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Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

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New Orders According to our recent survey of residential furniture manufacturers and distributors, new orders fell 3 percent in August 2007 compared to August 2006. For comparative purposes, August 2006 orders were 7 percent lower than August 2005. Year-to-date, new orders remained 4 percent below last year’s first eight months. At this time last year, new orders were off 1 percent from the first eight months of 2005. After a majority of participants reporting increased order rates last month, the participants’ orders flipped in August with approximately 64 percent of the participants reporting declines in orders compared to August 2006. As with the July results, approximately 70 percent of the participants reported lower orders year-to-date. Shipments and Backlogs Shipments in August were only off 1 percent from August 2006. August 2006 shipments were off 5 percent from August 2005. Only 53 percent of the participants reported lower shipments in August versus August 2006. Shipments were 20 percent higher than July shipments, somewhat normal due to most companies only shipping three weeks in July. Year-to-date, shipments remained 6 percent below August 2006. Similar to last month, shipments were lower for approximately 71 percent of the participants. Backlogs were 8 percent lower than August 2006 levels, the same as last month. With shipments higher than new orders, backlogs fell 6 percent from July’s backlogs. Receivables and Inventories Receivable levels fell 2 percent from last August, in line with sales for the month, but off a little compared to year-to-date sales. Timing of shipments and the volatility of shipments per month can impact these levels, but overall, they appear reasonable. August, the same as last month compared to July 2006. Inventories were even with July 2007 levels. Approximately 70 percent of the participants reported lower inventory levels, in line with those reporting lower orders and shipments. It appears that most companies are not building inventories in anticipation of business picking up. Factory Employees and Payroll Factory payrolls were 7 percent lower than August 2006, up from 6 percent comparing July 2007 to July 2006. Payrolls were 16 percent higher than July, but this reflects the effects of the normal July shutdowns. The number of factory employees was even with July 2007 but down 12 percent from last August. August 2006 employees were down 6 percent from August 2005, continuing to reflect plant closings and lower business volumes for domestic producers. National Consumer Confidence According to The Conference Board Consumer Research Center, the Conference Board Consumer Confidence Index, which has been declining since August, fell further in October. The Index now stands at 95.6, down from 99.5 in September. The Present Situation Index decreased to 118.8 from 121.2 in September. The Expectations Index declined to 80.1 from 85.0. Lynn Franco, Director of The Conference Board Consumer Research Center said, “Consumer Confidence posted its third monthly decline and continues to hover at two-year lows (Oct. 2005, 85.2). Further weakening in business conditions has, yet again, tempered consumers’ assessment of current-day conditions and may very well be a prelude to lackluster job growth in the months ahead. In addition, consumers are growing more pessimistic about the short-term future and their rather bleak outlook suggests a less than stellar ending to this year.” According to the University of Michigan Surveys of Consumers, consumer confidence also fell in October mainly due to falling home prices. “Consumers have expressed growing concerns about the housing slump and these concerns have spilled over to less favorable prospects for the overall economy,” according to Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers. The overall level of confidence is still well above the point that signals an impending recession. “Each downward step in confidence increases the probability of recession, which is still below 50 percent, but not comfortably so,” Curtin said. Falling home prices as well as higher food and fuel prices will make consumers much more cautious spenders. Overall, the pace of growth in real personal consumption is expected to slow to 2.0 percent over the next four quarters, with the weakest quarterly growth rate of about 1.0 percent at the turn of the year. Declines in the value of their homes were reported by 28 percent of all homeowners in October, well ahead of the 17 percent recorded three months ago, and above the 1992 peak of 24 percent recorded during the last housing slump. “The data indicate accelerating declines as 22 percent of homeowners anticipated declines in the value of their homes during the year ahead in October, up from 14 percent three months ago,” said Curtin. Homeowners expect a reprieve over the longer term, as two-thirds expect renewed increases, with an annual average expected gain of 3.7 percent over the next five years. (See housing below.) According to the report, personal financial expectations remained depressed by high fuel and food prices. Given their strained budgets, especially among lower income households, consumers will continue to insist on price discounts when making purchases. This indicates that there will be renewed stress on the profit margins of retailers and product suppliers during the upcoming holiday season. Leading Economic Indicators The Conference Board announced that the U.S. leading index increased 0.3 percent, the coincident index increased 0.2 percent and the lagging index increased 0.5 percent in September. The leading index increased in September, the third increase in the last six months, and these increases and decreases have been alternating and offsetting each other. As a result, the leading index is now at the same level as in March 2007. In September, building permits made the largest negative contribution which was offset by large positive contributions from vendor performance, stock prices, and unemployment insurance claims (inverted). In the period from March to September, gains in real money supply and stock prices have offset the weakness from the housing permits and interest rate spread components. Seven of the ten indicators that make up the leading index increased in September. The positive contributors — beginning with the largest positive contributor — were vendor performance, average weekly initial claims for unemployment insurance (inverted), stock prices, manufacturers’ new orders for nondefense capital goods, real money supply, manufacturers’ new orders for consumer goods and materials and index of consumer expectations. The negative contributors — beginning with the larger negative contributor — were building permits and interest rate spread. Average weekly manufacturing hours held steady in September. Gross Domestic Product According to advance estimates released by the Bureau of Economic Analysis, the 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 3.9 percent in the third quarter of 2007. The increase in real GDP in the third quarter reflected positive contributions from personal consumption expenditures (PCE), exports, federal government spending, equipment and software, nonresidential structures, private inventory investment, and state and local government spending that were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased. The slight acceleration in real GDP growth in the third quarter primarily reflected accelerations in PCE and in exports that were partly offset by an upturn in imports, a larger decrease in residential fixed investment, and a deceleration in nonresidential structures. Housing Total existing-home sales – including single-family, townhomes, condominiums and co-ops – fell 8.0 percent to a seasonally adjusted annual rate of 5.04 million units in September from a downwardly revised pace of 5.48 million in August, and are 19.1 percent below the 6.23 million-unit level in September 2006. Lawrence Yun, NAR senior economist, said the decline is understandable. “Mortgage problems were peaking back in August when many of the September closings were being negotiated, and that slowed sales notably in higher priced areas that rely more on jumbo loans,” he said. “The good news is that mortgage availability has markedly improved in recent weeks with interest rates on jumbo loans falling, and more people are applying for safer and conforming FHA mortgage products. Some of the cancelled transactions will move forward as buyers apply for other loans.” The national median existing-home price for all housing types was $211,700 in September, down 4.2 percent from September 2006 when the median was $220,900; this follows three months of stability in comparing with year-ago prices. “Because there were fewer transactions at the upper end of the market, there is a downward distortion reflected in a lower national median home price. Home prices continue to trend up in the Northeast and in the condo sector. In other areas not dependent on jumbo loans, such as much of the Midwest, prices are rising.” Total housing inventory inched up 0.4 percent at the end of September to 4.40 million existing homes available for sale, which represents a 10.5-month supply at the current sales pace, up from a downwardly revised 9.6-month supply in August. Single-family home sales dropped 8.6 percent to a seasonally adjusted annual rate of 4.38 million in September from a pace of 4.79 million in August, and are 19.8 percent below 5.46 million-unit pace in September 2006. The median existing single-family home price was $210,200 in September, down 4.9 percent from a year ago. Sales of new one-family houses in September 2007 were at a seasonally adjusted annual rate of 770,000, according to estimates released by the U.S. Census Bureau. This is 4.8 percent above the revised August rate of 735,000, but is 23.3 percent below the September 2006 estimate of 1,004,000. The median sales price of new houses sold in September 2007 was $238,000; the average sales price was $288,000. The seasonally adjusted estimate of new houses for sale at the end of September was 523,000. This represents a supply of 8.3 months at the current sales rate. Single family housing starts were at a seasonally adjusted annual rate of 963,000 in September according to the U.S. Census Bureau. This was 1.7 percent below the August rate. Consumer Prices The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in September, before seasonal adjustment, according to the Bureau of Labor Statistics. The September level was 2.8 percent higher than September 2006. On a seasonally adjusted basis, the CPI-U increased 0.3 percent in September, following a 0.1 percent decline in August. The index for energy, which declined in each of the preceding three months, rose 0.3 percent in September. The index for petroleum-based energy increased 0.4 percent and the index for energy services rose 0.1 percent. The food index rose 0.5 percent in September. The index for all items less food and energy advanced 0.2 percent in September, the same as in each of the preceding three months. Consumer prices increased at a seasonally adjusted annual rate (SAAR) of 1.0 percent in the third quarter of 2007, following increases in the first and second quarters at annual rates of 4.7 and 5.2 percent, respectively. This brings the year-to-date annual rate to 3.6 percent and compares with an increase of 2.5 percent for all of 2006. The index for energy, which advanced at annual rates of 22.9 and 32.9 percent in the first two quarters, declined at a 14.8 percent rate in the third quarter of 2007. Thus far this year, energy costs have risen at an 11.7 percent SAAR after increasing 2.9 percent in all of 2006. In the first nine months of 2007, petroleum-based energy costs (energy commodities) advanced at a 20.6 percent rate. Retail Sales According to the U.S. Census Bureau advance estimates of U.S. retail and food services sales for September, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $380.2 billion, indicating an increase of 0.6 percent from the previous month and 5.0 percent above September 2006. Total sales for the July through September 2007 period were up 4.2 percent from the same period a year ago. Retail trade sales were up 0.6 percent from August 2007 and were 5.0 percent above last year. Gasoline station sales were up 9.6 percent from September 2006 and sales of nonstore retailers were up 8.7 percent from last year. Sales at furniture and home furnishings stores, on an adjusted basis fell 0.6 percent from August and were down 0.9 percent from last September. For the first nine months, sales at these stores were reported to be up 2.3 percent. Employment According to the Bureau of Labor Statistics, nonfarm employment rose by 110,000 in September following increases of 93,000 in July and 89,000 in August (as revised). The unemployment rate increased slightly from 4.6 to 4.7 percent. In September, health care, food services, and professional and technical services continued to add jobs. Employment trended down in manufacturing and construction. Durable Goods Orders and Shipments According to the U.S. Census Bureau, new orders for manufactured durable goods decreased 1.7 percent in September. This was the second consecutive monthly decrease and followed a 5.3 percent August decrease. Excluding transportation, new orders increased 0.3 percent. Shipments of manufactured durable goods in September decreased 2.0 percent following a 1.9 percent decrease in August. Shipments of these goods have been down three of the last four months. According to the final report for August, shipments of furniture and related products decreased 4.2 percent and are showing a 5.2 percent decline year-to-date. Summary Last month we reported that July results had shown some improvements with hopes that the industry may have bottomed out. We warned that one month does not create a trend. Unfortunately, the results were not a trend as orders in August fell 3 percent from August a year ago. From our conversations, business in September and October has not improved significantly. With that said, the High Point Market was surprisingly up beat. While expectations were relatively low, we found many companies who were quite pleased with both attendance in their showrooms and the mood of buyers. Most retailers continue to say their business is very sluggish and many sales are coming from discounting. But retailers have very expensive fixed overheads to cover, so discounted sales are better than no sales. We do think that many who came to market found some deals here that may help drive sales with decent margins. The retailers cannot survive on all discounted sales unless the volume supports enough dollar margins. We also heard a good number of compliments about the High Point Market. The transportation system seems to be working very well now and some of the nightly entertainment we attended was great. Overall, we think business will likely be sluggish on into 2008, but there are still pockets of business in certain niches that are doing well. We hope that you find a niche that works for you. 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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