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Furniture Forecast From BDO Seidman - May 2006

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Monthly Forecast From BDO Seidman New Orders. The results of our recent survey of residential furniture manufacturers and distributors were somewhat mixed based on some of our expectations. New orders were basically flat in May 2006 compared to May 2005. New orders decreased 13 percent in April compared to April 2005, but some of that decline we had hoped was attributable to a late Furniture Market. We had expected May results to be more positive. On the other hand, orders were up 18 percent over April 2006. Plus, with most of the talk about business being slow at retail, at least orders came back to last year’s levels. Year-to-date, new orders are now just slightly ahead of last year for the first five months. After almost 80 percent of the participants reported lower orders in April 2006 compared to April 2005, the good news for May was that just over one-half the participants reported increased orders in May compared to May 2005. Year-to-date, only 32 percent of the participants have reported increased orders, but a good number of the participants are about even with last year. Shipments and Backlogs. After a disappointing April, shipments in May moved back to positive territory—increasing 1 percent over last May and 6 percent over April. Year-to-date, shipments are basically even with the first five months of last year. Some 54 percent of the participants reported increased shipments in May over last May. Year-to-date, 45 percent of the participants have reported increased shipments. As we have noted before, there are a number of participants reporting fairly strong double-digit improvements, but there are also a number that are off in double digits. Backlogs in May were about even with April as shipments and orders were about even in dollars. Backlogs fell slightly from last year in May. Receivables and Inventories. Receivables were about even with last May levels, reflective of shipments for the month in both years, as well as the year-to-date levels. There have been a couple of bankruptcies this year, but none of the magnitude of some in prior years. Inventories were 2 percent lower than last May, but up 1 percent over April. With business not all that great, inventories will need to be watched, but overall, they appear to be in decent shape. Employment and Payrolls. The number of factory employees decreased 5 percent from last May, but that has been consistent with previous months’ results. The May results were about equal to April’s levels of employment. Factory payrolls were down 8 percent from last May and down 2 percent from April, again reflecting slower business at retail. They appear to be helping to hold down inventory build-ups. Year-to-date, factory payrolls were down 7 percent, consistent with April results. Employment and payrolls continue to post year-over-year declines. For example, May 2006 employment was down 5 percent compared to May 2005. May 2005 employment was down 6 percent from May 2004. It appears that the employment declines have not leveled off. National Based on advance estimates from the Bureau of Economic Analysis, real gross domestic product—the output of goods and services produced by labor and property located in the U.S.— increased at an annual rate of 2.5 percent. This compares to a 5.6 percent increase in the GDP in the first quarter. The increase in the second quarter was attributed to positive contributions from personal consumption expenditures for services, private inventory investment, non-residential structures, exports, state and local government spending and personal consumption expenditures for nondurables. These were partially offset by negative contributions from residential fixed investment, federal government spending and a slight increase in imports. The deceleration from the first quarter was attributed to reductions in personal consumption expenditures for durable goods and in equipment and software, as well as the negative contributions noted above. Leading Economic Indicators According to the Conference Board, the U.S. leading index increased 0.1 percent in June, the coincident index increased 0.2 percent, and the lagging index increased 0.6 percent. The leading index increased slightly after two consecutive declines. From December to June, the index fell 0.3 percent. Declining housing permits were the largest negative contributor during this period. Six of the ten indicators in the leading index improved in June, with average weekly initial claims for unemployment insurance, index of consumer expectations, real money supply, average weekly manufacturing hours, interest rate spread and manufacturers’ new orders for nondefense capital goods all improving. All four indicators that make up the coincident index improved, led by industrial production and personal income. All seven components of the lagging index also improved — led by average duration of unemployment (inverted) and commercial and industrial loans outstanding. Consumer Confidence The Conference Board Consumer Confidence Index increased slightly in July following a moderate increase in June. The index now stands at 106.5, up from 105.4 in June. The Present Situation Index rose to 133.0 from 132.2. The Expectations Index rose to 88.8 from 87.5 last month. “Consumer confidence continues to hold steady, with the prognosis little changed from last month,” says Lynn Franco, Director of The Conference Board Consumer Research Center. “Present day conditions remain favorable, though not as strong as earlier this year. Expectations for the months ahead remain cautious and also below levels earlier this year.” Consumers’ overall assessment of current conditions held steady in July. Consumers claiming conditions are “good” increased to 27.6 percent from 26.6 percent. However, those claiming conditions are “bad” also increased to 15.5 percent from 15 percent. Labor market conditions were little changed. Consumers saying jobs are “plentiful” increased to 28.6 percent from 28 percent, while those claiming jobs are “hard to get” remained virtually unchanged at 19.9 percent. Housing According to the National Association of Realtors (NAR), existing home sales declined modestly in June and home prices were up slightly from a year ago. Total existing home sales declined 1.3 percent to a seasonally adjusted annual rate of 6.62 million from 6.71 million in May. June’s sales were 8.9 percent below June of 2005. Single-family home sales (excluding condos and cooperative housing) declined 0.9 percent to a seasonally adjusted annual rate of 5.81 million in June from 5.86 million in May. These sales were 8.2 percent below June 2005 levels. The median single-family home price was $231,500 in June, up 1.1 percent from a year ago. Regionally, existing home sales were flat in the Midwest and West, but declined 2.3 percent in the South and 3.5 percent in the Northeast. Sales of new one-family houses in June were at a seasonally adjusted annual rate of 1,131,000, according to the estimates from the U.S. Census Bureau. This was 3.0 percent below the revised May rate of 1,166,000 and was 11.1 percent below the June 2005 estimate of 1,272,000. The median price of new homes sold was $231,300. The seasonally adjusted estimate of new houses for sale at the end of June was 566,000. This represented a 6.1-month supply at the current sales rate. Single-family housing starts in June were at a rate of 1,486,000. This rate was 6.5 percent below May of 2006. Employment Non-farm payroll employment rose by 121,000 jobs in June according to the latest report from the Bureau of Labor Statistics. The unemployment rate held at 4.6 percent. Employment continued to trend upward in several service-providing industries and in mining. Average hourly earnings rose by 8 cents in June. The number of long-term unemployed persons—those unemployed 27 weeks or longer—fell to 1.1 million in June. This group was 16.2 percent of total unemployment, down from 18.8 percent in May. Retail Sales and Consumer Prices According to the U.S. Census Bureau, advance estimates of U.S. retail and food services sales for June, as adjusted, indicated a decrease of 0.1 percent from May 2006, but were 5.9 percent ahead of June 2005. Total sales for the quarter ending in June were up 6.8 percent over the same period a year ago. Retail trade sales were down 0.1 percent from May, but were up 5.7 percent over last June. Gasoline station sales were up 20.4 percent from June 2005 and sales at non-store retailers were up 12.3 percent over last year. According to the report, sales at furniture and home furnishings stores were up 1.1 percent over May and 9.3 percent over last June on an adjusted basis. Sales at these stores were up 9.8 percent for the first six months of 2006 over 2005. This compares to a 1.2 percent increase for auto and other motor vehicle dealers. The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in June according to the Bureau of Labor Statistics. This followed a 0.4 percent increase in May. Energy costs declined 0.9 percent in June after substantial increases in the previous three months, although we would expect this to change again in July. The index for all items, less food and energy, rose 0.3 percent in June, the same as in each of the preceding three months. The index for shelter again accounted for over half of the monthly advance. The index for medical care costs rose 0.3 percent and was 4.1 percent higher than a year ago. Consumer prices increased at a seasonally adjusted annual rate of 5.1 percent in the second quarter after a 4.3 percent increase in the first quarter. This brought the year-to-date index to an increase of 4.7 percent compared to an increase of 3.4 percent for all of 2005. Durable Goods Orders and Factory Shipments According to advance estimates from the U.S. Census Bureau, new orders for manufactured durable goods in June increased 3.1 percent over May. This was the fourth increase in the last five months. Excluding transportation, new orders increased 1.0 percent. Excluding defense, new orders increased 1.3 percent. Shipments of manufactured durable goods increased 0.1 percent over May. May’s increase was 3.0 percent. Shipments of these items have also increased four of the last five months. The final report for May that breaks down shipments by category indicated that shipments of furniture and related products increased 7.8 percent for the first five months of the year. The report indicated that May shipments were 6.8 percent ahead of last May. Orders in this grouping were up 8.2 percent year-to-date and were up 6.9 percent comparing May to May. Summary As we noted earlier, the results of our survey for May were not as good as we had hoped for, considering the declines noted in April. On the other hand, orders at least held steady with last May. There is some concern that had Market not been late, therefore getting some additional growth from Market orders, the results could have been worse. Based on our conversations with most in the industry, business at retail is not that good at most furniture stores. Much of what we hear is that not only are sales off, but so is traffic. And in many cases, the sales that are being made are being discounted in order to get those sales. We are not sure why what we are hearing is different from the government reports on retail sales at furniture and home furnishings stores. We do think that higher interest rates, especially on adjustable rate mortgages and higher gasoline and other energy related items are having a negative impact. While the housing market has begun to slow somewhat, those who took advantage of lower rates typically moved to larger, more expensive homes. Larger homes also cost more for upkeep, utilities, property taxes, etc… With higher mortgage payments and higher upkeep, it may take a while for income increases to catch up. Some of the differences today versus other similar times are that raises are not in double digits in most families today as they have been in certain times in the past. If homeowners stretch to buy bigger homes, there may just not be as much to spend on furniture until incomes catch up. Still, we continue to repeat our message. Furniture is being sold and lots of it. Sales are just not as robust as we would like. Let’s hope the second half of the year brings better growth for the industry. 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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