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Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

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Monthly Results New Orders New orders increased 5 percent in February 2008 compared to January 2008, according to our recent survey of residential furniture manufacturers and distributors. Unfortunately orders in February were off 7 percent from February 2007. These results were somewhat expected based on conversations we had heard in February. February 2007 orders were 4 percent less than February 2006. Year-to-date, new orders are off 6 percent after a 5 percent decline in January. The percentage of participants reporting a decline in orders increased to 60 percent for the year-to-date, up from 52 percent last month. Shipments and Backlogs Shipments also fell 7 percent in February 2008 compared to February 2007. February 2007 shipments were 3 percent lower than February 2006. Shipments were 8 percent higher than January, but shipments and orders are typically higher in February compared to January. Year-to-date, shipments are now 5 percent lower than the first two months of 2007, when they were also off 5 percent from 2006. Similar to percentages in orders, some 57 percent of the participants reported lower shipments compared to the previous year for the first two months. Backlogs rose 2 percent from January, but were 7 percent below February 2007. Receivables and Inventories Receivable levels fell 4 percent from January, even with shipments improving over January. Still February receivables were only down 2 percent from last year, even with the 7 percent decline in shipments versus last year. But, it does appear that receivables are much more in line than they were last month. We assume there were some timing issues last month, yet we continue to be concerned with a 5 percent spread of change in receivables versus shipments, and a 3 percent spread from year-to-date shipments. Inventory levels fell again in February, down 3 percent from January and down 6 percent from last February. These levels appear to be much more in line with current business conditions, although as we have noted in the past, these numbers can be somewhat misleading due to the volume of direct shipments to retailers where those dollars are usually not in the inventory numbers. Factory Employees and Payroll The number of factory employees was down 2 percent from January 2008. Compared to February 2007, the number of employees was down 8 percent versus 9 percent last month. Factory employees were down 13 percent in February 2007 compared to February 2006. Factory payrolls were off 10 percent in February 2008 compared to February 2007. Last month, they were off 9 percent. Year-to-date, factory payrolls were off 9 percent from last year. National Consumer Confidence According to The Conference Board, the Consumer Confidence Index, which had declined significantly in March, fell further in April. The Index now stands at 62.3, down from 65.9 in March. The Present Situation Index decreased to 80.7 from 90.6 while the Expectations Index was basically unchanged, 50.1 versus 49.4 in March. Lynn Franco, Director of The Conference Board Consumer Research Center said, “This month’s decline in Consumer Confidence was the result of yet another sharp decline in the Present Situation Index. This continued weakening suggests that not only has the feeble level of growth in the first quarter spilled over into the second quarter, but that economic conditions may have slowed even further. And, not only are lackluster business and job conditions eroding confidence, but rising gasoline prices are undoubtedly heightening concerns. Consumers’ inflation expectations continue to rise and this measure now matches the all-time high reached in the aftermath of Hurricane Katrina. The percentage of respondents intending to take a vacation over the next six months has fallen to a 30-year low, another sign of consumers turning more cost conscious. Looking ahead, consumers’ outlook for the economy, the job market and their income prospects remains quite pessimistic and little changed from last month. Or, in other words, the glass remains half empty.” According to the Reuters/University of Michigan Surveys of Consumers, consumer confidence sank to a quarter century low in April. “The recent acceleration in the loss in confidence indicates a longer and potentially deeper recession,” according to Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers. “Rising inflation, higher joblessness, and smaller income gains has made most consumers more cautious spenders. Rising uncer-tainty about future living standards has caused consumers to adopt more prudent spending plans and become more wary of incurring new debt,” Curtin said. The Index of Consumer Sentiment was 62.6 in the April 2008 survey, down from 69.5 in March, and significantly below the 87.1 recorded last April and the recent peak of 96.9 recorded in January of 2007. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, was 53.3 in the April 2008 survey, down from 60.1 in March, and well below the 75.9 recorded in April 2007 and the recent peak of 87.6 in January 2007. From the January 2007 peak, the Expectations Index has fallen 39 percent; the Expectations Index fell by 24 percent prior to the 1990 recession and by 30 percent prior to the 2001 recession. The report indicated that just three-in-ten consumers plan to spend the tax rebate in 2008, with most consumers preferring to repay debt and add to saving. “With the current high levels of economic uncertainty, most consumers favor adding to their reserve funds to increase their financial latitude as a safeguard against worsening future conditions,” Curtin noted. The report also noted that uncertainty about future income and job prospects has had a devastating impact on buying plans, with consumers citing these uncertainties three times as frequently as they did a year ago. Purchase plans for furniture, appliances, home electronics, and similar goods fell to their lowest level since the early 1980s, with one-third of all consumers specifically mentioning their uncertainty about jobs and incomes as their primary reason. Vehicle buying plans also fell to their lowest level since the 1990 recession, with one-third of all consumers citing uncertainty about jobs and incomes as well as the future price of gasoline. Leading Economic Indicators According to The Conference Board, the leading index increased slightly in March, following five consecutive monthly declines. Money supply, index of supplier deliveries (vendor performance) and the interest rate spread made large positive contributions to the index this month, offsetting the large negative contributions from initial claims for unemployment insurance (inverted), building permits and stock prices. During the six-month period ending in March, the leading index declined 1.6 percent (a -3.3 percent annual rate), and the weaknesses among its components have been very widespread. The coincident index also increased slightly in March, following a decline in February. Industrial production contri-buted positively to the index in March, more than offsetting the decline in employment. Despite this month’s gain, the six-month change in the coincident index has fallen to -0.1 percent (a -0.2 percent annual rate) from September 2007 to March 2008, down from 0.6 percent (about 1.1 percent annual rate) in the six-month period through December 2007. In addition, the weaknesses among the coincident indicators have been very widespread in recent months. The lagging index continued to increase in March, and as a result, the coincident to lagging ratio continued to decrease for the third consecutive month. This month’s release incorporates annual benchmark revisions to the composite indexes, which bring them up-to-date with revisions in the source data. Also, with this benchmark revision, the base year of the composite indexes has been changed to 2004 = 100 from 1996 = 100. These revisions do not change the cyclical properties of the indexes. The leading index now stands at 102 (2004 = 100). Housing Existing-Home Sales According to the National Association of Realtors®, existing home sales fell slightly in March from February. Existing-home sales – including single-family, townhomes, condominiums and co-ops – were down 2.0 percent to a seasonally adjusted annual rate of 4.93 million units in March from a level of 5.03 million in February, and remain 19.3 percent below the 6.11 million-unit pace in March 2007. A rise in condo sales in March was offset by a drop in single-family sales. Regionally, sales rose in the Northeast and West but fell in the Midwest and South. Lawrence Yun, NAR chief economist, said the market is performing unevenly. “Though mortgage rates are at historically low levels, some borrowers are facing restrictive lending practices in declining markets,” he said. “At the same time, many buyers continue to bide their time with a large number of homes to choose from, while other potential buyers remain on the sidelines.” Yun offered a caution. “With elevated inflation, the Federal Reserve should be extra careful about further rate cuts,” he said. “Mortgage interest rates, which do not move directly with Fed funds rates, may rise measurably and hurt the housing recovery if inflation gets out of hand. Monetary stimulus is plentiful – what is needed more at this point is a home buyer tax credit to get buyers off the sidelines and prevent the market from overshooting on the downside.” Total housing inventory rose 1.0 percent at the end of March to 4.06 million existing homes available for sale, which represents a 9.9-month supply at the current sales pace, up from a 9.6-month supply in February. Single-family homes sales fell 2.7 percent to a seasonally adjusted annual rate of 4.35 million in March from 4.47 million in February, and are 18.4 percent below the 5.33 million-unit pace in March 2007. The median existing single-family home price was $198,200 in March, down 8.3 percent from a year ago. Regionally, existing-home sales in the Northeast rose 2.2 percent to an annual pace of 910,000 in March, but are 18.8 percent below March 2007. The median price in the Northeast was $284,300, up 4.6 percent from a year ago. Existing-home sales in the West rose 2.2 percent in March to a level of 940,000 but are 22.3 percent below a year ago. The median price in the West was $285,100, which is 14.7 percent lower than March 2007. In the South, existing-home sales fell 3.5 percent to an annual rate of 1.92 million in March and are 20.0 percent below March 2007. The median price in the South was $167,200, down 7.1 percent from a year ago. Existing-home sales in the Midwest dropped 6.5 percent to an annual rate of 1.16 million in March, and are 15.9 percent below a year ago. The median price in the Midwest was $152,600, down 5.3 percent from March 2007. New Home Sales According to estimates from the U.S. Census Bureau, sales of new one-family homes in March were at a seasonally adjusted rate of 526,000. This rate was 8.5 percent below the revised February rate and was 36.6 percent below the March 2007 estimate. The seasonally adjusted estimate of new houses for sale at the end of March was 468,000. This represented an 11.0 month supply at the current sales rate. Compared to March 2007, new houses sold were off 64.6 percent in the Northeast, 50.0 percent in the Midwest, 25.9 percent in the South and 39.3 percent in the West. Housing Starts Single family housing starts in March were at a rate of 680,000 according to the U.S. Census Bureau. This rate was 5.7 percent below the February rate of 721,000. All privately owned housing starts were 11.9 percent below the February results and 36.5 percent below the revised March 2007 rate. Consumer Prices According to the Bureau of Labor Statistics, the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9 percent in March, before seasonal adjustment. The March 2008 level was 4 percent higher than in March 2007. On a seasonally adjusted basis, the CPI-U advanced 0.3 percent in March, following virtually no change in February. The energy index increased 1.9 percent in March after declining 0.5 percent in February. The food index, which rose 0.4 percent in February, increased 0.2 percent in March. The index for food at home also rose 0.2 percent. The index for all items less food and energy rose 0.2 percent in March, following virtually no change in February. A larger increase in the index for household furnishings and household operations and an upturn in the index for airline fares more than offset a larger decline in the apparel index. For the first three months of 2008, consumer prices increased at a seasonally adjusted annual rate (SAAR) of 3.1 percent. This compares with an increase of 4.1 percent for all of 2007. The index for energy, which rose 17.4 percent in 2007, advanced at a 8.6 percent SAAR in the first quarter of 2008. Petroleum-based energy costs increased at a 5.6 percent annual rate and charges for energy services rose at a 12.8 percent annual rate. The food index rose at a 5.3 percent SAAR in the first quarter of 2008, following a 4.9 percent increase in all of 2007. The index for grocery store food prices increased at a 5.9 percent annual rate, reflecting increases in each of the six major groups ranging from annual rates of 0.7 percent in the index for dairy products to 15.7 percent in the index for cereal and bakery products. Excluding food and energy, the CPI-U advanced at a 2.0 percent SAAR in the first quarter, following a 2.4 percent rise in all of 2007. The moderation thus far in 2008 largely reflects smaller increases in the indexes for shelter—up at a 2.0 percent rate after advancing 3.1 percent in all of 2007—and medical care, coupled with a larger decline in the index for apparel. Retail Sales According to the U.S. Census Bureau, advance estimates of U.S. retail and food services sales for March, adjusted for seasonal variation and holiday and trading-day differences, indicated an increase of 0.2 percent from February and an increase of 2.0 percent over March 2007. Total sales for the first quarter were up 2.9 percent over the first quarter of 2007. Retail trade sales were up 0.1 percent from February 2008 and were 1.8 percent above last year. Gasoline station sales were up 18.9 percent from March 2007 and sales of nonstore retailers were up 8.7 percent from last year. Sales at furniture and home furnishings stores, on an adjusted basis were down 0.3 percent from February and down 7.1 percent from March 2007. For the first quarter, sales at these stores were down 5.9 percent. Employment According to the Bureau of Labor Statistics, the unemployment rate rose to 5.1 percent in March from 4.8 in February. Nonfarm payroll employment continued to trend down, losing an estimated 80,000 jobs. Over the past 3 months, payroll employment has declined 232,000. In March, employment continued to fall in construction, manufacturing and employment services. There were gains in health care, food services and mining. Durable Goods Orders and Shipments According to the U.S. Census Bureau, new orders for manufactured durable goods in March decreased $0.7 billion or 0.3 percent. This was the third consecutive monthly decrease and followed a 0.9 percent February decrease. Excluding transportation, new orders increased 1.5 percent. Excluding defense, new orders increased 0.3 percent. Transportation equipment, down two of the last three months, had the largest decrease, $2.9 billion or 4.6 percent to $60.3 billion. Shipments of manufactured durable goods in March, down four of the last five months, decreased $0.8 billion or 0.4 percent. This followed a 2.6 percent February decrease. Transportation equipment, down four of the last five months, had the largest decrease, $1.0 billion or 1.9 percent. Summary The February results were pretty much expected based on what we had heard during February and early March. We did hear some signs of improvement in March, but the improvement in orders does not appear to have real traction yet. We are not really expecting any significant improve-ment anytime soon with all the issues in the economy. We keep hoping that we may have hit the bottom, but the economic news is not helping. The April market in High Point was quite interesting. We were concerned that the mood of market was going to be a downer. Were we ever wrong. We realize that it will probably be towards the end of May before the real results of market are known, but this market had the best “feel” of any recent market. One company executive, responded to my comments last month regarding, if you have some good news, tell me about it. He said on Friday late afternoon, “I have some good news for you to report. We’ve had a very good market and have written more orders than we have in years.” Some other good news was prevalent at market. There were price increases all over market. These are really needed for the industry as a whole. The more good news was that retailers were not fighting them. In fact, we heard many reports of retailers saying that they needed to move up in price points and get away from “how low can you go.” We believe many retailers are starting to realize that selling everything in the cheap is not a way to survive. Yes, there is a market for lower end goods, but most have now realized that, unlike golf shirts, if you put a dining room on sale, we are not likely to buy two of them. And, oh by the way, someone down the street is also selling cheap, so you probably are not going to gain that many new customers. While the economy, if not in a recession, is very close, people are still buying furniture. Yes, they want value, but most also want a good experience and great service. We have always said that we have a product that consumers have no clue what the product should cost. They generally have a budget and that is what dictates what they buy. So let’s get prices back up to a level that manufacturers and distributors and retailers can make a decent profit. Giving it away has not worked very well so far. ___________________________ 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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