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Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

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New Orders According to our latest survey of residential furniture manufacturers and distributors, new orders in July 2008 were 17 percent lower than July 2007 and 13 percent lower than June 2008 orders. Based on street talk, we did not expect the July results to be any better than June 2008 where orders were 14 percent lower than June 2007. Several participants were down significant double digits. The July decline pushed the year-to-date orders to a 10 percent drop for the first seven months, up from a 9 percent decline through June and 8 percent through May. For the month of July, approximately 77 percent of the participants reported declines in orders. Year-to-date, some 83 percent of the participants have reported lower orders compared to the same period last year. Shipments and Backlogs Shipments in July were 10 percent lower than July 2007 and were 19 percent below June. The decline from June is somewhat normal due to most companies taking vacation time around the 4th of July holiday. Year-to-date, shipments are off over 8 percent. Year-to-date shipments were lower than the same period from last year for 83 percent of the participants, up from 81 percent last month. Backlogs in July were 15 percent lower than last year at the same time, but fell only 1 percent from June levels. Receivables and Inventories Receivables were 7 percent lower than July 2007 levels, somewhat in line with the year-to-date sales decline of 8 percent, but a bit lower than the 10 percent reduction in sales for the month. We continue to see news of more closings or bankruptcies at retail, so receivables need to be watched closely. Inventories were 4 percent lower than July 2007, the same as the results we reported in June. Inventories did climb 2 percent from June levels. Inventories will also need to be monitored closely considering the decline in orders. Factory Employees and Payrolls The number of factory employees in July 2008 were 10 percent lower than July 2007 levels – the same as last month. The number of employees fell 1 percent from June levels. Factory payrolls in July were also off 10 percent from July 2007. Factory payrolls were 21 percent lower than June payrolls, but that is somewhat normal due to the July 4th holiday week. National Consumer Confidence The Conference Board Consumer Confidence Index gained slightly in September after a small improvement in August. The Index increased to 59.8, up from 58.5 in August. The Present Situation Index decreased to 58.5 from 65.0 last month. However, the Expectations Index increased to 60.5 from 54.1 in August. Lynn Franco, Director of The Conference Board Consumer Research Center said: “September’s increase in the Consumer Confidence Index™ was due solely to an improvement in the short-term outlook. However, these results did not capture all of the tumultuous events in the financial sector this month, and until the dust settles a bit more, we will not know the full impact on consumers’ expectations. Shocks, such as the 1987 crash, generally tend to have a temporary adverse effect on confidence, lasting on average two to four months, unless they result in significant job losses. Just as noteworthy, consumers’ assessment of current conditions continues to indicate that the current economic environment remains quite weak.” The report said consumers’ appraisal of current conditions eroded further in September. Those saying business conditions are “bad” increased to 34.2 percent from 32.7 percent, while those claiming business conditions are “good” declined to 12.5 percent from 13.7 percent last month. Consumers’ assessment of the labor market continues to deteriorate. Those saying jobs are “hard to get” rose to 32.8 percent from 31.7 percent in August, while those claiming jobs are “plentiful” decreased to 12.2 percent from 13.5 percent. The Reuters/University of Michigan Surveys of Consumers report also indicated some improvement in their survey. The report indicated that the Index of Consumer Sentiment was 70.3 in September, up from 63.0 in August, but substantially lower than the 83.4 recorded last September and the peak of 96.9 in January 2007. The Index of Consumer Expectations was 67.2 in September, up from 57.9 in August but below the 74.1 of last September and the high of 87.6 in January 2007. The report indicated that prior to the events of the past week, consumer confidence appeared to have reached its cyclical low. That changed dramatically. “Consumers have expressed heightened apprehensions about prospects for the economy due to the escalating financial crisis adding to the steep declines recorded over the past year,” according to Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers. The renewed declines reflect the dire economic predictions from the President, the Treasury Secretary, and the Fed Chairman. “These grim economic prospects were not unexpected since consumers believed the economy was already in recession, but the language used by the officials to describe the extent and depth of the financial crisis was nonetheless alarming to consumers,” Curtin added. The warnings of the economic policy makers had the effect of reducing confidence in financial institutions as well as in the ability of the real economy to withstand the financial crisis. “However important the explanation is for the passage of the bailout, lost confidence cannot be easily regained; confidence can be only restored slowly through experience,” Curtin said. Now the only issue is how deep and how long will the cutbacks in spending last. “The upcoming holiday shopping season will be swamped by financial turbulence, with holiday retail sales posting the lowest growth rates in decades,” according to Curtin. Leading Economic Indicators The Conference Board announced that the U.S. leading index decreased 0.5 percent, the coincident index decreased 0.1 percent and the lagging index increased 0.4 percent in August. The leading index decreased again in August, the third decline in the index in the last four months, and it is 2.7 percent below its level one year ago. Building permits, the index of supplier deliveries and initial claims for unemployment insurance (inverted) made large negative contributions to the index this month, more than offsetting positive contribu-tions from the interest rate spread and consumer expectations. The six-month change in the leading index stands at -1.1 percent (a -2.1 percent annual rate), up slightly from -1.6 percent (about a -3.3 percent annual rate) for the previous six months. However, the weaknesses among the leading indicators have remained widespread over the past six months. The leading index has been generally falling for a year now, and the coincident index has been mildly declining since late 2007. All in all, the prolonged and widespread deterioration in the composite indexes suggests further weakening in economic conditions going forward. Gross Domestic Product (GDP) According to final estimates by the Bureau of Economic Analysis, real GDP increased at an annual rate of 2.8 percent in the second quarter of 2008. In the first quarter, real GDP increased 0.9 percent. 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 than in the first quarter, an acceleration in exports, a smaller decrease in residential fixed investment, an acceleration in non-residential structures, an upturn in state and local government spending, and an acceleration in PCE that were partly offset by larger decreases in inventory invest-ment and in equipment and software. Housing Existing-Home Sales According to the National Association of Realtors® (NAR), existing-home sales fell in August 2008 after a gain in July. Sales rose in the Midwest and South, but fell in the Northeast and West. Nationally, existing-home sales – including single-family, townhomes, condominiums and co-ops – declined 2.2 percent to a seasonally adjusted annual rate of 4.91 million units in August from an upwardly revised pace of 5.02 million in July, and were 10.7 percent below the 5.50 million-unit pace in August 2007. NAR President Richard F. Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, California, said the pendulum in the mortgage market has swung too far. “The difficulty in obtaining a mortgage increased over past couple months, making it more challenging for creditworthy borrowers to find financing,” he said. “Our hope is that overly tight lending criteria can be loosened with reasonable standards and credit so that sales activity can catch up with demand. Interest rates have already declined, but there is a serious question as to whether a cash infusion by the U.S. Treasury into Wall Street would help consumers by improving mortgage funding. Lawrence Yun, NAR chief economist, said the recent drop in interest rates is an immediate impact of recent government action. “August sales reflect higher interest rates before the government takeover of Freddie Mac and Fannie Mae, and the sudden drop in mortgage interest rates over the past couple weeks is improving housing affordability,” he said. “With higher loan limits and a beefing up of the FHA program, all the mechanisms have been falling into place to increase mortgage availability. “However, home sales will be constrained without a freer flow of credit into the mortgage market. The faster that happens, the sooner we’ll see a broad stabilization in home prices that in turn will help the economy recover,” Yun said. “Historically, housing has led the nation out of economic doldrums – there will not be an economic recovery without a housing recovery.” Single-family home sales slipped 1.4 percent to a seasonally adjusted annual rate of 4.35 million in August from an upwardly revised pace of 4.41 million in July, and were 9.6 percent below the 4.81 million-unit level a year ago. The median existing single-family home price was $201,900 in August, down 9.7 percent from August 2007. Regionally, existing-home sales in the Midwest rose 0.9 percent in August to a pace of 1.14 million but were 12.3 percent below August 2007. The median price in the Midwest was $168,000, down 5.6 percent from a year ago. In the South, existing-home sales increased 0.5 percent to an annual pace of 1.86 million in August, but were 15.1 percent below a year ago. The median price in the South was $176,500, which is 3.4 percent lower than August 2007. Existing-home sales in the West fell 5.3 percent to an annual rate of 1.07 million in August, and were 4.9 percent higher than August 2007. The median price in the West was $251,600, down 23.9 percent from a year ago. “The highest concentration of foreclosures is in the West, which is weighing down the median price because many buyers are taking advantage of deeply discounted prices,” Yun said. In the Northeast, existing-home sales dropped 6.6 percent to an annual pace of 850,000 in August, and were 15.0 percent below a year ago. The median price in the Northeast was $271,000, down 3.8 percent from August 2007. New Home Sales Sales of new one-family houses in August were at a seasonally adjusted annual rate of 460,000 according to the U.S. Census Bureau. This was 11.5 percent below the revised July rate of 520,000 and 34.5 percent below the August 2007 estimate. The seasonally adjusted estimate of new houses for sale at the end of August was 408,000. This represented a supply of 10.9 months at the current rate of sale. Housing Starts According to the U.S. Census Bureau, single-family housing starts were at a rate of 630,000 in August. This was 1.9 percent below July starts. Total privately-owned housing starts were 6.2 percent below the revised July estimate and were 33.1 percent below the revised August 2007 rate. Consumer Prices The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.4 percent in August, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported. The August level of 219.086 (1982-84=100) was 5.4 percent higher than in August 2007. On a seasonally adjusted basis, the CPI-U decreased 0.1 percent in August, following a 0.8 percent increase in July. The index for energy fell 3.1 percent in August after three consecutive sharp increases. The gasoline index declined by 4.2 percent in August but is 35.6 percent higher than in August 2007. The index for household energy, which was up 3.8 percent in July, declined 1.6 percent in August. The food index advanced 0.6 percent in August after rising 0.9 percent in July. The index for food at home rose 0.8 percent in August after a 1.2 percent increase in July and is up 7.5 percent over the past year. The index for all items less food and energy increased 0.2 percent in August after increasing 0.3 percent in July. Deceleration in the indexes for new vehicles, apparel, and telephone services also contributed. Partly offsetting these were larger increases in the indexes for medical care and recreation. During the first eight months of 2008, the CPI-U rose at a 5.1 percent seasonally adjusted annualized rate (SAAR). This compares with a 4.1 percent increase for the 12 months ending December 2007. The energy index rose at a 22.4 percent SAAR in the first eight months of 2008 after increasing 17.4 percent in 2007. Gasoline prices increased at a 22.1 percent SAAR in 2008 after a 29.6 percent increase in 2007, while natural gas prices rose at a 46.3 percent SAAR after decreasing 0.4 percent in 2007. The food index increased at a 7.5 SAAR for the first eight months of 2008 after increasing 4.9 percent in 2007. Excluding food and energy, the CPI-U has advanced at a 2.5 percent SAAR in 2008 following a 2.4 percent increase in 2007. Retail Sales The U.S. Census Bureau announced that advance estimates of U.S. retail and food services sales for August, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $381.2 billion, a decrease of 0.3 percent from the previous month, but 1.6 percent above August 2007. Total sales for the June through August 2008 period were up 2.3 percent from the same period a year ago. The June to July 2008 percent change was revised from -0.1 percent to -0.5 percent. Retail trade sales were down 0.3 percent from July 2008, but were 1.3 percent above last year. Gasoline station sales were up 22.5 percent from August 2007 and sales of food and beverage stores were up 6.9 percent from last year. Sales at furniture and home furnishings stores in August 2008 were down 8.3 percent from August 2007 (6.8 percent on a seasonally adjusted basis). Year-to-date, sales at these stores were down 5.6 percent compared to 4.7 percent last month. Employment According to the Bureau of Labor Statistics, the unemployment rate increased to 6.1 percent in August – up from 5.7 percent in July. Nonfarm payroll employment fell 84,000 in August. Jobs were lost in manufacturing and employment services. Mining and health care continued to add jobs. Average hourly earnings rose by 7 cents, or 0.4 percent, over the month. Durable Goods Orders and Factory Shipments New orders for manufactured durable goods in August decreased $9.9 billion or 4.5 percent to $208.5 billion, according to the U.S. Census Bureau. This was the largest percent decrease in new orders since January 2008 and followed three consecutive monthly increases including a 0.8 percent July increase. Excluding transportation, new orders decreased 3.0 percent. Excluding defense, new orders decreased 5.0 percent. Transportation equipment, down two of the last three months, had the largest decrease, $5.1 billion or 8.9 percent. Shipments of manufactured durable goods in August, down following two consecutive monthly increases, decreased $7.7 billion or 3.5 percent to $210.1 billion. This was the largest percent decrease in shipments since December 2002 and followed a 2.3 percent July increase. Transportation equipment, down following two consecutive monthly increases, had the largest decrease, $4.2 billion or 7.7 percent. This was the largest percent decrease in shipments of transportation equipment since December 2002. According to the U.S. Census Bureau report, shipments in July of furniture and related products were 3.2 percent below July 2007 levels. Year-to-date, the report indicated that shipments were down 4.8 percent through July. Orders were down 5.1 percent year-to-date. Summary We almost decided not to write anything this month about the national scene as so much has happened since the information was available for August data. Yet, we decided to include the data at least for historical purposes. September 2008 will go down in history as a one of the worst from a financial institution standpoint. The U.S. Treasury committed $200 billion to rescue Fannie Mae and Freddie Mac. They also committed to a $50 billion guaranty program for money market mutual funds. The Federal Reserve committed to an $85 billion loan to AIG and the FDIC arranged for the bailout of Washington Mutual and the sale of Wachovia to Citigroup. Problems were also addressed by governments in the United Kingdom, Belgium, the Netherlands and Luxembourg, as well as plans in Germany. Then the government suggested a $700 billion bailout legislation, which at the time of this writing, has not passed Congress. The stock market has swung wildly, losing 777 points after the House of Representatives failed to pass the bailout legislation on Monday, September 29. This represented a 6.97 percent drop, the largest since September 11, 2001. In addition, gasoline shortages have consumers spooked and have kept the price of gasoline higher than expected in spite of the drop in crude oil prices. Suffice it to say, all of the above is not helping the furniture industry, at any level. The results for July were not good and we do not expect August results to be much better based on most of the conversations we have had in the industry. We did hear that some businesses noted a bit of improvement after Labor Day, but all the recent turmoil seems to have slowed some of the progress. We hope that Congress will do the right thing soon – whatever that is as we are not smart enough to know exactly what is right, but we do know that something has got to be done to loosen up credit for consumers and businesses. This is critical to the U.S. economy, especially considering the shape of the economy before this month. Hopefully things will settle down a bit in the next few days. In the meantime, business goes on. We are still selling furniture, though not what we need. We hope that things calm soon so that the High Point Market is successful for those who show and buy here. It will still be important to be here to see new product and shop for items to freshen stores. Assuming the financial crisis eases, we are still in very tough times. But business will continue to be done. Those who will make it will have to have good product to sell when the consumer returns. In the meantime, if anyone can tell me what to do with my retirement money, please let me know. ___________________________ 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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