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Furniture Forecast From BDO Seidman - May 2006

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New Orders New orders in March 2006 rose 3 percent over March 2005 levels according to our most recent survey of residential furniture manufacturers and distributors. New orders were 8 percent higher than February levels. March order rates historically are higher than February. Just less than one-half (48 percent) of the participants reported increased order rates in March compared to 53 percent in February and 58 percent in January. There were several though that reported a very small decline in March. Year-to-date, new orders were 5 percent higher than the first quarter of last year; down slightly from the 6 percent increase after February’s report. Some 51 percent of the participants reported increases in new orders for the first quarter, down slightly from 57 percent in February. Shipments and Backlogs Shipments in March increased 3 percent over March 2005 and were up 17 percent over February. As with orders, March shipments are usually substantially higher than February, with more shipping days, as well as the seasonal effect. As with new orders, approximately 48 percent of the participants reported increased shipments in March, compared to 50 percent for February. Year-to-date, shipments are up just slightly less than 2 percent. Only 42 percent of the participants reported increases for the full quarter. In looking at the percentages, it appears that shipments are lagging behind orders, but that is somewhat misleading as year-to-date in dollars, shipments are at 99 percent of the new orders. Backlogs increased 2 percent over last year after a 6 percent increase in February, but fell 2 percent from February 2006 levels. Last month, backlogs rose 2 percent in February over January 2006 levels. Receivables and Inventories Receivables levels increased 4 percent in March over March 2005, tracking somewhat the 3 percent increase in shipments. Receivables were 5 percent higher than February, again reflecting the increased shipments in March over February. Inventories were flat compared to March 2005 after falling 2 percent in February compared to February 2005. Inventory levels rose 1 percent over February 2006 levels. Overall, inventory and receivables levels remain in decent shape compared to orders and shipments. Factory Payrolls and Employment Factory payrolls fell 2 percent in March 2006 versus March 2005—consistent with the 2 percent decline in February over February comparisons. Factory payrolls in March were 13 percent higher than February—consistent with the increase in shipments and more working days. Year-to-date, factory payrolls declined 5 percent for the quarter compared to the first quarter of last year. The number of factory employees was about equal to the numbers in February. Compared to March 2005, the number of employees fell 4 percent, slightly less than the 5 percent reported in February comparing to February 2005. National The preliminary report from the Bureau of Economic Analysis indicated that the real gross domestic product (GDP)—the output of goods and services produced by labor and property located in the United States—increased at an annual rate of 5.3 percent in the first quarter of 2006. This compares to a 1.7 percent increase in the fourth quarter of 2005. The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures, exports, equipment and software, and federal government spending. Imports, which subtract from GDP, increased as well. Leading Economic Indicators The conference Board reported 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 April. Three of the ten indicators, making up the leading index, increased in April. The positive contributors—beginning with the largest—were vendor performance, stock prices and interest rate spread. The six other indicators declined with only average weekly manufacturing hours holding steady. During the six-month span ending in April, the leading index increased 1.5 percent with eight out of ten indicators advancing. All four indicators in the coincident index increased in April led by industrial production and employees on nonagricultural payrolls. Five of the seven indicators in the lagging index rose—led by commercial and industrial loans and average prime rate charged by banks. Consumer Confidence The Conference Board Consumer Confidence Index, which increased in April, declined somewhat in May. The index fell to 103.2, down from 109.8 in April. The Present Situation Index decreased to 132.5 from 136.2 while the Expectations Index fell to 83.7 from 92.3. “Consumer Confidence, which reached a four-year high in April, lost ground in May,” says Lynn Franco, Director of the Conference Board Consumer Research Center. “Apprehension about the short-term outlook for the economy, the labor market and consumers’ earning potential has driven the Expectations Index down to levels not seen since the aftermath of the hurricanes last summer. In sharp contrast, consumers continue to rate current conditions favorably, although the Present Situation Index also lost ground this month. Looking ahead, the Expectations Index bears close watching, as it is often a harbinger of times to come.” Housing According to the National Association of Realtors (NAR), total existing home sales fell 2 percent in April from March, and were 5.7 percent below April 2005’s seasonally adjusted annual rate. The seasonally adjusted annual rate in April was reported to be 6.76 million units. David Lereah, NAR’s chief economist, said the decline was expected. “Our leading indicator for pending home sales was trending lower, and our forecast model is showing a modest decline for the second quarter with sales leveling out before rising in the fourth quarter,” he said. “Higher interest rates are slowing home sales, but we see this as another sign of a soft landing for the housing sector which remains at historically high levels.” The decline in existing home sales was evident in all regions of the country, with the West having the largest decline compared to last year—a 13 percent decline. The national median existing home price for all housing types was $223,000 in April, up 4.2 percent from April 2005. Sales of new one-family homes in April 2006 rose 4.9 percent over March levels to a seasonally adjusted rate of 1,198,000, according to the U.S. Census Bureau. This rate was 5.7 percent below the revised April 2005 rate. The median price for new houses sold in April 2006 was $238,500. Privately owned housing starts were at a seasonally adjusted rate of 1,849,000 with single-family housing starts at a rate of 1,535,000. The single-family starts were 5.6 percent below March 2006. Employment Non-farm employment increased by 138,000 in April 2006 according to the Bureau of Labor Statistics. The unemployment rate was unchanged at 4.7 percent. Industries with notable job gains over the month included financial activities, health care and manufacturing. The Bureau reported that average hourly earnings rose by 9 cents in April. The number of unemployed persons (7.1 million) was essentially unchanged in April. Retail Sales and Consumer Prices The U.S. Census Bureau reported that advance estimates for U.S. retail and food services sales, adjusted for seasonal variation and holiday and trading day differences, indicated an increase of 0.5 percent from March and were up 6.6 percent over April 2005. Total sales for the three-month period ending in April were up 7.3 percent from the same period a year ago. Retail trade sales were up 0.5 percent from March and were up 6.6 percent over April 2005. Gasoline station sales were up 17.4 percent from a year ago due to higher fuel prices and sale of non-store retailers were up 13.3 percent from last year. Sales at auto and other vehicle dealers were off 0.4 percent from March and 0.6 percent from April 2005 after a 1.1 percent increase in March compared to February and 2 percent compared to March 2005. Sales at furniture and home furnishings stores fell 0.1 percent in April compared to March, but was 8.1 percent ahead of April 2005. In March, sales at these stores were reportedly up 9.6 percent over March 2005. For the three months ended April 2006, sales at these stores were 8.9 percent higher than the same period a year ago. Year-to-date, sales at these stores were up 9 percent over the first four months of last year. The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9 percent in April before seasonal adjustment and increased 0.6 percent on a seasonally adjusted basis. The April level was 3.5 percent higher than the level in April 2005, according to the Bureau of Labor Statistics. Energy costs, up 1.3 percent in March, increased 3.9 percent in April. Within energy, the index for petroleum-based energy increased 8.5 percent. Food prices remained stable. The index for all items, less food and energy, rose 0.3 percent in April, the same as March. Durable Goods Orders and Factory Shipments According to advance reports from the U.S. Census Bureau, new orders for manufactured durable goods in April decreased 4.8 percent after two consecutive monthly increases including a 6.6 percent increase in March. Excluding transportation, new orders decreased 1.1 percent. Excluding defense, new orders decreased 3.8 percent. Shipments of manufactured durable goods decreased 0.9 percent in April following a 0.3 percent increase in March. Year-to-date, shipments of durable goods were estimated to be 6.9 percent ahead of last year with new orders up 11 percent. The final March report indicated that shipments in the furniture and related products category increased 9.3 percent for the quarter while March shipments were 9 percent higher than March 2005. Summary In our recent conversations with industry people, the best description of business both at retail and with suppliers is that business is “spotty.” While business is being done and the mood at Market seemed better than expected, there is just no real consistency to current business conditions. One interesting report out from the Federal Reserve reported that consumer credit outstanding at the end of March 2006 was $2,161.4 billion. This compares to $1,842.3 billion at the end of 2001, or a 17.3 percent increase over 2001 levels. That to us is a lot of debt. Of this debt, most of the increase has been in non-revolving loans, which indicates that monthly payments must be substantially higher than they were in 2001. Couple that with the things we have talked about before—that being monthly payments for cable, Internet, cell phones, satellite radio, etc…and most consumers, while making more, are committed to higher monthly payments than ever before. That only leaves us so much for discretionary spending, especially for items such as furniture, which is considered a deferrable purchase. The good news is, that even with these negatives, there is still a lot of furniture being sold. We heard some good reports from Market and hope that business continues to come your way. The key, as we have said over and over, is to make sure you are getting your share. That will only come through innovation, quality and great performances by your people. 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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