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Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

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Furniture Insights Monthly Results New Orders According to our latest survey of residential furniture manufacturers and distributors, net new orders for December were 8 percent below December 2006, the same results we had in November, when orders were 8 percent below November 2006. December 2006 orders were 6 percent below December 2005. For the year, new orders remained 4 percent below last year’s levels. New orders were 3 percent lower in 2006 than they were in 2005 resulting in an approximate 6 percent decline over the two years. For the year, some 70 percent of the participants reported lower orders. For the month of December alone, 68 percent of the participants reported declines. Shipments and Backlogs December 2007 shipments were 5 percent lower than December 2006. Shipments in December 2006 were 5 percent lower than December 2005. November 2006 shipments were also 5 percent lower than November 2005. For the year 2007, shipments were 5 percent lower than 2006. Shipments in 2006 were 2 percent lower than 2005 levels, remembering that 2006 started with some increases. For the year, approximately 76 percent of the participants reported lower shipments than in 2006. Just over ¼ of the participants reported lower shipments of 10 percent or more compared to the previous year. Backlogs fell 7 percent in December compared to November as shipments overall exceeded new orders. Backlogs were 6 percent lower than December 2006. In December 2006, backlogs were 1 percent lower than the previous year. Receivables and Inventories Receivables levels dropped 3 percent from December 2006. Compared to a 5 percent decline in shipments for both the month and the year, receivables remain a concern. With the number of bankruptcies in 2007 and early 2008, receivables will need to be watched even closer as the retail business overall continues to struggle. Inventories fell 1 percent from November and were 7 percent lower than December 2006. In November, inventories were 9 percent lower than November 2006. With the impact of imported goods flowing not always on a consistent basis, overall inventories appear to be managed fairly well. Inventories were also down 7 percent from December 2006 compared to December 2005. As we have noted before, with so many direct shipments, especially in case goods, it makes sense that inventories are down more than shipments. Factory Employees and Payroll The number of factory employees fell 1 percent compared to November and was 6 percent lower than December a year ago. In December 2006, the number of employees was 10 percent lower than December 2005. Factory payrolls were 10 percent lower than December 2006 when they were 7 percent lower than December 2005, all reflecting the decline in the number of employees as well as companies taking more time off. Factory payrolls were 6 percent higher than November, but that is somewhat normal with holiday pay and bonuses. National Consumer Confidence The Conference Board Consumer Confidence Index, which had declined in January, fell sharply in February. The Index now stands at 75.0, down from 87.3 in January. The Expectations Index declined to 57.9 from 69.3. The Present Situation Index decreased to 100.6 from 114.3 in January. Lynn Franco, Director of The Conference Board Consumer Research Center said, “The Consumer Confidence Index continues losing ground and, with the exception of the Iraqi War in 2003, is now at its lowest level in nearly fifteen years (Nov. 1993, 71.9). The weakening in consumers’ assessment of current conditions, fueled by a combination of less favorable business conditions and a sharp rise in the number of consumers saying jobs are hard to get, suggests that the pace of growth in early 2008 has slowed even further. Consumers’ expectations have also deteriorated significantly and are now at a seventeen-year low (Jan. 1991, 55.3). With so few consumers expecting conditions to turnaround in the months ahead, the outlook for the economy continues to worsen and the risk of a recession continues to increase.” Consumers’ appraisal of present-day conditions weakened significantly in February. Those claiming business conditions are “bad” increased to 21.8 percent from 20.1 percent, while those claiming business conditions are “good” declined to 18.5 percent from 20.6 percent. Consumers’ assessment of the job market was considerably more pessimistic than last month. Those saying jobs are “hard to get” rose to 23.8 percent from 20.6 percent, while those claiming jobs are “plentiful” decreased to 20.6 percent from 23.8 percent. Consumers’ short-term expectations also deteriorated considerably in February. Consumers expecting business conditions to worsen over the next six months increased sharply to 21.4 percent from 16.3 percent, while those anticipating business conditions to improve declined to 9.5 percent from 11.5 percent in January. Leading Economic Indicators The Conference Board’s report noted that the U.S. leading index decreased 0.1 percent, the coincident index increased 0.1 percent and the lagging index was unchanged in January 2008. The leading index declined for the fourth straight month in January. Stock prices were the largest negative contributor to the index this month, followed by housing permits, manu-facturers’ new orders for nondefense capital goods, and interest rate spread. Money supply (real MS), index of consumer expectations, and initial claims for unemployment insurance (inverted) made positive contributions to the index. Average weekly manufacturing hours and manufacturers’ new orders for consumer goods and materials held steady in January. With this month’s decline, the leading index has fallen 2.0 percent (a decline of 4.0 percent annual rate) from July 2007 to January 2008, the largest six-month decline in the index since early 2001. In addition, the weaknesses among its components have been more widespread than the strengths in recent months. The coincident index increased again in January, although its growth rate has slowed in recent months. The strengths among the coincident indicators have remained fairly widespread. For this month, positive contributions from personal income less transfer payments, real manufacturing and trade sales, and industrial production more than offset the small decline in nonagricultural payroll employment. Despite the gain in January, the six-month growth rate in the coincident index has slowed to 0.4 percent (a 0.8 percent annual rate) from July 2007 to January 2008, down from a 1.1 percent rate from January to July 2007 (a 2.3 percent annual rate). Housing Existing-home sales ― including single family, townhomes, condominiums and co-ops fell 0.4 percent to a seasonally adjusted rate of 4.89 million units in January 2008 according to the National Association of Realtors® (NAR). This rate was 23.4 percent below the 6.44 million unit estimate in January 2007. Single family home sales rose 0.5 percent to a seasonally adjusted annual rate of 4.34 million in January. This rate was 22.4 percent below the rate in January 2007. The median price for existing single-family homes was $198,700, down 5.1 percent from a year ago. Lawrence Yun, NAR chief economist, said many potential buyers remain on the sidelines. “Subprime loans and other risky mortgage products have virtually disappeared from the marketplace, and over the past five months, this has been reflected in soft but fairly stable home sales,” he said. “As the increased limits for FHA and conventional loans are implemented, more buyers will have access to safer FHA loans and lower interest rate loans in high-cost areas, which could lead to steadily higher home sales later in the year.” NAR President Richard Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, California, said some buyers in high-cost are waiting for higher limits on conventional loans. “Keep in mind the biggest slowdown in home sales last year was in high-cost markets, which were hard-hit by the credit crunch and notably higher interest rates for jumbo loans, but relief is on the way,” he said. “Once buyers have greater access to higher loan limits, it will take a few months for increased shopping activity to translate into higher sales,” Gaylord said. “We should see some movement of pent-up demand by this summer, but higher loan limits need to be implemented fully and promptly to have maximum benefit.” Total housing inventory rose 5.5 percent at the end of January to 4.19 million existing homes available for sale, which represents a 10.3-month supply, at the current sales pace, up from a 9.7-month supply in December. Regionally, existing-home sales in the Midwest rose 3.4 percent to an annual pace of 1.20 million in January, but are 20.0 percent below January 2007. The median price in the Midwest was $154,200, down 4.0 percent from a year ago. Existing-home sales in the South slipped 0.5 percent in January 2007 to a level of 1.95 million and are 22.0 percent below a year ago. The median price in the South was $164,300, which is 5.9 percent lower than January 2007. In the West, existing-home sales declined 2.1 percent to an annual rate of 930,000 in January and are 28.5 percent below January 2007. The median price in the West was $300,100, down 6.7 percent from a year ago. Existing-home sales in the Northeast fell 3.6 percent to an annual rate of 810,000 in January, and are 25.7 percent below a year ago. The median price in the Northeast was $270,800, up 3.1 percent from January 2007. New Home Sales Sales of new one-family houses in January 2008 were at a seasonally adjusted annual rate of 588,000, according to estimates released jointly by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 2.8 percent below the revised December rate of 605,000 and is 33.9 percent below the January 2007 estimate of 890,000. The median sales price of new houses sold in January 2008 was $216,000; the average sales price was $276,600. The seasonally adjusted estimate of new houses for sale at the end of January was 482,000. This represents a supply of 9.9 months at the current sales rate. Housing Starts Single family housing starts in January were at a seasonally adjusted rate of 743,000 or 5.2 percent below December 2007 according to the U.S. Census Bureau. All privately owned housing starts were 0.8 percent above the December estimate, but were 27.9 percent below the January 2007 rate. Consumer Prices The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in January before seasonal adjustment, according to the Bureau of Labor Statistics. The January level was 4.3 percent higher than January 2007. On a seasonally adjusted basis, the CPI-U increased 0.4 percent in January. The indexes for food and for energy, each advanced 0.7 percent, following increases in December of 0.1 and 1.7 percent, respectively. The index for all items less food and energy rose 0.3 percent, following increases of 0.2 percent in each of the preceding nine months. The January advance report reflects larger increases than in December in the indexes for apparel, for medical care, for recreation, for education and commu-nication, and for other goods and services. Retail Sales According to the U.S. Census Bureau advance estimates, U.S. retail and food services sales for January 2008, adjusted for seasonal variation and holiday and trading-day differences, increased 0.3 percent over December 2007 and were 3.9 percent above January 2007 sales. Total sales for the 3 months ended January were up 4.4 percent over the same period a year ago. Retail trade sales were up 0.4 percent from December and were 3.8 percent above last year. Gasoline station sales were up 23 percent from January 2007 (and if you went to a gas station you know why ― and in February the hits keep coming). On an unadjusted basis, sales at furniture and home furnishings stores were down 4.3 percent from January 2007. Sales at these stores were down 20.8 percent from December. Employment Nonfarm payroll employment fell 17,000 jobs in January according to the Bureau of Labor Statistics. Total employment at 138.1 million and the unemployment rate of 4.9 percent were essentially unchanged. The number of unemployed persons was estimated at 7.6 million. In 2007, payroll employment rose an average of 95,000 jobs a month. Durable Goods Orders and Shipments New orders for manufactured durable goods in January decreased $12.0 billion or 5.3 percent to $212.8 billion, according to the U.S. Census Bureau. This decrease followed two consecutive monthly increases including a 4.4 percent December increase. Excluding transporta-tion, new orders decreased 1.6 percent. Excluding defense, new orders decreased 4.7 percent. Transportation equipment, down following three consecutive monthly increases, had the largest decrease, $9.5 billion or 13.4 percent to $61.2 billion. This was led by nondefense aircraft and parts, which decreased $6.5 billion. Shipments of manufactured durable goods in January, up following two consecutive monthly decreases, increased $3.8 billion or 1.8 percent to $215.5 billion. This followed a 0.4 percent December decrease. Computers and electronic products, up three of the last four months, had the largest increase, $2.4 billion or 7.1 percent to $36.1 billion. Summary The December results for our participants were not surprising and were pretty much in line with expectations. We expect January results to continue to show weakness in the industry as a whole. For the year, except for the blip related to the April Market and October, every month in 2007 reported lower orders than the previous year. Shipments were also down every month in 2007 compared to the previous year same month. On a brighter note, after hearing mostly negative news in January, we have heard some positive comments in February. Not anything great, mind you, but at least some comments of some decent order days and even weeks in February. As we have commented before, we do not expect much of a turnaround until at least later on in 2008. The NAR seems to think that housing has bottomed out, but even they believe that it is going to take a while for the system to sort itself out. Unfortunately, most of the news on the consumer front is not good for business. Gas prices are at record levels. The noise from the politicians on TV and in print is all about how bad everything is in the whole world. The stock market makes no sense whatsoever (I find it interesting that even the brokers say they and their companies have no idea). On the other hand, the Federal Reserve is expected to reduce rates again in March. Lenders for mortgages are getting back on track. The tax rebate program (which will take a while to get in the hands of consumers) should create some interest in furniture. We have suggested that everyone write their congressman and have the rebates tied to furniture purchases, but we do not think such a suggestion is getting much traction, as good a thought as it is (kidding of course). So as we said last month, it’s time to hunker down and hold on until times get better ― and we believe they will. We just can’t say when at this point. ___________________________ 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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