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Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

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Monthly Results New Orders According to our recent survey of residential furniture manufacturers and distributors, new orders in March 2008 were 11 percent lower than the level of new orders in March 2007. New orders in March 2007 were 4 percent lower than March 2006 orders. New orders were 2 percent higher than February 2008. This increase was somewhat lower than normal as March is typically higher than February. Year-to-date, new orders were reported 8 percent lower than the first quarter of 2007. The first quarter of 2007 was 5 percent lower than the same quarter in 2006 resulting in a 12 percent decline over the two year period. For the month, 83 percent of the participants reported lower orders compared to last year. With only a few exceptions, those reporting increases were only up very slightly. For the quarter, just over 80 percent of the participants have reported declines in orders compared to the previous year first quarter. Shipments and Backlogs March 2008 shipments fell 9 percent compared to March 2007, when shipments declined 6 percent from March 2006. Similar to orders, 83 percent of the participants reported lower shipments. Shipments were 5 percent higher than February 2008. Year-to-date, shipments are now 7 percent lower than the first quarter of 2007, when they were down 6 percent from 2006. Some 78 percent of the participants reported lower shipments in the first quarter. With orders down more than shipments so far this year, we do not expect shipments to improve significantly in April. With shipments exceeding orders, backlogs fell again in March, down 2 percent from February, but down 10 percent from March 2007. Receivables and Inventories Receivable levels fell 6 percent from March 2007 and were down 4 percent compared to February, even though shipments were higher in March than they were in February. With shipments down 7 percent year-to-date, the 6 percent decline in receivables appears to be in line after being somewhat out of line in January. Inventory levels fell 7 percent in March compared to March 2007, in line with the decline in shipments. While the decline appears in line with shipments, we wonder, with so many of the shipments now direct from Asia to retailers, are inventories as much in line as they appear to be? Factory Employees and Payroll The number of factory employees fell 1 percent from February and 7 percent from last March. In February 2008, the number of factory employees was down 8 percent from February 2007. Factory payrolls fell 13 percent compared to March 2007, when payrolls were down 11 percent from March 2006. While factory payrolls were 9 percent higher than February that was likely the result of more days in the month. Year-to-date, factory payrolls are down 10 percent from last year. National Consumer Confidence The Conference Board Consumer Confidence Index fell again in May. The Index dropped to 57.2 down from 62.8 in April (65.9 in March). The Present Situation Index decreased to 74.4 from 81.9 and the Expectations Index fell to 45.7 from 50.0 in April. Lynn Franco, Director of The Conference Board Consumer Research Center said, “The Consumer Confidence Index now stands at a 16-year low (Oct. 1992, 54.6). Weakening business and job conditions coupled with growing pessimism about the short-term future have further depleted consumers’ confidence in the overall state of the economy. Consumers’ inflation expecta-tions, fueled by increasing prices at the pump, are now at an all-time high and are likely to rise further in the months ahead. As for the short-term outlook, the Expectations Index suggests little like-lihood of a turnaround in the immediate months ahead.” Consumers’ appraisal of current conditions grew more pessimistic in May. Those claiming business conditions are “bad” rose to 30.6 percent from 26.5 percent, while those claiming business conditions are “good” decreased to 13.1 percent from 15.4 percent last month. Consumers’ assessment of the job market was also more downbeat. The percentage of consumers saying jobs are “hard to get” was virtually unchanged, 28.0 percent versus 27.9 percent in April. Those claiming jobs are “plentiful” declined to 16.3 percent from 17.1 percent. Gross Domestic Product According to the Bureau of Economic Analysis, 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 0.9 percent in the first quarter of 2008. In the fourth quarter, real GDP increased 0.6 percent. The increase in real GDP in the first quarter primarily reflected positive con-tributions from personal consumption expenditures (PCE) for services, exports of goods and services, federal government spending, and private inventory invest-ment that were partly offset by negative contributions from residential fixed investment and PCE for durable goods. Imports, which are a subtraction in the calculation of GDP, decreased. Sales of computers contributed 0.06 percentage point to the first-quarter growth in real GDP after contributing 0.16 percentage point to the fourth-quarter growth. Motor vehicle output subtracted 0.35 percentage point from the first-quarter growth in real GDP after subtracting 0.86 percentage point from the fourth-quarter growth. Leading Economic Indicators The Conference Board also reported that the U.S. leading index increased 0.1 percent, while the coincident index remained unchanged and the lagging index increased 0.1 percent in April. According to the report, the leading index increased for the second straight month in April, after declining in the previous five months. Stock prices, the interest rate spread, and housing permits made large positive contributions to the index this month, more than offsetting the sharp declines in average weekly hours and consumer expectations. In April, the six-month rate of decline in the leading index slowed to -1.2 percent (a -2.3 percent annual rate), from -2.4 percent (a -4.7 percent annual rate) from July 2007 to January 2008. In addition, the weaknesses among the leading indicators have become somewhat less widespread in the last two months. The coincident index was unchanged again in April, and this measure of current economic activity has not increased since October 2007. Industrial production and employment decreased this month, but these declines were offset by gains in personal income less transfer payments and real manufacturing and trade sales. The six-month change in the coincident index continued to fall, to -0.4 percent (a -0.7 percent annual rate) in April, down from an increase of 0.3 percent (a 0.6 percent annual rate) from July 2007 to January 2008. The lagging index continued to increase this month. After declining steadily since the middle of 2007, the leading index appears to have stabilized lately, increasing slightly in March and April. Meanwhile, the coincident index declined slightly since October 2007 and the weaknesses among its components have been widespread in recent months. The current behavior of the composite indexes so far still suggests that economic activity is likely to remain weak in the near term. Six of the ten indicators that make up the leading index increased in April. The positive contributors — beginning with the largest positive contributor — were stock prices, interest rate spread, building permits, average weekly initial claims for unemployment insurance (inverted), index of supplier deliveries (vendor performance) and manufacturers’ new orders for consumer goods and materials. The negative contributors — beginning with the largest negative contributor — were index of consumer expectations, average weekly manufacturing hours, and manufacturers’ new orders for nondefense capital goods. Real money supply held steady in April. Housing Existing-Home Sales The National Association of Realtors® (NAR) reported that existing home sales slowed in April, partly because restrictive lending practices hampered home buyers. Existing-home sales – including single-family, townhomes, condominiums and co-ops – declined 1.0 percent to a seasonally adjusted annual rate of 4.89 million units in April from an upwardly revised pace of 4.94 million in March, and are 17.5 percent below the 5.93 million-unit level in April 2007. NAR President Richard F. Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, California, said the good news is that mortgage restrictions have just been eased. “In the past week, Freddie Mac and Fannie Mae announced that they were eliminating their ‘declining market’ policies, effective June 1,” he said. “This means consumers across the country will have access to safe, affordable financing with downpayments of only 5 percent on most mortgages, with 100 percent financing available on some loan products, and we could see an upturn in home sales this summer.” Lawrence Yun, NAR chief economist, said eliminating restrictive policies should be a big help to home buyers. “I would encourage buyers who were disappointed by poor mortgage options to take another look at the market because the lending changes are significant,” he said. “Also, a recent notable drop in interest rates on conforming jumbo loans will help consumers in high-cost markets like California and New York.” The unusual mix of market conditions around the country continues, but areas showing healthy price gains include Greenville, South Carolina, and Springfield, Missouri, both with solid local economies. “On the other hand, some markets like San Diego, California, and Fort Myers, Florida, are experiencing rising sales after sudden double-digit drops in local home prices, so lower prices and low interest rates are starting to generate results,” Yun said. The national median existing-home price for all housing types was $202,300 in April, which is 8.0 percent below a year ago when the median was $219,900. Because the slowdown in sales from a year ago is greatest in high-cost areas, there is a downward distortion to the national median with relatively more sales in low- and moderate-priced markets. Total housing inventory at the end of April rose 10.5 percent to 4.55 million existing homes available for sale, which represents an 11.2-month supply at the current sales pace, up from a 10.0-month supply in March. According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage slipped to 5.92 percent in April from 5.97 percent in March; the rate was 6.18 percent in April 2007. Single-family home sales slipped 0.5 percent to a seasonally adjusted annual rate of 4.34 million in April from 4.36 million in March, and are 16.1 percent below the 5.17 million-unit level recorded one year ago. The median existing single-family home price was $200,700 in April, down 8.5 percent from April 2007. Regionally, existing-home sales in the West rose 6.4 percent in April to a level of 1.00 million but are 15.3 percent below a year ago. The median price in the West was $285,700, which is 16.7 percent lower than April 2007. In the South, existing-home sales were unchanged from March at an annual rate of 1.92 million in April, but are 18.6 percent below April 2007. The median price in the South was $170,800, down 5.1 percent from a year ago. Existing-home sales in the Northeast fell 4.4 percent to an annual pace of 870,000 in April, and are 14.7 percent below a year ago. The median price in the Northeast was $262,000, which is 7.7 percent below April 2007. In the Midwest, existing-home sales were at an annual rate of 1.10 million in April, which is 6.0 below March and 19.7 percent lower than April 2007. The median price in the Midwest was $159,100, down 2.9 percent from April 2007. New Home Sales Sales of new one-family houses in April 2008 were at a seasonally adjusted annual rate of 526,000, according to estimates released by the U.S. Census Bureau. This was 3.3 percent above the revised March rate of 509,000 but was 42 percent below the April 2007 estimate of 907,000. The seasonally adjusted estimate of new houses for sale at the end of April was 456,000. This represents a 10.6-month supply at the current rate. Housing Starts The U.S. Census Bureau reported that single family housing starts in April were at a seasonally adjusted rate of 692,000, or 1.7 percent below the March rate. For all privately owned housing starts, the seasonally adjusted rate was 8.2 percent above the revised March estimate. These starts were 30.6 percent below the revised April 2007 rate. Consumer Prices The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in April, before seasonal adjustment according to the Bureau of Labor Statistics. The April level was 3.9 percent higher than it was in April 2007. On a seasonally adjusted basis, the CPI-U advanced 0.2 percent in April, following a 0.3 percent increase in March. The index for energy was virtually unchanged after advancing 1.9 percent in March. In April, the index for petroleum-based energy fell 1.6 percent, offsetting a 2.5 percent increase in the index for energy services. The food index rose 0.9 percent in April. The index for all items less food and energy advanced 0.1 percent in April, following a 0.2 percent rise in March. Downturns in the indexes for public transportation, for household furnishings and operations, and for recreation, coupled with a larger decline in the index for lodging away from home, more than offset an upturn in the index for apparel. Retail Sales The U.S. Census Bureau reported that advance estimates of U.S. retail and food services sales for April, adjusted for seasonal variation and holiday and trading-day differences, decreased 0.2 percent from the previous month and increased 2.0 percent over April 2007. Total sales for the three months, February to April, rose 2.2 percent over the same period a year ago. Retail trade sales were down 0.3 percent from March but were 1.8 percent above last year. Gasoline station sales were up 16.3 percent from April 2007 and sales of food and beverage stores were up 5.7 percent from last year. On an unadjusted basis, sales at furniture and home furnishings stores were down 3.4 percent from March and down 2.7 percent from April a year ago. For the first four months of the year, sales were reported 4.3 percent lower than the same period a year ago. Employment Nonfarm payroll employment was down 20,000 in April after falling 240,000 in the first three months of the year. The unemployment rate remained essentially unchanged at 5.0 percent according to the Bureau of Labor Statistics. This compared to a 4.5 percent rate in April 2007. Durable Goods Orders and Shipments New orders for manufactured durable goods in April decreased 0.5 percent as reported by the U.S. Census Bureau. This was the third decrease in four months and followed a 0.3 percent decrease in March. Excluding transportation, new orders increased 2.5 percent. Excluding defense, new orders fell 0.3 percent. Shipments of manufactured durable goods in April increased 1.2 percent after two months of declines. Computers and electronic products had the largest increase following two months of declines. The Census Bureau reported that shipments of furniture and related products in March were down 10.2 percent from March 2007 and down 6.8 percent year-to-date, in line with our report. Orders were down 4.2 percent from March 2007 and down 7 percent from the first quarter last year. Summary The results for March continued to reflect poor performance for most in the industry. We hope that April market orders help to improve results over the next few months, but we are not hearing very many reports of good business out there. And with orders down so much, it will take some time for shipments to catch up. We do hear about a few good days and sometimes even a good week, but there does not appear enough traction to see any sort of rebound. Our hopes that we had somewhat bottomed out last year and might be somewhat flat in 2008 while waiting on economic conditions to improve, have not been realized so far this year. It is pretty obvious that inflation in so many staple areas is hurting retail. While Jerry Epperson has written about the disconnect between the government numbers and the real world, even the government numbers are reflecting declines at retail at home furnishings stores. We believe it is just going to take time to get through all of this. The housing/ mortgage situation is bad enough, but adding to that are the problems that oil prices are creating with not only gas prices but also so many other products increasing as well, as freight costs are adding to most everything. Consumers' disposable income is being chewed up. As many that we have talked to have said, it’s just time to hunker down and hold on. We all believe times will get better, but you have to do what you have to do to survive until those times do get here. The good news is that we are still selling furniture — just maybe not enough of it. ___________________________ 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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