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Furniture Forecast From BDO Seidman - February 2006

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Monthly Forecaster This is the final report for the year 2005. The year was a good one for a number of our participants. It was also a struggle for many of the participants who lost market share in some pretty big ways. Also, a number of the participants are still trying to determine the balance between domestic production and imports, a difficult task for sure. New Orders. According to our recent survey of residential furniture manufacturers and distributors, new orders in December fell slightly in December 2005─just over half of one percent. With the exception of September, each month since July has shown plus or minus 1 percent, or basically flat growth. December orders were 11 percent lower than November, but that is somewhat normal for December. Last year, orders were 12 percent lower in December compared to November. For the month of December, only 35 percent of the participants reported increases compared to 55 percent last month. Again, we saw some relatively large winners, as well as some larger decreases. For the year, new orders were up 2.35 percent compared to a 6 percent increase in 2004. The number of participants reporting increases was about 40 percent which is consistent with the last few months. This 40 percent compares to 56 percent of the participants reporting increases in 2004. Shipments and Backlogs. Shipments in December fell 2 percent from December 2004. This followed a 3 percent increase in November. It marked the first month all year that shipments decreased compared to the same month in the prior year (October was flat). Only 30 percent of the participants reported increased December-over-December shipments. This compared to 40 percent in November and 36 percent in October. For the year, shipments increased a little over 3 percent. This increase compares to a 6 percent increase in 2004 over 2003. Some 38 percent of the participants reported an increase in shipments in 2005 as of the end of the year. This compared to 40 percent at the end of November and October and 56 percent in 2004 compared to 2003. Backlogs fell 9 percent from November as shipments exceeded new orders. Backlogs were also lower than last December levels. Receivables and Inventories. For one of the few times this year, receivables moved in a negative direction from shipments. Receivables increased 1 percent over last year while shipments for the month were down 2 percent. Timing can be an issue with these results especially at year-end. With shipments for the year up 3 percent and receivables only up 1 percent, it appears that receivables continue to be in line. Inventories fell again in December dropping 1 percent from November levels and 1 percent compared to December of 2004. The 1 percent decline was comparable to the same results in November. On an overall basis, inventories appear to be in line, although we are not sure that is true in all cases. We continue to hear of some overstocks, especially in imported products. Factory Payrolls and Employment. Factory payrolls fell 1 percent in December compared to last December, but were improved from November when they were down 5 percent from November 2004. Payrolls increased 14 percent over November, but most of that we believe is related to year-end bonuses and vacation pay as we normally see a large increase from November to December. The number of factory employees was down 5 percent, the same as November and typical of the year. For the year, factory payrolls decreased 1 percent compared to a 5 percent increase in 2004 over 2003. With the 3 percent increase in shipments, this decrease in payrolls appears to reflect a combination of more sales of imported products and some plant efficiencies. National Economic Indicators: The Conference Board reported that the U.S. leading index increased 1.1 percent in January, while the coincident index increased 0.2 percent and the lagging index increased 0.7 percent. The leading index has now increased in five of the last six months, increasing 2.3 percent from July 2005 to January 2006 (a 4.7 percent annual rate). The report indicated that the strengths have become more widespread since August. Six of the ten indicators increased in January. The positive contributors─beginning with the largest─ were average weekly claims for unemployment (inverted), real money supply, building permits, vendor performance, stock prices and interest rate spread. The only negative contributor was the index of consumer expectations. All other indicators held steady. The coincident index, a measure of current economic activity, increased again in January. It has been on a relatively steady upward trend since April 2003, but the growth has been moderate. The index grew 2.1 percent from January 2005 to January 2006, down from about 3.0 percent in 2004. Three of the four indicators advanced─employees on non-agricultural payrolls, manufacturing and trade sales and personal income less transfer payments. The negative was industrial production. Consumer Confidence: The Conference Board Consumer Confidence Index, which had increased in January, declined in February. The Index now stands at 101.7 (1985=100), down from 106.8 in January. The Present Situation Index rose to 129.3 from 128.8. The Expectations Index, however, fell to 83.3 from 92.1 last month. “The Present Situation Index continues to hold steady at a four-and-a-half year high (August 2001, 144.5) suggesting that, at least for now, the start of 2006 will be better than the end of 2005,” said Lynn Franco, Director of The Conference Board Consumer Research Center. “However, consumers are growing increasingly concerned about the short-term health of the economy and, in turn, about job prospects. The Expectations Index is now at its lowest level in three years (March 2003, 61.4), excluding the two months following Hurricane Katrina. If expectations continue to lose ground, the outlook for the remainder of 2006 could deteriorate.” The outlook for the labor market was not favorable. Consumers expecting fewer jobs to become available in the coming months increased to 20.0 percent from 15.2 percent in January, while those expecting more jobs declined to 13.4 percent from 13.6 percent. The proportion of consumers anticipating their incomes to increase in the months ahead eased to 18.6 percent from 19.9 percent last month. Housing: Sales of existing homes were down in January while home prices continued to appreciate at double-digit rates, according to the National Association of Realtors. Total existing-home sales─including single-family, townhomes, condominiums and co-ops─declined 2.8 percent to a seasonally adjusted annual rate of 6.56 million units in January from an upwardly revised pace of 6.75 million in December. Sales were 5.2 percent below the 6.92 million-unit level in January 2005. David Lereah, NAR’s chief economist, said sales are tracking the trend in the association’s Pending Home Sales Index. “Our leading indicator, based on pending sales, has been trending down since hitting a record last August,” he said. “In the wake of interest rates peaking in November, I expect we are in a bit of a trough that may be followed by a modest rise and then a general plateau in the level of sales activity. Existing-home sales should stay below the record levels experienced over the last two years, but they’ll maintain a historically high pace.” The national median existing-home price for all housing types was $211,000 in January, up 11.6 percent from January 2005 when the median was $189,000. Single-family home sales dipped 1.5 percent to a seasonally adjusted annual rate of 5.77 million in January from an upwardly revised 5.86 million in December, and were 4.8 percent lower than the 6.06 million-unit pace in January 2005. The median existing single-family home price was $210,500 in January, up 13.1 percent from a year earlier. Regionally, existing-home sales in the South rose 2.6 percent in January and were 1.9 percent higher than a year ago. Total existing-home sales in the West declined 3.5 percent in January, and were 14.4 percent below January 2005. In the Midwest, existing-home sales dropped 7.7 percent in January, and were 3.4 percent below a year earlier. Existing-home sales in the Northeast fell 10.0 percent in January, and were 13.2 percent lower than January 2005. Sales of new one-family houses in January 2006 were at a seasonally adjusted rate of 1,233,000, according to the U.S. Census Bureau. This rate was 5.0 percent below the revised December rate, but was 3.3 percent higher than the January 2005 rate. Comparing January 2006 to January 2005, sales were up in the Mid-west and the West. Sales were down in the Northeast and South. The median price of new houses sold in January 2006 was $238,100. The average price was $291,600. The report indicated that there was a 5.2-month supply available at the current sales rate. Privately owned housing starts were 14.5 percent above the revised December estimate and were 4 percent above the January 2005 rate. Single family housing starts were 12.8 percent above December after falling 12.3 percent in December from November. The January starts were 2.8 percent above the January 2005 rate. Employment Non-farm employment increased 193,000 in December and the unemployment rate fell to 4.7 percent. Job gains were noted in construction, mining, food services and drinking places, healthcare and financial activities. The unemployment rate had ranged from 4.9 to 5.1 percent during most of 2005. The number of unemployed persons fell to 7.0 million in January. Retail Sales and Consumer Prices: According to the U.S. Census Bureau, advance estimates of U.S. retail and food services sales for January, adjusted for seasonal variation and holiday and trading day differences, indicated an increase of 2.3 percent from December and an increase of 8.8 percent over January 2005. Total sales for the three months ended January 31 were 7.1 percent higher than the same period a year ago. Retail trade sales were up 2.3 percent over December and were 8.5 percent higher than January 2005. Gasoline station sales were up 22.7 percent and sales of building material and garden equipment and supplies dealers were up 14.7 percent from last year. Obviously, the gasoline station sales are driven by increased fuel costs. The good news for furniture was that sales at furniture and home furnishings stores were up 9.5 percent over January 2005. On an unadjusted basis, sales in January at these stores were down 24 percent from December, but on a seasonally adjusted basis, these sales were up 3.7 percent. That seems to show why January usually “feels” so bad. According to the Bureau of Labor Statistics, the Consumer Price Index for all Urban Consumers (CPI-U) increased 0.8 percent in January, before seasonal adjustment and 0.7 percent after seasonal adjustment. The January level was 4.0 percent higher than in January 2005. Energy costs increased 5.0 percent, the first time since September, and accounted for 70 percent of the overall increase in the CPI-U. The food index rose 0.5 percent after a 0.1 percent increase in December. The index for all items less food and energy rose 0.2 percent in January after a 0.1 percent increase in December. Durable Goods Orders and Factory Shipments: New orders for manufactured durable goods in January decreased 10.2 percent from December, according to the U.S. Census Bureau. The decrease came after three consecutive months of increases, including an increase of 2.5 percent in December (over November). Excluding transportation, new orders increased 0.6 percent. Excluding defense, new orders decreased 8.1 percent. Transportation equipment, falling after three consecutive increases, had the largest decrease at 31.2 percent. This was the largest decline since July 2000. The decline was led by nondefense aircraft and parts. Shipments of manufactured durable goods also declined after three consecutive increases. The decline was 1.3 percent after a 4.1 percent increase in December. The decline was also attributed to transportation equipment, led by nondefense aircraft and parts. Summary: After a reasonably strong comeback in 2004, the year 2005 was quite a mixture. New orders started slow in January and February, were pretty good from March to June, then fell off the last half of the year to end the year a little over 2 percent ahead of last year. Shipments started strong (reflecting some declines in backlogs), but began to slow in the last four months of the year. While the statistics for January at retail seemed good compared to last year, the street talk seems to indicate some sluggish activity in February. As we have indicated before, activity is spotty. Some segments at retail seem to be doing fairly well, while others are not. The index of leading indicators may give us some idea of why things are not better in the industry as a whole. The only negative indicator in January was that of consumer expectations. With no strong confidence level and interest rates going up and gas prices still relatively high, our deferrable purchase items may not be getting the play that they should be. We continue to expect growth as an industry for 2006, but as we have seen the last few years, that growth is not necessarily for everyone. This means, unfortunately, those who succeed in 2006, will have to work very hard for that success, as significant growth will likely mean taking someone else’s market share. Indicators FAVORABLE Housing Starts Consumer Spending Consumer Prices Retail Sales Unemployment Automobile Sales UNFAVORABLE Consumer Confidence Consumer Debt Existing Home Sales Producer Prices Interest Rates New Home Sales 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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