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Furniture Forecast From BDO Seidman - April 2006

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New Orders. According to our latest survey of residential furniture manufacturers and distributors, new orders in February 2006 increased 7 percent over new orders in February 2005. New orders were 6 percent higher than January order rates. The results were somewhat surprising (on the good side) based on recent conversations with people in the industry. The results again were very mixed among participants. Some 53 percent of the participants reported increases in the February-to-February comparisons similar to the 58 percent in January and clearly better than the 35 percent showing increases in December. Once again, the disparity among participants was wide, with a good number of participants reporting strong double-digit increases, while others continue to report double-digit declines. Year-to-date, new orders were up 6 percent for the two months ended February 2006. Some 57 percent of the participants reported increased orders. Shipments and Backlogs. Somewhat surprising, shipments for February only increased 2 percent. Following a 6 percent increase in orders in January with shipments basically flat, one might have expected shipments to increase a little more, but timing of the new orders may have made a difference along with issues relating to receiving imported products or components. Year-to-date for the two months, shipments were up 1 percent. Approximately 50 percent of the participants reported increased shipments in February as well as year-to-date. This compared to 46 percent in January. Backlogs increased 6 percent over last February and 2 percent over January levels as new orders exceeded shipments. Receivables and Inventories. Receivables fell 3 percent from last year’s levels even with the increase in shipments. Receivables increased 3 percent over January levels, still short of the 9 percent increase in shipments in February over January. As we have noted in recent months, receivables levels appear to be in good shape. Inventory levels fell 2 percent from last February and 2 percent from January. In January, inventories were 1 percent lower than they were a year ago. With increased orders, but shipments not keeping pace, as well as a decline in inventories, it appears that there may be some timing issues with getting raw materials or imported products and components. Factory Payrolls and Employment. Factory payrolls were 2 percent lower in February 2006 compared to February 2005. Factory payrolls were 6 percent higher in February compared to January, apparently reflecting the increases in order rates. Year-to-date, payrolls were 6 percent lower than the first two months of last year, compared to an 8 percent decline in January. The number of factory employees was 5 percent lower than February 2005, consistent with the January 2006 results. The number of employees in February was about even with those in January. National The Conference Board announced that the U.S. leading index decreased 0.1 percent, the coincident index increased 0.2 percent and the lagging index increased 0.3 percent in March. The leading index decreased slightly in March, and February’s decrease was revised down due to data revisions in several underlying components. Despite the weakness in the leading index in February and March, its six-month growth rate picked up to an average of 3.2 percent annual rate in the first quarter, up from an average growth rate of 2.7 percent in the fourth quarter, which was higher than its average growth of 1.8 percent in 2005. In addition, the strengths among the leading indicators have been widespread in recent months. The coincident index increased again in March, and it has been increasing steadily since September 2005. The six-month growth rate of the coincident index picked up to a range of 3.0 to 4.0 percent annual rate in the first quarter, up from an average growth of about 2.0 percent in the fourth quarter of 2005, and the strengths among the coincident indicators have been widespread in recent months. The growth of the leading index has slowed steadily since mid-2004 while fluctuating around a moderate upward trend. At the same time, economic activity has slowed from strong to more moderate growth through the first quarter. The current behavior of the leading index suggests economic growth should continue moderately in the near term. Five of the ten indicators that make up the leading index increased in March. The positive contributors--beginning with the largest--were vendor performance, stock prices, index of consumer expectations, manufacturers’ new orders for consumer goods and materials and interest rate spread. The negative contributors _ beginning with the largest _ were building permits, average weekly initial claims for unemployment insurance (inverted), manufacturers’ new orders for non-defense capital goods, and real money supply. The average weekly manufacturing hours held steady in March. All four indicators that make up the coincident index increased in March. The lagging index stands at 122.9 (1996=100) in March, with five of the seven components advancing. Consumer Confidence The Conference Board Consumer Confidence Index, which had increased in March, improved further in April. The Index now stands at 109.6 (1985=100), up from 107.5 in March. This is the highest level since May 2002 (110.3). The Present Situation Index rose to 136.2 from 133.3. The Expectations Index improved to 91.9 from 90.3 last month. “Improving present-day conditions continue to boost consumers’ spirits,” says Lynn Franco, Director of The Conference Board Consumer Research Center. “Recent improvements in the labor market have been a major driver behind the rise in confidence in early 2006. Looking ahead, consumers are not as pessimistic as they were last month. However, expectations for the economy and labor have been trending downward since peaking in 2003. And, while prices at the pump have yet to impact confidence, further increases could dampen consumers’ mood.” Housing Sales of existing homes increased in March following a strong rebound in February, according to the National Association of Realtors. Total existing-home sales--including single-family, townhomes, condominiums and co-ops--rose 0.3 percent to a seasonally adjusted annual rate of 6.92 million units in March from a pace of 6.90 million in February, but were 0.7 percent below a 6.97 million-unit level in March 2005. David Lereah, NAR’s chief economist, said sales are leveling out. “It’s a good sign to see home sales holding close to the level of a strong rebound in the month before,” he said. “This is additional evidence that we’re experiencing a soft landing. We may see some minor slowing in home sales as interest rates rise, but the market clearly is stabilizing.” Lereah expects 2006 to be the third strongest year on record for home sales. “We now see appreciation cooling to single-digit rates of price growth _ another sign that the market is normalizing,” Lereah said. The national median existing-home price for all housing types was $218,000 in March, up 7.4 percent from March 2005 when the median was $203,000. Total housing inventory levels rose 7.0 percent at the end of March, which represents a 5.5-month supply at the current sales pace. Single-family home sales rose 0.3 percent to a seasonally adjusted annual rate of 6.07 million in March from 6.05 million in February, and were 0.5 percent below the 6.10 million-unit pace in March 2005. The median existing single-family home price was $217,300 in March, up 7.8 percent from a year ago. Regionally, existing-home sales in the Northeast rose 1.7 percent in March, and were 2.6 percent higher than a year ago. Existing-home sales in the Midwest increased 1.2 percent in March, and were 3.8 percent above March 2005. In the South, existing-home sales slipped 0.7 percent in March, but were 1.5 percent higher than a year ago. Existing-home sales in the West eased 0.7 percent in March, and were 12.3 percent below March 2005. The data for new home sales in March was not available at this writing. According to the U.S. Census Bureau, housing starts in March 2006 were at a seasonally adjusted rate of 1,960,000 or 7.8 percent below the revised February estimate. They were still 6.9 percent above the March 2005 rate. Single family starts in March were at a rate of 1,591,000 or 12.0 percent below the February starts, but were 2.6 percent above the March 2005 rate. Employment Non-farm payroll employment increased by 211,000 in March according to the Bureau of Labor Statistics. The unemployment rate dropped slightly to 4.7 percent from a 4.8 percent rate in January. The job growth was reported to be widespread in the service providing sector. Retail Sales and Consumer Prices The U.S. Census Bureau announced that advance estimates of U.S. retail and food services sales for March, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, increased 0.6 percent from the previous month and were up 7.9 percent from March 2005. Total sales for the January through March 2006 period were up 8.3 percent from the same period a year ago. Retail trade sales were up 0.7 percent from February and were 7.9 percent above last year. Building material and garden equipment and supplies dealers were up 17.9 percent from March 2005 and sales of nonstore retailers were up 14.1 percent from last year. Sales at furniture and home furnishings stores or an adjusted basis were up in March about one half of a percent from February, but were up 10 percent over March 2005. For the first three months of the year, sales at these stores were up an estimated 10.5 percent. The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in March, before seasonal adjustment, according to the Bureau of Labor Statistics of the U.S. Department of Labor. The March level of 199.8 (1982-84=100) was 3.4 percent higher than in March 2005. On a seasonally adjusted basis, the CPI-U advanced 0.4 percent in March, following a 0.1 percent rise in February. Energy costs, which declined 1.2 percent in February, increased 1.3 percent in March. Within energy, the index for motor fuels increased 3.6 percent, while the index for household fuels fell 1.0 percent. The index for all items less food and energy rose 0.3 percent in March, following a 0.1 percent increase in February. Durable Goods Orders and Factory Shipments The results for March were not available at the time of this writing. The final report for February indicated that new orders for manufactured durable goods were up 2.7 percent (from original 2.6 percent). Shipments were up 0.2 percent following a 1.8 percent decrease in January. Shipments of furniture and related products in February 2006 increased 2.6 percent over January and were up 7.8 percent over February 2005. Year-to-date shipments were up 9.1 percent. Orders were up 10.2 percent. Summary As we mentioned earlier, the results for February were somewhat surprising based on street talk. Lately, most of the talk has been about a soft retail environment, yet the retail sales reports have tended to indicate that retail is holding up well, even in furniture and home furnishings stores. As we began Furniture Market here in High Point, the news appeared to be good for the first few “unofficial” days. We hope that continues. Consumer confidence remains at good levels in spite of the recent spikes at the gas pumps. As we approach summertime vacations, we are somewhat concerned that this may hurt sales somewhat at the promotional end of the market, but it appears that gas prices haven’t reached a point yet that Americans have cut back too much. We hope by the time you read this you will have had a successful High Point Market. If you did not come, you should try to make it in September. There have been lots of changes, as well as great product selection. You owe it to yourself to come to see all that High Point offers. There is really nothing in the world quite like it. 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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