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Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

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Monthly Results New Orders New orders fell less than ½ of one percent in July 2007 compared to July of 2006, according to our recent survey of furniture manufacturers and distributors. This was the lowest decline since June of 2006 when orders were flat compared to June of 2005, excluding the anomaly in April when market orders skewed the results due to the timing of markets. New orders were 15 percent lower than June 2007, but the decline from June to July is somewhat normal due to the July shutdowns for most companies. July 2006 orders were 4 percent below July 2005. Year-to-date, new orders were down 4 percent compared to the first seven months of last year. Approximately 63 percent of the participants reported an increase in new orders in July over July 2006. July was the first month in quite some time that the majority of participants reported increased order rates versus the same month last year. Still, year-to-date, 70 percent of the participants reported decreased order rates—the same as last month. Shipments and Backlogs Shipments in July were 2 percent below July 2006 and were off 20 percent compared to June. As with orders, the decline from June is somewhat normal since July is normally a three week month for most. Year-to-date, shipments were 6 percent below the first seven months of last year. As with orders, some 71 percent of the participants have reported lower shipments for the year compared to last year. With orders exceeding shipments for the month, backlogs increased for the first time in over a year, excluding the April market results. Backlogs were 5 percent higher than June but were 8 percent lower than last year. Receivables and Inventories Receivable levels fell back in line in July with participants reporting receivables down 7 percent from July 2006 in line with the 6 percent decline of year-to-date shipments. Receivables were 2 percent lower than June 2007 even with shipments off 20 percent but most of that difference is likely due to timing as shipments resume to more normal levels at the end of July. Inventories were up 1 percent over June but were 11 percent lower than July 2006. This compared to a 12 percent decline in June compared to June 2006. As we noted last month, inventory levels appear to be in line considering the decline in orders and the effects of direct container sales. Factory Employees and Payroll The number of factory employees remained stable in July compared to June. Compared to July 2006, the number of factory employees declined 14 percent, compared to 15 percent last month. Factory payrolls were down 6 percent compared to last July versus a 12 percent decline comparing June to June of 2006. These payrolls were 21 percent lower than June, a normal occurrence due to the normal shutdown periods. Year-to-date, factory payrolls were down 8 percent. National Consumer Confidence The Conference Board Consumer Confidence Index, which had declined in August, fell further in September. The Index now stands at 99.8 (1985=100), down from 105.6 in August. The Present Situation Index decreased to 121.7 from 130.1. The Expectations Index declined to 85.2 from 89.2. Lynn Franco, Director of The Conference Board Consumer Research Center said, “The Consumer Confidence Index is now at its lowest level in nearly two years (Nov. 2005, 98.3). Weaker business conditions combined with a less favorable job market continue to cast a cloud over consumers and heighten their sense of uncertainly and concern. Looking ahead, little economic improvement is expected and with the holiday season around the corner, this is not welcome news.” According to the Reuters/University of Michigan Survey, consumer confidence remained unchanged in September at the same level recorded in August. “Consumers quickly tempered their reactions to the crisis in financial markets and a fear-induced free-fall in confidence was avoided. Over the past several months, however, consumers have become increasingly concerned about falling home prices,” according to Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers. While these concerns are not expected to spark an economy-wide recession, consumers are anticipated to become more cautious spenders in the year ahead. “Overall, the pace of growth in real personal consumption is expected to slow to 2.0 percent over the next four quarters, with some quarters weaker than this average, especially around the turn of the year,” Curtin noted. The Index of Consumer Sentiment was 83.4 in the September 2007 survey, identical to the August level, and just below the 85.4 recorded in September of 2006. This is the third year that the average of the August and September levels of the Sentiment Index have been nearly identical, ranging from 83.0 to 83.7, despite the fact that slumping home prices have been added to consumers’ concerns about high food and fuel prices. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, was 74.1 in the September 2007 survey, just above the 73.7 in August and below the 78.2 record last September. The Current Economic Conditions Index was 97.9 in the September 2007 survey, between the 98.4 in August and the 96.6 in September of 2006. Leading Economic Indicators According to the Conference Board, the U.S. leading index decreased 0.6 in August while the coincident index increased 0.1 percent and the lagging index increased 0.3 percent in August. One of the ten indicators that make up the leading index increased in August. The positive contributor was real money supply. The negative contributors – beginning with the largest negative contributor – were index of consumer expectations, average weekly initial claims for unemployment insurance (inverted), stock prices, building permits, vendor performance, manufacturers’ new orders for nondefense capital goods, interest rate spread, and manufacturers’ new orders for consumer goods and materials. The average weekly manufacturing hours held steady in August. The leading index now stands at 137.8 (1996=100). During the six-month span through August, the leading index increased 0.5 percent, with six out of ten components advancing. Three of the four indicators that make up the coincident index increased in August. The positive contributors to the index – beginning with the largest positive contributor – were industrial production, personal income less transfer payments, and manufacturing and trade sales. Employees on nonagricultural payrolls was essentially unchanged in August. Gross Domestic Product Real gross domestic product – the output of goods and services produced by labor and property located in the United States – increased at an annual rate of 3.8 percent in the second quarter of 2007, according to final estimates released by the Bureau of Economic Analysis (revised from 4.0 percent last month). In the first quarter, real GDP increased 0.6 percent. The acceleration in real GDP growth in the second quarter primarily reflected a downturn in imports, upturns in federal government spending and in private inventory investment, accelerations in exports, in nonresidential structures, and in equipment and software, and a smaller decrease in residential fixed investment that were partly offset by a notable deceleration in PCE. Housing According to the National Association of Realtors (NAR), total existing home sales decreased 4.3 percent in August to a seasonally adjusted annual rate of 5.50 million units. This rate was 12.8 percent below August 2006. Lawrence Yun, NAR senior economist, expected the decline. “The unusual disruptions in the mortgage market, including a significant rise in jumbo loan rates, resulted in a fairly high number of postponed or cancelled sales, with many buyers having to search for other financing when loan commitments fell through,” he said. “Lower sales contributed to a buildup of unsold inventory.” Yun expects similar results for home sales in September. “Once we get through these disruptions, we’ll get a better sense of where the actual market is in late fall as conditions begin to normalize,” he said. Total housing inventory rose 0.4 percent at the end August to 4.58 million existing homes available for sale, which represents a 10.0-month supply at the current sales pace, up from a 9.5-month supply in July. Single-family home sales fell 3.8 percent to a seasonally adjusted annual rate of 4.81 million units. The August 2007 rate was 13.0 percent below August 2006. The median existing single-family home price was $223,900 in August essentially even with a year ago. Regionally, existing-home sales in the Northeast slipped 2.0 percent in August, and are 5.7 percent below a year ago. Existing-home sales in the South eased by 2.7 percent in August, and are 12.7 percent lower than August 2006. Existing-home sales in the Midwest fell 5.2 percent in August, and are 10.5 percent below a year ago. Existing-home sales in the West dropped 9.8 percent in August, and are 21.7 percent below August 2006. Sales of new one-family houses in August 2007 were at a seasonally adjusted annual rate of 795,000, according to recent estimates released jointly by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 8.3 percent below the revised July rate of 867,000 and is 21.2 percent below the August 2006 estimate of 1,009,000. The median sales price of new houses sold in August 2007 was $225,700; the average sales price was $292,000. The seasonally adjusted estimate of new houses for sale at the end of August was 529,000. This represents a supply of 8.2 months at the current sales rate. Privately owned housing starts in August were at a seasonally adjusted annual rate of 1,331,000 according to the U.S. Census Bureau. This was 2.6 percent below the revised July estimate and 19.1 percent below the August 2006 estimate. Single family starts were 7.1 percent below July and 27.1 percent below August 2006. Consumer Prices According to the Bureau of Labor Statistics, the Consumer Price Index for All Urban Consumers (CPI-U) declined 0.2 percent in August, before seasonal adjustment. The August level of 207.917 (1982-84=100) was 2.0 percent higher than in August 2006. On a seasonally adjusted basis, the CPI-U declined 0.1 percent in August, the first decline since a 0.4 percent decrease in October 2006. The index for energy declined for the third consecutive month, down 3.2 percent in August. The index for petroleum-based energy decreased 4.6 percent. The index for energy services fell 1.3 percent, resulting from a 4.2 percent decline in the index for natural gas. The food index rose 0.4 percent in August. The index for all items less food and energy advanced 0.2 percent in August, the same as in July. During the first eight months of 2007, the CPI-U rose at a 3.7 percent seasonally adjusted annual rate (SAAR). This compares with an increase of 2.5 percent for all of 2006. The larger advance thus far this year was due to larger increases in the energy and food indexes. Despite registering declines in each of the last three months, the index for energy increased at a 12.7 percent SAAR through August. Petroleum-based energy led the acceleration with a 22.7 percent increase at an annual rate. Last year the overall energy index rose 2.9 percent. The food index also increased much more so far this year compared with last year, a 5.6 percent SAAR compared with a 2.1 percent rise for all of 2006. Excluding food and energy, the CPI-U advanced at a 2.3 percent SAAR in the first eight months, following a 2.6 percent rise for all of 2006. Retail Sales The U.S. Census Bureau announced its advance estimates for retail sales. According to the report, U.S. retail and food service sales for August, adjusted for seasonal variation and holiday trading-day differences, but not for price changes, were $377.6 billion, an increase of 0.3 percent from the previous month and 3.7 percent above August 2006. Total sales for the June through August 2007 period were up 3.8 percent from the same period a year ago. The June to July 2007 percent change was revised from +0.3 percent to +0.5 percent. Retail trade sales were up 0.3 percent from July 2007 and were 3.5 percent above last year. Nonstore retailers were up 6.9 percent from August 2006 and sales of sporting goods, hobby, book, and music stores were also up 6.9 percent from last year. Sales at furniture and home furnishings stores were up 2.75 percent over August 2006 on a not adjusted basis (2.0 on an adjusted basis). For the first eight months, sales at these stores increased 3.1 percent. Employment Nonfarm payroll employment declined 4,000 jobs (essentially unchanged) in August according to the Bureau of Labor Statistics. Over the last 3 months, total payroll employment changes have averaged 44,000 per month and private sector employment changes have averaged 72,000 per month. In August, employment in manufacturing, construction and local government education declined, while job growth continued in health care and food services. The number of unemployed held at 7.1 million and the unemployment rate remained at 4.6 percent. Durable Goods Orders and Shipments According to the U.S. Census Bureau, new orders for manufactured durable goods in August decreased 4.9 percent from July. The decrease followed two consecutive monthly increases. Excluding transportation, new orders decreased 1.8 percent. Excluding defense, new orders decreased 5.9 percent. Transportation equipment had the largest decrease. Shipments of durable goods in August declined 1.6 percent following a 4.0 percent increase in July. As with orders, transportation equipment had the largest decrease. According to the final July results, shipments for furniture and related products dropped 1.7 percent in July. Year-to-date, shipments in this category were off 5.5 percent. The only durable goods categories with larger declines were wood products (13.7 percent), construction machinery (29.2 percent), computer storage devices (14.0 percent), computers (9.8 percent) and heavy duty trucks (31.3 percent). New orders in this category were off 3.7 percent for the months and 3.9 percent year-to-date. Summary A friend of mine recently visited several large retailers in the Northeast and Midwest. He said that the consistent message he heard describing current business was “tough.” At least the results for July were not as disappointing as recent month’s results. We hope that this may be a sign that we may be bottoming out, but one month’s results will not tell us that. We were also discussing business with another executive. As we were discussing the impact of housing on the industry, we noted that with the severity of the slump, it is not just about putting furniture in new homes. Many jobs have been lost or time cut back in home building. Also significant income is lost among many others, most notably real estate agents. Many of these positions are second incomes for families which creates a fair amount of disposable income. Add to that lesser commissions for sales people who supply furniture, components, sell furniture at wholesale and at retail, you end up with a widespread decline in disposable income. And these are only a few of the ones that are affected. While these thoughts sound like doom and gloom, the reality is that the housing market is expected to rebound as interest rates turn lower and the mortgage market sorts itself out. The mortgage market may very well help our industry. In the housing boom, mortgage brokers loaned ridiculous amounts of money to people for homes they could not afford. This left no disposable income for furniture. Tightening credit should actually be a good thing for furniture sales. As we have said so many times before, furniture is still being sold and lots of it—just not enough for all the players in the industry. We expect there will be some turn for the good in 2008. With that said, the High Point Market will be interesting. We hope that retailers take the opportunity to see all the new products and we believe the smart ones will buy product to freshen their stores. We hope the market is a good one for all involved. This Furniture Insights® newsletter report has been re-published with the permission of Smith Leonard PLLC an independent member of the BDO Seidman Alliance. Firm Profile: Founded in 1930 by BDO Seidman, LLP, the High Point, North Carolina practice was recently acquired by four individuals who have spent the majority of their 100+ year careers building the existing practice. Beginning January 1, 2007, Smith Leonard PLLC became an independent member of the BDO Seidman Alliance. Partners are Ken Smith, Darlene Leonard, Jon Glazman and Mark Bulmer. Among the firm's 32 employees are 18 CPAs.??Service Area – Smith Leonard concentrates primarily in the Triad, but also services companies with domestic locations throughout North Carolina, Virginia, South Carolina and Texas. Smith Leonard has an extensive network of international relationships that helps service their clients’ needs throughout the world with locations in Asia, Europe, South America, Mexico and Canada. These companies range in revenue size of $2 million to $300 million.??Practice Concentration – The majority of the client base is composed of manufacturing and distribution companies. Many of its clients are either furniture manufacturers, distributors or suppliers to the furniture industry. Smith Leonard also services companies in retail, transportation, insurance, not-for-profit entities and employee benefit plans. Smith Leonard offers a full range of accounting and consulting services including audits, compilations, reviews, tax planning and compliance. The partners and staff of Smith Leonard also assists clients in mergers, acquisitions, business consulting, cash flow projections, and tax outsourcing. Individual clients benefit from extensive experience in family wealth services including estate tax planning.??The firm continues to produce monthly and annual statistics for the furniture industry. For more information call (336) 883-018 or e-Mail: ksmith@smithleonardcpas.com.

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