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Furniture Forecast From BDO Seidman - November 2005 - New Furniture Orders 3% Higher For First Three Quarters

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Furniture Insights/ Monthly Forecaster from BDO Seidman November 2005 New Orders. New orders for September increased 10 percent over September 2004, according to our most recent survey of residential furniture manufacturers. This increase followed a 1 percent increase in August over August 2004 and a 1 percent decline in July. New orders in September were 12 percent higher than orders in August 2005. Almost 55 percent of the participants reported increased order rates in September compared to 58 percent in August, 36 percent in July and 45 percent in June. Some of the participants reported healthy double-digit increases in orders. Year-to-date, new orders increased 3 percent over the first three quarters of 2004, inching up from the 2 percent last month. Approximately 45 percent of the participants have reported increases year-to-date through September compared to 43 percent over the last few months. Shipments and Backlogs. Shipments in September were only up 1 percent over September 2004, but shipments in September 2004 were up 4 percent over the previous year. Shipments increased 2 percent in August and 5 percent in July compared to the previous year. September shipments were 6 percent higher than August 2005. Only 39 percent of the participants reported increased shipments in September compared to 42 percent last month. As with orders, some participants reported significant double digit increases. Year-to-date, shipments are up 4 percent over last year, down slightly from last month. Similar to last month, 43 percent of the participants have reported increases year-to-date. Backlogs dropped slightly from last year levels, but were up slightly compared to August. Receivables and Inventories. Receivable levels continue to track well with shipments. Receivables rose 1 percent over September 2004, similar to the increased shipments. Compared to August, shipments increased 5 percent, in line with the 6 percent increase in shipments. Inventories increased 2 percent over August and were 1 percent higher than last year. With orders and shipments up, the increase in inventories appears very much in line with current business conditions. Payrolls and Employment. Payrolls fell 3 percent in September compared to September 2004. This decline compares to a 5 percent decline in August. Payrolls were up 6 percent over August. Year-to-date, payrolls were about even with last year. The number of factory employees fell 1 percent in September from last year compared to a 5 percent decline in August over August. Employment fell 5 percent compared to August. It continues to appear that more shipments are made with fewer employees. While some of this is a result of more imported product, we are also hearing that several plants are now working more hours with fewer people. National According to advance estimates from the Bureau of Economic Analysis, the Gross Domestic Product (GDP) increased to an annual rate of 3.8 percent in the third quarter of 2005 compared to an annual rate of 3.3 percent in the second quarter. The major contributors to the increase were personal consumption expenditures, equipment and software, federal government spending and residential fixed investment. The negative contribution was from private inventory investment. Economic Indicators The Conference Board report on economic indicators noted an increase of 0.9 percent in the leading index, a 0.1 percent increase in the coincident index and a 0.8 percent increase in the lagging index. The increase in the leading index in October offset the large decrease in September, partially reflecting the economic impact of the Gulf Coast hurricanes in late August and September. October’s increase was widespread among the indicators. Seven of the ten indicators increased in October. The positive contributors— beginning with the largest—were average weekly initial claims for unemployment insurance (inverted), average weekly manufacturing hours, vendor performance, real money supply, interest rate spread, manufacturers’ new orders for non-defense capital goods and manufacturers new orders for consumer goods and materials. The negative contributors were building permits and stock prices. The 0.9 percent increase in the leading index followed a 0.8 percent decrease in September and was unchanged in August. During the six months ended October, the leading index increased 1.2 percent. Consumer Confidence The Conference Board’s Consumer Confidence Index improved significantly in November. The index, which fell to 85.2 in October, rebounded to 98.9 in November. The Present Situation Index rose to 114.0 from 107.8 while the Expectations Index increased to 88.8 from 70.1 last month. “A decline of more than 40 cents in gasoline prices this month and the improving job outlook have combined to help restore consumers’ confidence,” said Lynn Franco, director of the Conference Board Consumer Research Center. He noted that even though consumers are feeling better just in time for the holiday season, holiday spending will likely be driven by the bargains consumers have come to expect. The University of Michigan Consumer Survey also reported substantial improvement in the November survey, ending a three-month plunge recorded from July to October. Richard Curtin, the Director of the Survey, indicated that, “The recent rise in consumer confidence was due to declines in gas prices.” The University’s Index of Consumer Sentiment was 81.6 in November, up from 74.2 in October, but still below the 96.5 recorded in July and the 92.8 recorded in November 2004. Housing Sales of existing homes eased in October with a moderate decline in both single-family and condo sales, 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 rate of 7.09 million units in October, down 2.7 percent from September’s pace, but still 3.7 percent above October 2004. David Lereah, NAR’s chief economist said, “We are returning to more balanced markets between home buyers and sellers, one that places buyers on a more even footing. Housing activity has peaked and is coming down a bit, and we expect further cooling in the coming months. We feel confident that housing is landing softly as rates continue to rise.” Single-family home sales dropped 2.5 percent from September, but remained 3.3 percent above October 2004. Condo and co-op sales fell 4.4 percent. Regionally existing home sales fell in all regions 1 to 2 percent except for the Northeast where they fell 7.4 percent. The national median existing home price for all types was $218,000 in October; that’s some 16.6 percent higher than October 2004. Sales of new-one family homes in October were at a seasonally adjusted rate of 1,424,000 according to the U.S. Census Bureau. This was 13.0 percent above the revised September rate and is 9 percent above October 2004. It appears that new home sales helped offset some of the decline in existing home sales. Sales of new homes were up in all regions except the Mid-West. Housing starts in October were at a seasonally adjusted annual rate of 2,014,000. This was 5.6 percent below the revised September estimate and 2.3 percent below the October 2004 rate. This appears to reflect the expected slower rate of housing sales. Employment Non-farm payroll employment was up 56,000 in October with the unemployment rate falling slightly to 5.0 percent. These results were modified for several issues relating to the hurricanes. Average hourly earnings of production and non-supervisory workers on private non-farm payrolls rose by 8 cents-per-hour over the month. The unemployment rate has ranged from 4.9 to 5.1 percent since May. Retail Sales and Consumer Prices The U.S. Census Bureau announced that advance estimates of U.S. retail and food services sales for October, adjusted for seasonal variation and holiday and trading day differences, indicated a decrease of 0.1 percent from September, but were up 5.7 percent from October 2004. Total sales for the three months ended October were up 6.8 percent from the same period a year ago. Retail trade sales declined 0.2 percent from September, but were up 5.5 percent above last year. Gasoline station sales were up 27.1 percent due primarily to price increases and sales of building material and garden equipment and supplies dealers were up 13.1 percent over last year. On an adjusted basis, sales at furniture and home furnishings stores were up 0.7 percent over September and up 9.0 percent over October 2004. For the ten months, sales at these stores are up 5.2 percent over the same period a year ago. The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in October. The October level was 4.3 percent above the October 2004 rate. The index for all items less food and energy rose 0.2 percent in October following increases of 0.1 percent in each of the five preceding months. The index for food rose 0.3 percent while the index for energy fell 0.2 percent due to a decline in the index for motor fuels. During the first ten months of 2005, the CPI-U rose at a 4.9 percent seasonally adjusted rate. This compares to 3.3 percent in all of 2004. The index for energy during this time frame rose 37.1 percent and the index for food rose 2.4 percent. Excluding food and energy, the CPI-U increased 2.1 percent for the ten months versus 2.2 percent in all of 2004. Durable Goods Orders and Factory Shipments New orders for manufactured durable goods increased 3.4 percent in October according to the U.S. Census Bureau. This followed a 2.0 percent increase in September. Excluding transportation, new orders increased 0.3 percent. Excluding defense, new orders increased 1.7 percent. Shipments for manufactured durable goods in October increased 1.4 percent. This was the highest level since the series first was stated on the new basis in 1997. Summary September orders were a good sign for many residential manufacturers. As we have noted before, the last couple of years have been unusual with very wide swings among participants. Some are enjoying pretty good overall results in both orders and shipments while others are reporting significant declines. Based on what we heard at market and recent conversations, we do not expect October results to be as strong on the order front, but hopefully shipments will remain at decent levels due to increased orders over the last few months. There is little doubt that many of the increases participants are reporting reflect increased sales of imported products as we continue to experience plant closings. With gas prices falling and consumer confidence picking up, we would expect somewhat better results in the future. The retail sales statistics continue to show improvements in furniture and home furnishings stores. Some of this likely is coming from direct imports, which do not flow through domestic companies. We have forecasted sales in the fourth quarter to increase about 1 percent over last year’s fourth quarter. Last year shipments were up about 4 percent over the previous year. So while not exactly stimulating, the growth continues even with the cheaper prices for imported products. FAVORABLE INDICATORS: Consumer Confidence Existing Home Sales Housing Starts Consumer Spending New Home Sales Retail Sales Unemployment Capital Outlays Durable Goods Orders Factory Shipments UNFAVORABLE INDICATORS: Consumer Prices Consumer Debt Producer Prices Interest RatesAutomobile 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.

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