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Furniture Forecast From BDO Seidman - December 2005 - Inventories In Good Shape

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Furniture Insights/ Monthly Forecaster from BDO Seidman December 2005 New Orders. According to our latest survey of residential furniture manufacturers, new orders in October 2005 were almost even with new orders in October last year and were down 10 percent compared to September. Some of this decline from September may have been related to a late High Point Furniture Market in 2005 (October 20 to 27). In addition, based on our conversations with manufacturers, most indicated that September orders were really picking up, but fell off again in October (September orders were 10 percent higher than September 2004). After 55 percent of the participants reported increases in September, only 46 percent of the participants reported increases in October. The respective percentages were 58 percent in August and 36 percent in July. Year-to-date, new orders remained 3 percent above the first ten months of last year. Approximately 47 percent of the participants have reported increases year-to-date, compared to 45 percent last month. There continues to be a number of participants reporting double-digit increases. Shipments and Backlogs. Shipments for October were also about even with last October, but fell 7 percent from September 2005. Shipments in October are typically down some from September although normally not quite as much as this year. Comparisons of September to October are also skewed somewhat due to some companies using fiscal periods which, for calendar year and others with normal quarter ends, results in 5-week periods in September. Some 36 percent of the participants reported increases in shipments during October compared to 39 percent in September and 42 percent in August. Year-to-date, shipments remained 4 percent ahead of last year. Some 40 percent of the participants have reported increases in shipments year-to-date, down slightly from the last two months. Backlogs fell slightly, dropping 1 percent compared to last October. Backlogs also declined by 1 percent from September as shipments exceeded orders by a slim margin. Receivables and Inventories. Receivables dropped 5 percent from last October and 2 percent from September. While not in line with shipment results, at least the movement was in the right direction. We are not certain what would cause this significant difference. It may result purely from timing. We will continue to monitor the receivable levels, although the drop from September to October was more in line with the shipments decline. Inventories fell again in October, with a 2 percent decline from September 2005 levels. Inventories were also down 1 percent compared to last October. Overall, inventories appear to be in good shape. Payrolls and Employment. Factory payrolls were 6 percent lower in October compared to October 2004. In September, payrolls were down 3 percent so the decline in October was significant. We will have to see if that trend continues next month. Again, in any given month, there may be timing issues. Factory employment also fell in October, declining 4 percent from October 2004 although the number of factory employees was relatively stable compared to September. In September, the number of factory employees was only down 1 percent compared to last year. National: The final report for Gross Domestic Product for the third quarter was issued by the Bureau of Economic Analysis in December. This report indicated an increase at an annual rate of 4.1 percent compared to earlier estimates of 3.8 percent and a 3.3 percent increase in the second quarter. The major contributors remained the same as earlier reports. (These include personal consumption expenditures, equipment and software, federal government spending and residential fixed investment.) These were offset somewhat by private inventory investment and an increase in imports. Economic Indicators: The Conference Board announced that the U.S. leading index of economic indicators for November increased 0.5 percent, the coincident index increased 0.2 percent, and the lagging index increased 0.6 percent. The leading index increased substantially in November after an increase of 0.9 percent in October. The six-month growth rate indicated a 3.4 percent annual rate of growth, compared to about 1.9 percent for the first half of 2005. Seven of the ten indicators that make up the leading index increased in November. The positive indicators were average weekly claims for unemployment (inverted), which returned to pre hurricane levels, real money supply, index of consumer expectations, stock prices, building permits, interest rate spread, and manufacturers’ new orders for consumer goods and materials. All four indicators that make up the coincident index increased in November. For the lagging index, six of the seven components increased with only the ratio of consumer installment credit to personal income holding steady. Consumer Confidence: The Conference Board’s Consumer Confidence Index improved again in December after a significant increase in November. The Index now stands at 103.6 up from 98.3 in November. The Present Situation Index increased significantly to 121.5 from 113.2 last month. The Expectations Index increased to 91.6 from 88.4 last month. “Consumer confidence continues to bounce back and is now at its highest level since Hurricane Katrina struck the Gulf Coast,” says Lynn Franco, Director of The Conference Board Consumer Research Center. “The resiliency of the economy, recent declines in prices at the pump, and job growth have consumers feeling more confident at year-end than they felt at the start of 2005. Even though all of the improvement over the past twelve months has been in consumers’ assessment of current conditions, and expectations remain below earlier levels, consumers are confident that the economy will continue to expand in 2006.” Consumers claiming conditions are “bad” decreased to 14.7 percent from 17.9 percent. Those claiming conditions are “good,” however decreased slightly from 25.6 percent to 24.3 percent. The latest index is now at its highest level since August 2005. Housing: According to the National Association of Realtors (NAR), existing-home sales declined in November while home prices sustained double-digit annual gains. Total existing home sales–including single-family, town homes, condos and co-ops–fell 1.7 percent to a seasonally adjusted rate of 6.97 million units. Sales were 0.1 percent below the November 2004 level. Sales of single-family homes were down 1.9 percent to a seasonally adjusted rate of 6.11 million in November and were 0.5 percent below the November 2004 level. The median single-family home price was $213,500, which was 13.5 percent above last year. Sales levels fell in all four regions of the country. David Lereah, NAR’s chief economist said, “The current pace of home sales activity remains historically strong--only eight months have had a higher sales pace. A modest downtrend, to a sales volume that is expected to be the second best year ever in 2006, will be good for the long-term health of the housing sector.” Sales of new one-family houses in November 2005 were at a seasonally adjusted annual rate of 1,245,000, according to estimates from the U.S. Census Bureau. This was 11.3 percent below the revised October rate. Much has been made of this in the media, but it should be noted that November’s rate was still 6 percent above November of 2004. We remember when any rate over 900,000 was good and it wasn’t long ago that anything over 1,100,000 was outstanding. The decline was in all regions except the Northeast where there was a 13.4 percent increase. The West was hit the hardest with a 22.1 percent decline. Compared to last year, all regions except the Mid-West were up, where sales were flat. Privately owned housing starts in November were 5.3 percent above October’s estimate and were 17.5 percent above November 2004. Single-family housing starts were at a seasonally adjusted annual rate of 1,808,000 or 4.8 percent above October. Employment: Non-farm payroll employment grew by 215,000 in November according to the Bureau of Labor Statistics. Job growth was reported as widespread with large gains in construction and food services. The unemployment rate remained unchanged at 5.0 percent. Retail Sales and Consumer Prices: According to the U.S. Census Bureau, advance estimates of U.S. retail and food services sales for November indicated an increase of 0.3 percent from October. These sales, adjusted for seasonal variation and holiday and trading day differences, were up an estimated 6.3 percent from November 2004. Sales for the three months ended November were also up 6.3 percent over the same period a year ago. Retail trade sales were up 0.2 percent from October and were 6.1 percent higher than last November. Gasoline station sales were up 16.8 percent from November 2004 (compared to 27.1 percent last month). Sales of building materials and garden equipment and supplies dealers were up 14.5 percent from last year (compared to 13.1 percent last month). On an adjusted basis, sales at furniture and home furnishings stores were down 0.3 percent from October, but up 6.1 percent over last November. For the eleven months ended November 2005, sales at these stores were up 5.0 percent over last year. The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.8 percent in November according to the Bureau of Labor Statistics. The November level was 3.5 percent higher than in November 2004. On a seasonally adjusted basis, the CPI-U decreased 0.6 percent in November, its largest decline since a 0.9 drop in July 1949. The decline was led by the index for energy, which declined for the second straight month–down a record 8.0 percent in November. Within energy, a 15.2 percent decline in petroleum-based energy offset a 2.1 percent increase in the index for energy services. The index for food increased 0.3 percent while the index for all items less food and energy rose 0.2 percent in November, the same as October’s increase. Durable Goods Orders and Factory Shipments: The advance report for manufactured durable goods orders in November indicated a 4.4 percent increase according to the U.S. Census Bureau. This was the highest level since the series was first stated on the current basis in 1992 and followed a 3.0 percent increase in October. Excluding transportation, new orders decreased 0.6 percent. Excluding defense, new orders increased 5.9 percent. Shipments of manufactured durable goods decreased 0.2 percent in November, following a 1.2 percent increase in October. Computers and electronic products, down two of the last three months, had the largest decrease at 1 percent. According to the final report for October, shipments for furniture and related products increased 7.3 percent over last October. Year-to-date, shipments from these manufacturers indicated an 8.9 percent increase. Summary: The results for October at the manufacturing level were not that impressive yet the results were no surprise, as business seemed to slow in October before the Market. It seems that business picks up, as it did in September, and then slows down again, as it did in October. The latest comments we have heard indicate more of the same, although one advance report we heard on the news today indicated that December retail sales were good versus last year and that home furnishings was one of the better performers. Overall the economy seems to be holding up pretty well in spite of high gas prices and higher interest rates. Our latest projection for manufacturers’ shipments for 2006 indicates growth in the 4 to 5 percent range. Unfortunately, we can expect about one-half of that growth to be related to price increases. From what we have heard, whether recent increases were permanent or surcharges, no one really expects prices to go back down. With inflation fears continuing, most believe we will see more increases in interest rates–some as high as an 8 percent prime rate. While the low rates of the last few years have been great, from an historical perspective, 8 percent is still not that bad. Best wishes from all of us for a very prosperous new year. As we have said many times before–while not always at the levels you may like--furniture is being sold, both at retail, as well as by manufacturers and distributors. The key is to get your share. Let’s hope you do. Indicators: UNFAVORABLE Consumer Prices Consumer Debt Producer Prices Interest Rates Automobile Sales FAVORABLE Consumer Confidence Existing Home Sales Housing Starts Consumer Spending New Home Sales Retail Sales Unemployment Capital Outlays Durable Goods Orders Factory Shipments 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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