane Katrina, coupled with soaring gas prices and a less optimistic job outlook, has pushed consumer confidence to its lowest level in nearly two years (81.7 in October 2003) and created a degree of uncertainty and concern about the short-term future” said Lynn Franco, Director of the Conference Board Consumer Research Center. Franco also noted that historically, shocks have had a short term impact on consumer confidence, but also noted, “As rebuilding efforts take hold and job growth gains momentum, consumers’ confidence should rebound and return to more positive levels by year-end or early 2006.” The University of Michigan Consumer Survey also reported a huge decline in confidence. The report indicated that the Index of Consumer Sentiment was 76.9 in September, down from 89.1 in August and 96.5 in July. The one-month decline of 12.2 points equaled the largest monthly decline recorded since 1978 and the combined August and September decline was the largest two-month decline on record. The Index of Consumer Expectations indicated similar results. Richard Curtin, the Director of the University’s Survey noted that, “high gas prices had a devastating impact on consumer budgets and caused consumers to expect a worsening financial situation during the year ahead.” Curtin noted that prior declines of this magnitude have typically triggered recessions, but noted that the key issue is whether the rise in Federal spending due to Katrina and Rita will be enough to offset the decline in consumer spending. Housing Existing home sales rose again in August to the second highest pace on record according to the National Association of Realtors (NAR). Total existing home sales—including single-family, town homes, condominiums and co-ops—increased 2.0 percent in August. Single-family home sales increased 1.9 percent from July and were 6.9 percent above August of 2004. The median single-family home price was $219,400 in August, up 16.2 percent from a year ago. David Lereah, NAR’s chief economist noted that housing inventory levels remain tight. Lereah said, “As a result, we’ll continue to see above-normal home price appreciation for the foreseeable future.” According to the Census Bureau, sales of new, one-family homes fell in August to a seasonally adjusted rate of 1,237,000. This is down 9.9 percent from the July rate, but was 6.2 percent above the August 2004 estimate. The largest declines were reported in the Northeast and West with a minimal 2.2 percent decline in the South. The medium price of new homes sold in August was $220,300. Privately owned housing starts in August were 1.3 percent below the revised July estimate and 0.8 percent below August of 2004, according to the Census Bureau. Employment Nonfarm payroll employment increased by 169,000 and the unemployment rate dropped to 4.9 percent according to the Bureau of Labor Statistics. The number of unemployed persons was about the same as July. The unemployment rate, at 4.9 percent, has trended down by about 0.5 percent since February. The number of unemployed persons, 7.4 million, was down from 8.0 million in February. Of course, all of this data did not reflect the impact of Hurricane Katrina and Rita. Retail Sales and Consumer Prices The U.S. Census Bureau reported that advance estimates of U.S. retail and food services sales for August indicated a decrease of 2.1 percent from July, but those sales were up 7.9 percent over August of 2004. Total sales for the three months ended August were up 9.4 percent over the same period a year ago. Retail trade sales were down 2.3 percent from July, but were up 8.0 percent over a year ago. Gasoline station sales were up 29.3 percent from August 2004 and sales of nonstore retailers were up 11.0 percent from a year ago. Sales at furniture and home furnishings stores, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were up 0.8 percent over July and were up 5.6 percent over August 2004. Year-to-date, sales at these stores were up 4.0 percent over last year. For all retail, excluding food, year-to-date sales are up 7.7 percent. The Consumer Price Index for all Urban Consumers (CPI-U) increased 0.5 percent in August on both a before and after seasonal adjustment. Energy costs increased sharply again, rising 5 percent. Within energy, petroleum based energy increased 7.9 percent. The August level was 3.6 percent higher than August 2004. The report noted that over 90 percent of the prices for August were collected prior to Hurricane Katrina striking the Gulf Coast. Durable Goods Orders and Factory Shipments According to advance estimates from the Census Bureau, new orders for manufactured durable goods in August increased 3.3 percent, following a 5.3 percent decrease in July. Excluding transportation, new orders increased 4.2 percent. Excluding defense, new orders increased 3.6 percent. Computers and electronic products, up three of the last four months, had the largest increase. Primary metals, fabricated metal products, machinery and transportation equipment also had significant increases. Shipment of manufactured durable goods increased 1.7 percent in August, following a 0.7 percent decrease in July. The August levels were at the highest levels since the series was first stated on its current basis in 1992. The final report for July indicated a 9.4 percent increase in shipments of furniture and related products for the first seven months of the year. New orders for this category were up 7.4 percent. Summary The data we are reporting in this issue registered prior to the devastating effects of Hurricane Katrina and Rita. Not only is business in the Gulf Coast of Louisiana, Mississippi and Texas not at normal levels, there are and will be, far-reaching impacts on business in general. Consumers are now paying historically high prices for gasoline. They are also sending millions of dollars for hurricane relief and worrying about energy bills as the weather cools and winter approaches. This will have some negative effect on furniture sales for the short term. On the other hand, as rebuilding of those areas continues, more furniture will be sold to replace the damaged furniture in those regions. That will likely create a short-term positive impact for some. Unfortunately, the damage caused by the hurricanes does more than disrupt lives in that area and increase gas prices across the country. It also has an impact on the cost of many raw materials, which are petroleum based, such as certain fabrics, poly for cushioning and others. In addition, there are many other factors that are impacted, such as freight and port activities. It will be a while before things return to normal, or at least somewhat normal. Unfortunately, rising costs are not needed at a time when consumers’ confidence is already low. It is difficult enough to sell furniture when consumers are in a good mood. It becomes much harder to sell them when they are not confident and prices are being raised as well. Unfortunately, that is where we are today. Hopefully, things will settle down soon. While the Gulf Coast will take a while, we would expect the refineries to get back up on a full scale reasonably soon. It may take a while for the system to catch up, but it will eventually. We wish everyone who attends a successful High Point Market. It will definitely be interesting to see how the market goes this time. 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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