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Furniture Forecast From BDO Seidman -October 2006

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Monthly Forecast From BDO Seidman New Orders. According to our recent survey of residential furniture manufacturers and distributors, new orders fell 4 percent in July 2006 compared to July 2005. New orders were 16 percent lower than June 2006 orders. The decline from June to July is somewhat typical since most plants shut down for vacation a week in July. For the month, just over 40 percent of the participants reported increased orders over last July, compared to 58 percent of the participants in June. Year-to-date, new orders are just slightly below the levels of the first seven months of last year. For the year, 34 percent of the participants have reported increased orders, although several are very close to even. Shipments and Backlogs. Shipments in July also fell 4 percent compared to July 2005 and were 22 percent lower than June shipments. Again, the decline in July is somewhat normal with plants being off a week. (Last year, July shipments were 20 percent lower than June.) For the month of July, approximately 46 percent of the participants reported increased shipments. Year-to-date, as with orders, shipments were down slightly for the seven months—less than 0.5 percent. Approximately 41 percent of the participants have reported increased shipments year-to-date, about equal to last month’s percentage. Backlogs were about equal to last year’s levels and were 2 percent higher than June. The slight increase in July over June is also normal with orders being received in spite of plants being closed. Receivables and Inventories. Receivable levels in July were even with July 2005 levels, but were 8 percent lower than June. This would be reasonable with the decrease in shipments. Inventories were down 1 percent from last year and up 1 percent over June 2006. As we have noted before, inventory levels seem to be at reasonable levels compared to orders and shipments. Factory Payrolls and Employment. Factory payrolls were down 10 percent compared to July 2005 and down 25 percent compared to June. The decline from June to July is somewhat normal although a little higher than normal. We think that these results may have been impacted by the timing of vacation pay, since June 30 was a Friday. This may have caused June’s payrolls to be higher than normal and July’s lower. Year-to-date, factory payrolls were down 7 percent from the same period a year ago, compared to 6 percent last month. The number of factory employees fell 7 percent from last year in July. The factory employees were down 3 percent compared to June levels. Again some of these comparisons from year to year reflect the impact of some plant closings. National The final report from the Bureau of Economic Analysis indicated that the economy grew at an annual rate of 2.6 percent in the second quarter, down 0.3 percent from preliminary estimates. The deceleration in the second quarter was attributed to downturns in consumer spending on durable goods (don’t we know it), investment in equipment and software, and in federal government spending. Leading Economic Indicators According to the Conference Board, the U.S. leading index decreased 0.2 percent, the coincident index increased 0.1 percent and the lagging index increased 0.3 percent in August. From February to August, the leading index has decreased 0.6 percent and has declined in five of the last eight months. The report indicated that weaknesses and strengths have been fairly balanced in recent months, resulting in a trend that is more flat than declining. Weakening housing permits and consumer expectations made the largest negative contributions during the February to August periods. These were somewhat offset by positive contributions from average weekly hours in manufacturing and vendor performance. The increase in the coincident index related to strengths in employment and production. The increase in the lagging index was led by commercial and industrial loans outstanding, the change in the CPI for services and the ratio of manufacturing and trade inventories to sales. Consumer Confidence The Conference Board Consumer Confidence Index increased to 104.5 in September from 100.2 in August, following a sharp decrease in August. The Present Situation Index increased to 127.7 from 123.9. The Expectations Index rose to 89.0 from 84.4 in August. Lynn Franco, Director of The Conference Board Consumer Research Center said, “A more favorable assessment of current conditions coupled with a less pessimistic short-term outlook boosted consumer confidence this month. However, even though consumers’ concerns have eased, there is little to suggest a significant change in economic activity as we enter the final quarter of 2006.” Consumers’ appraisal of ongoing conditions improved in September. Those claiming conditions are “good” increased to 27.4 percent from 26.2 percent. Those claiming conditions are “bad” eased to 15.4 percent from 16.6 percent. Labor market conditions were mixed. Consumers saying jobs are “plentiful” improved to 25.9 percent from 24.5 percent. Those claiming jobs are “hard to get,” however, edged up to 21.3 percent from 21.1 percent in August. Housing Total existing home sales including single family, town homes, condos and coops, decreased 0.5 percent in August to a seasonally adjusted annual rate of 6.30 million. These sales were 12.6 percent lower than August of 2005, the second highest on record. Single-family home sales were steady at an adjusted annual rate of 5.51 million. This sales level was 12.3 percent lower than a year ago. The median existing single-family home price was $225,700 in August, down 1.7 percent from a year ago. David Lereah, NAR’s chief economist, said home sales appear to be leveling out. “After a stronger-than-expected drop in July, the fairly even sales numbers in August tell us the market is at a more sustainable pace,” he said. “It keeps us on track to see the third highest sales year on record, but we do expect an adjustment in home prices to last several months as we work through a build up in the inventory of homes on the market.” Regionally, existing-home sales in the Northeast rose 1.9 percent to a pace of 1.07 million in August, but were 11.6 percent below August 2005. Existing-home sales in the Midwest rose 0.7 percent in August to a level of 1.44 million, but were 11.1 percent lower than a year ago. Existing-home sales in the South slipped 0.8 percent to an annual sales rate of 2.51 million units in August, and were 7.4 percent below August 2005. Existing-home sales in the West dropped 2.3 percent to an annual pace of 1.29 million in August, and were 22.8 percent lower than a year earlier. Sales of new one-family homes in August were at a seasonally adjusted annual rate of 1,050,000, according to the U.S. Census Bureau. This was 4.1 percent above the revised July rate but was 17.4 percent below the August 2005 estimate. The median price of new homes sold in August was $237,000. It was estimated that there is a 6.6-month supply of homes for sale at the current rate. Single-family housing starts in August were 5.9 percent below the July estimates. Total privately owned housing starts were 6.0 percent below the July estimate and 19.8 percent below the August 2005 rate. Employment Total nonfarm payroll employment increased by 128,000 in August. The unemployment rate was little changed, remaining at 4.7 percent. Payroll employment grew in education and health services and several other groups had modest increases. Average hourly earnings rose 2 cents or 0.1 percent in August after larger gains the last two months. The number of unemployed persons was essentially unchanged at 7.1 million. This compares to 7.4 million a year ago. Retail Sales and Consumer Prices According to the U.S. Census Bureau, advance estimates of U.S. retail and food services sales in August indicated an increase of 0.2 percent from July. The report indicated the August 2006 sales were up 6.7 percent over last August. Total sales for the three months ended August were up 5.6 percent over the same period a year ago. Retail trade sales alone were also up 0.2 percent over July and were 6.6 percent ahead of August 2005. Non-store retailers were up 12.5 percent and gasoline station sales were up 11.0 percent over August 2005. Sales at furniture and home furnishings stores were up 6.5 percent on an adjusted basis over last August. For the first eight months of the year, sales at these stores were up 9.0 percent, down from 9.7 percent last month. The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in August before seasonal adjustment and the same percent after seasonal adjustment. This followed a 0.4 percent increase in July. Energy prices, which increased 2.9 percent in July, rose 0.3 percent in August. The index for all items, less food and energy, rose 0.2 percent in August — the same as July. For the first eight months, this index increased at a 3.0 percent seasonally adjusted rate, following a 2.2 percent increase for all of 2005. Durable Goods Orders and Factory Shipments According to the U.S. Census Bureau, new orders for manufactured durable goods in August decreased slightly following a 2.8 percent decrease in July. Electrical equipment, appliances and components, down two of the last three months, had the largest decrease at 8.6 percent. Shipments of manufactured durable goods increased 2.1 percent after being up two of the last three months. Transportation equipment, up following two consecutive monthly decreases, had the largest increase at 6.0 percent. Shipments for furniture and related products were up 11.6 percent over July when July was down 7 percent from June. Year-to-date, shipments in this category are up 6.7 percent. Orders for this group were reported up 5.5 percent. Summary The results for July were pretty much as expected based on what we had heard from those we talked with. While some companies are growing rather nicely, others continue to struggle as with the industry as a whole. We have heard of a few bright spots lately. As it seems to always be, when business starts to rebound, it never comes immediately. Unfortunately, our latest forecast for the rest of the year and next does not indicate a lot of improvement. This forecast indicates that we should finish off 2006 at about the same level as 2005 and that 2007 may be down a little (less than 1 percent). At the AHFA Finance Division Meeting recently, we noted that if the forecast holds true, the industry will still be below the year 2000 levels. It should be noted that our numbers do not reflect direct shipments to retailers that do not sell through U.S. based distributors, so those numbers are a little misleading for the industry as a whole. Yet, they are reflective of what is going on with U.S. based manufacturers and distributors. As we move into the High Point Market, let’s hope that retail has picked up a little so that buyers can come in a good frame of mind. As for the buyers, we hope you will take this opportunity to look for fresh ideas to freshen up your stores so that when Ms. Consumer comes in your door, she will see new and exciting ideas that make her want to buy. 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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