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Furniture Forecast From BDO Seidman - October 2005 - New Orders 2% Higher Year To Date

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Furniture Insights/ Monthly Forecaster from BDO Seidman October 2005 New Orders. According to our latest survey of U.S. residential furniture manufacturers, new orders in August 2005 were 1 percent higher than orders in August of 2004. This followed a 1 percent decline in July versus July a year ago. New orders in August were 7 percent higher than July orders, a somewhat normal increase. Approximately 58 percent of the participants reported increased orders in August compared to August a year ago, considerably higher than last month’s 36 percent. The 58 percent also compares to 45 percent in June, 61 percent in May and 53 percent in April. Year-to-date, new orders were 2 percent higher than the same period a year ago. Approximately 43 percent of the participants have reported increases year-to-date, similar to the last few months’ year-to-date results. Shipments and Backlogs. Shipments in August 2005 were 2 percent higher than August 2004 and were 15 percent higher than July. The increase over July is somewhat normal with the vacation week normally taken in July by most participants. The 2 percent increase in August followed a 5 percent increase in July over July and a 9 percent increase in June. Some 42 percent of the participants reported increases in shipments, similar to the July results. In June, 52 percent of the participants reported increases. Year-to-date, shipments remained 5 percent ahead of last year’s first eight months. Approximately 43 percent of the participants are reporting increased year-to-date shipments, down slightly from last month’s 47 percent. Backlogs fell 10 percent compared to August a year ago, but were only down 2 percent compared to July. This was the ninth consecutive month backlogs have decreased compared to the same period a year ago. These decreases reflect the fact that year-to-date shipments have exceeded incoming orders. Receivables and Inventories. Receivables increased only 1 percent in August over August 2004, reflective of the 2 percent increase in shipments. We will likely see some changes in receivables and shipments depending on the outcome of the Levitz situation. Inventories fell 1 percent in August after a 1 percent increase in July. Considering the order rates and shipments, inventory levels appear to be reasonable overall, as individual companies deal with the cost of carrying inventories versus the ability to better service customers, requiring higher inventory levels. Payrolls and Factory Employees. Factory payrolls were 5 percent lower than August 2004 compared to a 4 percent decline in July compared to July 2004. Payrolls increased 15 percent over July levels, again somewhat normal due to the July vacation. Year-to-date payrolls were flat compared to last year. The number of factory employees fell 5 percent compared to August last year, down slightly from the 3 percent reported last month. The number of employees also fell 1 percent compared to July when they were 1 percent lower than June. The number of employees, as well as factory payrolls, continue to reflect adjustments made by manufacturers in determining the right balance for the companies in their domestic manufacturing versus importing finished products or parts. National Economic Indicators: Data for September’s U.S. Leading Economic Indicators are the first to reflect the impact of the two hurricanes that hit the Gulf Coast region of the U.S. at the end of August and in September. As actual data for all components of the index becomes available, the immediate impact will likely be more fully reflected in the coming months. The Conference Board announced that the U.S. leading index decreased 0.7 percent in September, while the coincident index decreased 0.1 percent and the lagging index increased 0.2 percent. The decline in the leading index was sharp reflecting the impact of the hurricanes. The September decline was the third consecutive month of declines. The largest negative contributor was the index of consumer expectations and initial claims for unemployment insurance. The report indicated that excluding the large positive contributions relating to the interest rate spread, the leading index has been fluctuating around a relatively flat trend throughout 2005. With the slowing of the GDP rate to 3.3 percent in the second quarter, the recent behavior of the leading index is still consistent with the economy continuing to expand more moderately in the near-term. Consumer Confidence: The Conference Board’s Consumer Confidence Index fell again in October after a sharp decline in September. The index in October was at 85.0 falling from 87.5 in September. The Present Situation index declined to 108.2 (from 110.4 last month), while the Expectations Index decreased to 69.5 from 72.3. Lynn Franco, Director of the Conference Board Consumer Research Center said, “Much of the decline in confidence over the past two months can be attributed to the recent hurricanes, pump shock and a weakening labor market.” He also noted, “Consumers assessment of current conditions, however, remains above readings a year ago, but their short-term expectations are significantly below last October’s level. This degree of pessimism, in conjunction with the anticipation of much higher home heating bills this winter, may take some cheer out of the upcoming holiday season.” The University of Michigan’s Consumer Survey also reported a small decline in confidence after a significant decline in September. The decline in October put their confidence index to the lowest level in thirteen years. Richard Curtin, the Director of the University’s Survey indicated that, “The current outlook for higher costs of home heating, higher interest rates, and falling real incomes will cause cut backs in consumer spending in the coming months.” Both the Index of Consumer Sentiment and the Index of Consumer Expectations reported more than 22 point declines in the last three months, the second largest quarterly declines on record. The largest ever decline of these indexes was the decline associated with the 1990 recession. Housing: Sales of existing homes were reported as the second highest pace on record, with sales increasing substantially in some areas following Hurricane Katrina, according to the National Association of Realtors (NAR). Total existing home sales—including single family, town homes, condominiums and co-ops—were at a seasonally adjusted annual rate of 7.28 million units in September—the same as August. Sales were 7.2 percent above September 2004. The report noted that sales in markets such as Baton Rouge rose dramatically from September 2004 while parts of New Orleans recorded a fraction of the volume a year ago. The median existing home price for all housing types was $212,000 in September, up 13.4 percent over September 2004. David Lereah, NAR’s chief economist noted, “Masked by the data are early signs that housing is starting to wind down from a boom and will transition into an expansion—in other words, a soft landing.” Sales were up in the South and Northeast, but declined 3 to 4 percent in the Midwest and the West. Sales of new one-family homes in September were at a seasonally adjusted annual rate of 1,222,000, according to the U.S. Census Bureau. This rate was 2.1 percent above the August rate, but was 0.1 percent below the September 2004. Privately owned housing starts in September were 3.4 percent higher than August and were 10.3 percent higher than September 2004. Single-family housing starts were 2.6 percent ahead of August. Employmentz: Nonfarm payroll employment was virtually unchanged, down 35,000, in September and the unemployment rate rose to 5.1 percent according to the Bureau of Labor Statistics. The report indicated that the measures of employment and unemployment reported reflect both the impact of Hurricane Katrina and ongoing labor market trends. Over the 12 months ended August, payroll employment grew by an average of 194,000 a month, while the unemployment rate trended downward. It was noted that the report would not reflect the effects of Hurricane Rita due to the timing of the survey. Retail Sales and Consumer Prices: The U.S. Census Bureau reported that advance estimates of U.S. retail and food services sales for September indicated an increase of 0.2 percent from August and 6.5 percent over September 2004. Retail trade sales were up 0.2 percent from August and 6.7 percent over last year. Gasoline station sales were up 34.8 percent from September 2004. Sales of nonstore retailers were up 11.1 percent from last year. Sales at auto and motor vehicle dealers were down 3 percent from last month and down 4.5 percent from last September, although they remain 5.7 percent ahead of last year for the nine months. Sales at furniture and home furnishings stores were 1.2 percent ahead of August and were up 8.3 percent over last September. Year-to-date, sales at these stores were 4.8 percent above last year. For the quarter ended September, sales were reported up 5.9 percent over the same quarter last year. The Consumer Price Index for all Urban Consumers (CPI-U) increased 1.2 percent in September, before and after seasonal adjustment. Energy costs increased for the third straight month—up 12 percent in September and accounted for over 90 percent of the increase in the CPI-U. Within energy, petroleum based products increased 17.4 percent. The index for all items less food and energy increased 0.1 percent―the fifth consecutive monthly increase. Consumer prices increased at a seasonally adjusted annual rate (SAAR) of 9.4 percent in the third quarter following increases of 4.3 percent and 1.9 percent in the first two quarters of the year. The year-to-date annual rate is 5.1 percent compared to 3.3 percent for all of last year. For the year-to-date, energy costs have risen at a 42.5 percent SAAR after a 16.6 percent rate in all of 2004. The energy index increased at a 122.1 percent rate in the third quarter. Durable Goods Orders and Factory Shipments: Advanced reports for the U.S. Census Bureau indicated that new orders for manufactured durable goods decreased 2.1 percent in September. This followed a 3.8 percent increase in August. Excluding transportation, new orders decreased 1.0 percent and excluding defense, new orders decreased 2.1 percent. Shipments of manufactured durable goods in September, up four of the last five months, increased 0.1 percent. Machinery had the largest increase. Summary: The October Furniture Market was interesting. We do not believe that many exhibitors came to town with high expectations. Surprisingly, a good number of the people we talked with had very good markets. Attendance was off according to most we talked to (and those percentages varied widely), but that was expected. With the effects of Katrina and Rita, then Wilma coming to Florida, and business at retail somewhat sluggish, it would have been hard to expect increased attendance. Business expectations for the fourth quarter for most are not that high. With extremely high gas prices, expectations for high home heating costs and consumer confidence down, it is hard to believe that we will see significant increases in furniture sales. Add to that increasing raw material prices, and you do not get a formula for excitement. With that said, furniture will be sold. As we tell our clients, it is not about selling all the furniture in the world—it is about selling your share. Good luck in what may be some difficult times. 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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