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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 fell again in May compared to May of 2007. New orders were off 6 percent compared to May 2007 and down 9 percent from April (new orders usually fall some in May due to orders received at market). For the month, 67 percent of the participants reported lower orders compared to last year, down from 71 percent last month, but the changes by participant were all over the place this month. Some participants reported healthy double digit increases, while some reported significant double digit declines. The significant declines seemed to also cross all price points, from lower end to high end goods. Year-to-date, new orders remained 8 percent lower than the first five months of last year. Similar to last month, 86 percent of the participants are reporting lower orders year-to-date. Shipments and Backlogs Shipments in May were 10 percent lower than May 2007 but were only off 2 percent compared to April. Shipments in May 2007 were off 7 percent compared to May 2006. Approximately 76 percent of the participants reported lower shipments compared to May 2007, up from 66 percent when comparing April to April. Year-to-date, shipments remained 7 percent below the first five months of last year, the same as last month. Approximately 78 percent of the participants are reporting lower shipments year-to-date compared with 74 percent last month. Backlogs fell 2 percent from April as once again, shipments in dollars exceeded new orders. Backlogs are now 6 percent lower than May of 2007. Receivables and Inventories We will need to put receivable levels on the watch list as receivables only fell 2 percent compared to May 2007 versus a 10 percent decline in shipments. Receivable levels were actually up 3 percent from April even with the 2 percent decline in shipments comparing month to month. One month does not necessarily create alarm, but we will need to watch this in the months to come. Inventories were off 5 percent compared to May 2007 and were up 1 percent from April. Last month, inventories were down 7 percent compared to the previous year. With orders off 8 percent year-to-date, inventory levels also need to be watched, but again, timing may be an issue here. Factory Employees and Payroll The number of factory employees in May was 9 percent lower than May of 2007, compared to 7 percent last month. The number of employees fell 2 percent compared to April. Last year, the number of employees in May was 14 percent lower than May 2006. Factory payrolls fell 14 percent from May 2007 and were down 6 percent from April. Year-to-date, factory payrolls are down 10 percent compared to the same period a year ago. National Gross Domestic Product According to preliminary estimates from the Bureau of Labor Statistics, real gross domestic product (GDP) – the output of goods and services produced by labor and property located in the U.S. – increased at an annual rate of 1.9 percent in the second quarter of 2008. This was up from 0.9 percent increase in the first quarter. The increase in real GDP in the second quarter primarily reflected positive contributions from exports, personal consumption expenditures (PCE), nonresidential structures, federal government spending, and state and local government spending that were partly offset by negative contributions from private inventory investment, residential fixed investment, and equipment and software. Imports, which are a subtraction in the calculation of GDP, decreased. The acceleration in real GDP growth in the second quarter primarily reflected a larger decrease in imports, an acceleration in exports, a smaller decrease in residential fixed investment, and an acceleration in PCE that were partly offset by a larger decrease in inventory investment. Consumer Confidence According to The Conference Board, the Consumer Confidence Index held steady in July, standing at 51.9 versus 51.0 in June. The Present Situation Index was at 65.3 versus 65.4 last month while the Expectations Index increased moderately to 43.0 from 41.4 in June. Lynn Franco, Director of The Conference Board Consumer Research Center said, “Consumers’ assessment of current conditions was little changed, suggesting there has been no significant improvement, nor significant deterioration, in business or labor market conditions. Looking ahead, while consumers remain extremely grim about short-term prospects, the modest improvement in expectations, often a harbinger of economic times to come, bears careful watching over the next few months.” Consumers’ appraisal of present-day conditions remained quite bleak in July. Those claiming business conditions are “bad” increased slightly to 32.8 percent from 31.9 percent, while those claiming business conditions are “good” rose to 13.1 percent from 11.5 percent last month. Consumers’ appraisal of the labor market remained negative. Those saying jobs are “hard to get” edged up to 30.3 percent from 29.7 percent in June, while those claiming jobs are “plentiful” declined to 13.5 percent from 14.1 percent. The Reuters/University of Michigan Surveys of Consumers indicated that consumer confidence rose by a surprising amount in July, with gains posted across all income and age groups as well as among all regions of the country. “Even after the small July gain, the overall level of consumer confidence is dismal and still points toward declines in the pace of spending in late 2008 and early 2009,” according to Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers. The gains could signal that consumers simply over-estimated the extent of the economic damage or even that they now sense that the end of the economy’s decline is on the distant horizon. “It is more likely that the gains in confidence reflect a “dead cat bounce,” a phenomena has been repeatedly observed over the past fifty years: following a steep decline in confidence a small gain is recorded before confidence resumes its downward slide,” Curtin explained. The Index of Consumer Sentiment was 61.2 in the July 2008 survey, up from 56.4 in June, but 32 percent below the 90.4 recorded in last year’s July survey. There have been less than a dozen surveys since 1952 that recorded a lower level on confidence. The Index of Consumer Expectations, a closely watched com-ponent of the Index of Leading Economic Indicators that is noted for its ability to foreshadow recessions, was 53.5 in the July survey, up from 49.2 in June, but down 34 percent from last July’s 81.5. A recession has always occurred whenever the Expectations Index has declined by this amount. The report indicated that the extent of the economic damage reported by consumers remained sizable. More than half of all consumers reported that their financial situation worsened due to higher food and fuel prices and half anticipated that their overall living standards would decline in the year ahead. While the anticipated declines in inflation-adjusted incomes were mainly due to higher expected inflation, consumers also anticipate shorter work hours, fewer bonuses, and smaller wage gains. Nine-in-ten consumers thought that the economy was in recession, with record numbers citing unfavorable news about rising prices, lost jobs, slowing economic growth, falling stock prices, and the continuing fallout from the credit and housing crises. Six-in-ten consumers expected the unemployment rate to rise and three-in-four anticipated the con-tinuation of bad times financially in the economy during the year ahead. “The appraisals of consumers of their own finances as well as conditions in the national economy remained very negative, near the worst levels recorded in the fifty-year history of the surveys,” said Curtin. Leading Economic Indicators The Conference Board reported that the U.S. leading index decreased 0.1 percent in June, while the coincident index increased 0.1 percent and the lagging index decreased 0.3 percent. The leading index declined for the second consecutive month in June, and May’s small increase was revised down to a small decline as a result of data revisions in average work week in manufacturing and manufacturers’ new orders for consumer goods and materials. Real money supply, stock prices and weekly initial claims made very large negative contributions to the index in June, more than offsetting positive contributions from building permits, the interest rate spread and supplier deliveries. The decline in the leading index has moderated somewhat, and the six-month change in the index has picked up to -0.9 percent (a -1.7 percent annual rate) in June, up from -1.7 percent (a -3.4 percent annual rate) at the end of the first quarter. However, the weaknesses among the leading indicators continue to be widespread. Housing Existing-Home Sales According to the National Association of Realtors® (NAR), existing-home sales – including single-family, townhomes, condominiums and co-ops – fell 2.6 percent to a seasonally adjusted annual rate of 4.86 million units in June from a pace of 4.99 million in May, and are 15.5 percent lower than the 5.75 million-unit rate in June 2007. NAR President Richard F. Gaylord said there is something of a quandary in the current market. “A recent online survey of Realtors® shows nearly a quarter of potential home buyers are waiting on the sidelines,” he said. “However, timing the market can be very tricky, which is why home buyers should always have a long-term view to build wealth.” Total housing inventory at the end of June rose 0.2 percent to 4.49 million existing homes available for sale, which represents an 11.1-month supply at the current sales pace, up from a 10.8-month supply in May. Lawrence Yun, NAR chief economist, said first-time home buyers are critical to the health of the housing market. “About four in 10 homes are purchased by first-time buyers, which frees existing owners to trade up,” Yun said. “With many potential first-time home buyers on the sidelines, a first-time buyer tax credit would have a significant positive impact on both housing and the economy. Combined with permanent increases to mortgage loan limits and enhancing the FHA loan program, the housing stimulus package working its way through Congress would go a long way toward helping consumers and boosting the overall economy.” Single-family home sales declined 3.2 percent to a seasonally adjusted annual rate of 4.27 million in June from 4.41 million in May, and are 14.8 percent below the 5.01 million-unit pace in June 2007. The median existing single-family home price was $213,800 in June, which is down 6.7 percent from a year ago. Regionally, existing-home sales in the West rose 1.0 percent in June to a pace of 1.03 million but are 6.4 percent lower than a year ago. The median price in the West was $288,400, which is 17.2 percent below June 2007. In the South, existing-home sales fell 3.1 percent to an annual rate of 1.85 million in June, and are 18.1 percent below June 2007. The median price in the South was $185,300, down 2.4 percent from a year ago. Existing-home sales in the Midwest declined 3.4 percent to an annual pace of 1.12 million in June, and are 17.6 percent below a year ago. The median price in the Midwest was $175,300, up 2.8 percent from June 2007. In the Northeast, existing-home sales fell 6.6 percent to an annual rate of 850,000 in June, and are 15.8 percent below June 2007. The median price in the Northeast was $256,700, down 12.6 percent from June 2007. New Home Sales Sales of new one-family houses in June were 0.6 percent below the revised May rate of 533,000 according to the U.S. Census Bureau. This rate was 33.2 percent below the June 2007 rate. The median price of new houses sold in June 2008 was $230,900. The inventory of new houses for sale represented a 10.0-month supply at the current sales rate. Housing Starts Also according to the U.S. Census Bureau, privately owned housing starts in June 2008 were at a seasonally adjusted rate of 1,066,000. This was 9.1 percent above the revised May 2008 estimate, but was 26.9 percent below the revised June 2007 estimate. Single-family starts in June were at a rate of 647,000 or 5.3 percent below the May rate. Consumer Prices The Consumer Price Index for all Urban Consumers (CPI-U) increased 1.0 percent in June, before seasonal adjustment, according to the Bureau of Labor Statistics of the U.S. Department of Labor. The June level of 218.815 (1982-84=100) was 5.0 percent higher than in June 2007. On a seasonally adjusted basis, the CPI-U advanced 1.1 percent in June, following a 0.6 percent increase in May. The index for energy rose sharply for the second straight month, increasing 6.6 percent in June following a 4.4 percent increase in May. The increase in the energy index accounted for around two-thirds of the overall increase in the all items index in June. The index for petroleum-based energy advanced 10.0 percent and the index for energy services rose 1.5 percent. The food index rose 0.8 percent in June after rising 0.3 percent in May. The index for food at home went up 1.0 percent in June, with indexes for four of the six major grocery store food groups sharply accelerating. The index for all items less food and energy increased 0.3 percent in June, following a 0.1 percent rise in April and 0.2 percent increase in May. Retail Sales According to the U.S. Census Bureau, advance estimates of U.S. retail and food services sales for June, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $384.2 billion, an increase of 0.1 percent from the previous month and 3.0 percent above June 2007. Total sales for the April through June 2008 period were up 2.6 percent from the same period a year ago. The April to May 2008 percent change was revised from +1.0 percent to +0.8 percent. Retail trade sales were up 0.1 percent from May 2008 and were 3.0 percent above last year. Gasoline station sales were up 24.5 percent from June 2007 and sales of nonstore retailers were up 8.1 percent from last year. On a non-adjusted basis, sales in June at furniture and home furnishings stores were 5.4 percent below May and down 8.5 from June 2007. Sales at these stores were down 5.1 percent for the first half of the year compared to the same period a year ago. Employment The unemployment rate rose to 5.7 percent, and nonfarm payroll employment continued to trend down in July (-51,000), the Bureau of Labor Statistics of the U.S. Department of Labor reported. Employment continued to fall in construction, manufacturing, and several service-providing industries, while health care and mining continued to add jobs. Average hourly earnings rose by 6 cents, or 0.3 percent, over the month. Both the number of unemployed persons (8.8 million) and the unemployment rate (5.7 percent) rose in July. Over the past 12 months, the number of unemployed persons has increased by 1.6 million, and the unemployment rate has risen by 1.0 percentage point. Durable Goods Orders and Factory Shipments The U.S. Census Bureau reported that new orders for manufactured durable goods increased 0.8 percent in June. This was the second consecutive monthly increase, following a 0.1 percent rise in May. Excluding transportation, new orders increased 2.0 percent. Excluding defense, new orders increased 0.1 percent. Shipments of manufactured durable goods in June increased 0.5 percent following a 1.2 percent May decrease. According to the U.S. Census Bureau, new orders for furniture and related products in May were 6.7 percent lower than May 2007 in line with the results of our survey. Year-to-date, new orders were 6.2 percent lower than last year, down slightly less than our survey. Shipments for furniture and related products in May were down 4.0 percent from last year and down 5.2 percent year-to-date. Summary The first half of 2008 has not been very exciting for most companies involved in the residential furniture industry. For the first five months, the 7 percent reduction in shipments followed the same course as the first five months of 2007 when shipments were down 7 percent from the same period in 2006. In 2006, shipments were even with the first five months of 2005. As we noted earlier, the negative results seems to be across the board in price points. Some we have talked with in the higher end price points have noted that they have not seen that end of the market hit this hard in recent memory. For those of you who have been fussing at me for reporting such negative news, there have been some bright spots noted recently. We have talked to a few manufacturers and distributors who have noted a bit of an up tick in orders recently. Even one of our fabric friends noted some improvement. Early reports from Vegas were even encouraging for some. As with all markets, we will know more in six to eight weeks, but apparently the moral there was pretty good in spite of the heat and a few glitches. We heard a good quote recently from a Wall Street Journal report. It said something like, “Flat is the new up.” We think most in the industry would agree that we would certainly take flat for a few months. Unfortunately, most of the economic news reported lately is not good. The stock market is all over the place, but mostly not good. On the other hand, we have seen a tiny bit of relief at the gas pumps lately. It’s pretty interesting when talking with someone on a cell phone driving down the road and they stop the conversation to note the price per gallon at a station had dropped 2 cents since they passed the same station that morning. Hopefully, the lower prices will stick and even ease off some more. That will help consumer confidence which will definitely help the furniture business. As we have noted in the last several issues, just try to hang on a little while longer. ___________________________ 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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