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Furniture Forecast From BDO Seidman - November 2006

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Monthly Forecast From BDO Seidman New Orders. According to our most recent survey of residential furniture manufacturers and distributors, new orders declined 7 percent in August 2006 compared to August 2005. New orders increased 6 percent over July, a typically slower period for orders. These results were somewhat expected based on our conversations with industry executives due to current business conditions prior to Labor Day. Year-to-date, new orders are now down 1 percent compared to the first eight months of last year. For the first seven months ended in July, new orders were about even with the same period a year ago. Almost 70 percent of the participants reported lower orders in August compared to a year ago. Year-to-date, approximately 64 percent of the participants have reported reduced order levels. Shipments and Backlogs. Shipments also fell in August 2006 compared to August 2005, falling 5 percent. Shipments increased 18 percent over July 2006, a somewhat normal occurrence as July is a short shipping month due to the July 4th vacation week that most companies take. Year-to-date, shipments are also running 1 percent below the first eight months of last year, about the same as July year-to-date results. Similar to the new orders results, just under 70 percent of the participants reported reduced shipments for August compared to last August. Year-to-date, some 61 percent of the participants have reported lower shipment levels, although there are a number that are running pretty close to even with last year. Backlogs fell 1 percent from last August, in line with reduced orders. Backlogs also fell 4 percent from July levels when they were up 2 percent over June. Again, July backlogs usually go up due to orders coming in over the whole month, but shipping usually only three weeks. Receivables and Inventories. Receivable fell 1 percent in August compared to August a year ago, but were 5 percent higher than July. With shipments up 18 percent over July, this increase is reasonable. The decline over last year is in line with shipment levels. Inventories fell 1 percent compared to last August and also from July. This appears to be a good thing as most companies have seen in the past that building inventories, when times are tough, is not necessarily a good thing to do in the long run. Factory Payrolls and Employment. Factory payrolls fell 12 percent compared to August 2005. This compared to a 10 percent drop in July. Year-to-date, factory payrolls are off 8 percent compared to 7 percent in July. Obviously, plant closings continue to have an impact when comparing to last year. The number of factory employees fell 6 percent from last August. The number of employees was about equal with last month. National According to advance reports from the Bureau of Economic Analysis, real gross domestic product (GDP) increased at an annual rate of 1.6 percent in the third quarter of 2006. This followed a 2.6 percent increase in the second quarter. The increase in real GDP primarily reflected positive contributions from personal consumption expenditures (PCE), exports, equipment and software, non residential structures and state and local government spending. These were partially offset by residential fixed investment and an increase in imports. The deceleration in real GDP growth in the third quarter primarily reflected an acceleration in imports, a downturn in private inventory investment, a larger decrease in residential fixed investment, and decelerations in PCE for services and in state and local government spending that were partly offset by upturns in PCE for durable goods, in equipment and software, and in federal government spending. Leading Economic Indicators According to the Conference Board, the U.S. leading index increased 0.1 percent, the coincident index remained unchanged and the lagging index increased 0.2 percent in September. The leading index increased in September, following two consecutive declines. From March to September, the leading index fell by 0.9 percent (a -1.7 percent annual rate). The leading index has declined in 5 of the last 8 months. Weaknesses offset strengths among the leading indicators in recent months. Weakening manufacturers’ new orders of nondefense goods and housing permits made the largest negative contributions to the leading index from March to September, offsetting positive contributions from money supply and consumer expectations. The coincident index remained unchanged in September. This measure of current economic activity has been increasing consistently since September 2005, although the pace moderated in recent months. From March to September, the coincident index grew 0.8 percent (a 1.6 percent annual rate), and the strengths continued to be more widespread than weaknesses in recent months. The leading index has fallen 1.0 percent below its most recent high reached in January. The behavior of the leading index so far suggests that economic growth should continue at the slow rate in the near term. Five of the ten indicators that make up the leading index increased in September. The positive contributors — beginning with the largest positive contributor — were index of consumer expectations, real money supply, stock prices, average weekly initial claims for unemployment insurance (inverted), and manufacturers’ new orders for nondefense capital goods. The negative contributors — beginning with the largest negative contributor — were building permits, average weekly manufacturing hours, vendor performance, interest rate spread, and manufacturers’ new orders for consumer goods and materials. Three of the four indicators that make up the coincident index increased in September. The positive contributors to the index — beginning with the largest positive contributor — were personal income less transfer payments, manufacturing and trade sales, and employees on nonagricultural payrolls. The negative contributor was industrial production. Consumer Confidence The Conference Board Consumer Confidence Index, which increased in September, edged down in October. The Index now stands at 105.4 (1985=100), down from 105.9 in September. The Present Situation Index decreased to 124.7 from 128.3. The Expectations Index rose to 92.6 from 91.0 last month. “October’s dip in confidence was prompted by consumers’ mixed assessment of present-day business conditions and a less favorable view of the job market,” says Lynn Franco, Director of The Conference Board Consumer Research Center. “Consumers’ short-term expectations posted a slight improvement, but the outlook for the labor market remains mixed. Overall, this month’s readings continue to suggest a moderate pace of economic growth and more of the same for the first few months of 2007.” Consumers’ short-term outlook was moderately more optimistic in October than in September. Consumers expecting business conditions to improve in the next six months increased to 18.5 percent from 16.5 percent. Those anticipating business conditions to worsen decreased to 9.9 percent from 10.3 percent. The University of Michigan Survey of Consumers was much more positive. The resilience of consumers was once again in evidence as consumer confidence recorded its eight largest monthly gain in the October 2006 survey. The Index of Consumer Sentiment was 93.6 in the October 2006 survey, up from 85.4 in September, and nearly twenty points above last October’s Katrina-depressed reading of 74.2. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, rose to 84.8 in October, up from 78.2 in September and 63.2 in October of 2005. The Current Economic Conditions Index rose to 107.3 in October, up from 96.6 in September and 91.2 in October of 2005. “Declines in gas prices sparked the initial gains in late August, but the more substantial October gains were driven by the expectation of an improved pace of economic growth, larger wage gains, and a low unemployment rate during the year ahead,” according to Richard Curtin, the Director of the University of Michigan’s Survey of Consumers. Not all aspects of future economic prospects were positive. Although inflation has improved due to declines in gas prices, consumers remain concerned that an elevated inflation rate will persist during the year ahead, and consumers widely anticipate additional hikes in interest rates next year. “Despite a continued downturn in housing during 2007, the data indicate a 3 1/4 percent growth rate in personal consumption spending during the year ahead,” noted Curtin. Housing Existing home sales eased in September along with the number of homes available for sale, according to the National Association of Realtors (NAR). Total existing home sales fell 1.9 percent to a seasonally adjusted annual rate of 6.18 million units and were 14.2 percent below September 2005. Single family home sales fell 1.6 percent to a seasonally adjusted annual rate of 5.42 million and were 13.8 percent below the September 2005 pace. David Lereah, NAR’s chief economist, said stabilizing sales should build confidence in the housing market. “Considering that existing-home sales are based on closed transactions, this is a lagging indicator and the worst is behind us as far as a market correction — this is likely the trough for sales,” he said. “When consumers recognize that home sales are stabilizing, we’ll see the buyers who’ve been on the sidelines get back into the market, and sales will be at more normal levels in the wake of the unsustainable boom that we saw last year.” He noted sales already are improving in some areas. Regionally, existing-home sales in the South rose 0.4 percent to an annual sales rate of 2.52 million in September, but were 9.0 percent below September 2005. The median price in the South was $184,000, down 1.6 percent from a year ago. Existing-home sales in the Midwest eased 2.8 percent in September to a level of 1.39 million, and were 13.7 percent lower than a year ago. The median price in the Midwest was $169,000, which is 2.3 percent below September 2005. In the West, existing-home sales declined 3.1 percent to an annual pace of 1.25 million in September, and were 23.8 percent lower than a year earlier. The median price in the West was $332,000, down 4.3 percent from September 2005. Existing-home sales in the Northeast fell 3.7 percent to a level of 1.03 million in September, and were 13.4 percent below September 2005. The median existing-home price in the Northeast was $259,000, down 5.1 percent from a year earlier. Sales of new one-family houses in September 2006 were at a seasonally adjusted annual rate of 1,075,000 according to the U.S. Census Bureau. This was 5.3 percent above August 2006, but was 14.2 percent below the September 2005 estimate. Sales of new homes was down in the Northeast and Midwest but up in the South and West. Privately owned housing starts were 5.9 percent above the revised August estimate but were 17.9 percent below the September 2005 rate. Employment Nonfarm payroll employment was up 51,000 and the unemployment rate was 4.6 percent in September, according to the Bureau of Labor Statistics. Job growth continued in health care and financial activities while employment declined in manufacturing. There was little change in the other major industry sectors. The number of unemployed persons (6.9 million) was essentially unchanged in September. Retail Sales and Inflation According to the U.S. Census Bureau, advance estimates of U.S. retail and food services for September, indicate that these sales decreased 0.4 percent from August, adjusted for seasonal variation and holiday and trading day differences, but were 5.5 percent higher than September 2005. Total sales for the quarter were up 5.6 percent over the same quarter a year ago. Retail trade sales were down 0.6 percent from August, but were 5.2 percent higher than September 2005. Nonstore retailers were up 12.9 percent from last year and sales of clothing and clothing accessories were up 10.7 percent from last year. Sales at furniture and home furnishings stores were up 0.2 percent from August and up 4.5 percent from last September. Year-to-date, sales at these stores were up 8.6 percent. The Consumer Price Index for all Urban Consumers (CPI-U) decreased 0.5 percent in September for both before and after seasonal adjustment. Energy prices fell 7.2 percent in September with the index for petroleum based energy declining 12.9 percent. The index for all items less food and energy rose 0.2 percent in September, the same as August. Increases in shelter and apparel components accounted for over 80 percent of the September increase. Durable Goods Orders and Factory Shipments New orders for manufactured durable goods in September increased $16.3 billion or 7.8 percent to $226.7 billion, the U.S. Census Bureau announced today. This was at the highest level since the series was first stated on a NAICS basis in 1992 and followed two consecutive monthly decreases including a 0.1 percent August decrease. Excluding transportation, new orders increased 0.1 percent. Excluding defense, new orders increased 6.3 percent. Transportation equipment, up two consecutive months, had the largest increase, $16.2 billion or 27.6 percent to $74.9 billion. This was the largest increase in transportation equipment since June 2000. This was due to nondefense aircraft and parts, which increased $14.5 billion. Shipments of manufactured durable goods in September, down two of the last three months, decreased $5.9 billion or 2.8 percent to $208.6 billion. This followed a 2.0 percent August increase. Transportation equipment, down three of the last four months, had the largest decrease, $2.4 billion or 4.3 percent to $54.3 billion. For August, the report indicated increased shipments of furniture and related products of 11.6 percent over July and 6.2 percent over August last year. Year-to-date, shipments in this category increased 6.7 percent. Summary The results for August in our survey were pretty much reflective of what we have heard on the street. In addition, what we are continuing to hear is that business is sluggish. Some sectors seem to be doing ok but most feel that business at retail overall is not that strong. The October Market was interesting. While Monday’s opening day was not the big bang everyone expected, it seems that attendance was about equal to last October. Some reported increases while some thought attendance was down, but overall we think it was about equal. It seems that the market was a little more spread out with some coming later in the week according to the schedules they have used in the past. While this may have detracted somewhat from opening day, it made traffic more steady from Monday to at least Friday. Most we have talked to feel 2007 will not improve substantially. But the thing to keep in mind is that furniture is being sold. With certain channels growing, this will make it more difficult for others. But, as we have always said, it is not about selling all the furniture that is being sold, it is about selling your share. We certainly hope you are able to do just that. 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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