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Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

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Monthly Results New Orders New orders for August fell 16 percent from August 2007 levels according to our recent survey of residential furniture manufacturers and distributors. This marked the third month in a row that orders were down double digits. Approximately 83 percent of the participants reported declines in orders, and as with the last few months, several reported significant double digit declines. The decline in August pushed the year-to-date decline up to 10 percent for the first eight months. Some 86 percent of the participants have reported lower orders than the first eight months. From street talk since August and through market, we do not expect to see significant rebounds in orders in September and October. Shipments and Backlogs Shipments were also down 16 percent in August 2008 compared to August of 2007. We did see an increase from July 2008, but that is somewhat normal with the normal three week work month due to the holiday in July. Year-to-date, shipments declined 9 percent from the same period a year ago, up from 8 percent last month. As with orders, some 86 percent of the participants are reporting lower shipments than last year, with several down significant double digits. Backlogs were also down 16 percent from last year and were down 7 percent from July. Backlogs are at seriously low levels. Receivables and Inventories Receivable levels fell 6 percent from last August. While not far off from year-to-date shipments declines of 9 percent, the decline is not as much in line with the last two months declines in shipments. We know there is some extended dating going on, but we are also hearing a lot about delinquent payments from retailers. Inventory levels fell 4 percent from last year’s levels and were even with July levels. The 4 percent decline was the same as the decline reported in July. We suspect that with orders continuing to decline, inventory levels may be a bit high. Factory Employees and Payrolls The number of factory employees fell 3 percent from July bringing the total number compared to last year down to a 13 percent decrease. This decrease was up from a 10 percent decline in July and 9 percent in June. Factory payrolls in August were 18 percent below August 2007, up from 10 percent last month. Factory payrolls were up 13 percent over July but that increase was due to the shutdown for most companies over the week of the 4th of July. National Consumer Confidence The Conference Board Consumer Confidence Index fell to an all time low in October after a slight gain in September. The index now stands at 38.0 (1985 = 100), far below the 61.4 reached in September. The Present Situation Index decreased from 61.1 last month to 41.9 in October. The Expectations Index declined to 35.5 from 61.5 in September. Lynn Franco, Director of The Conference Board Consumer Research Center said: “The impact of the financial crisis over the last several weeks has clearly taken a toll on consumers’ confidence. The decline in the Index (-23.4 points) is the third largest in the history of the series, and the lowest reading on record. In assessing current conditions, consumers rated the labor market and business conditions much less favorably, suggesting that the fourth quarter is off to a weaker start than the third quarter. Looking ahead, consumers are extremely pessimistic, and a significantly larger proportion than last month foresees business and labor market conditions worsening. Their earnings outlook, as well as inflation outlook, is also more pessimistic, and this news does not bode well for retailers who are already bracing for what is shaping up to be a very challenging holiday season.” Consumers’ appraisal of current conditions deteriorated sharply in October. Those saying business conditions are “bad” increased to 38.3 percent from 33.4 percent, while those claiming business conditions are “good” declined to 9.2 percent from 12.8 percent. Consumers’ assessment of the labor market was also much more negative. The percentage of consumers saying jobs are “hard to get” rose to 37.2 percent from 32.2 percent in September, while those claiming jobs are “plentiful” decreased to 8.9 percent from 12.6 percent. Consumers’ short-term outlook turned significantly more pessimistic. Those expecting business conditions to worsen over the next six months surged to 36.6 percent from 21.0 percent, while those anticipating conditions to improve fell to 9.9 percent from 13.4 percent. The outlook for the job market was also less favorable. The percent of consumers expecting fewer jobs in the months ahead surged to 41.5 percent from 26.9 percent, while those anticipating more jobs decreased to 7.4 percent from 11.9 percent. The Reuters/University of Michigan Surveys of Consumers report also indicated falling confidence. Their Index of Consumer Sentiment was 57.6 in October, a record 12.7 points below the 70.3 in September and 23.3 points below October 2007. Since the peak in January 2007, the Sentiment Index has declined 41 percent, the largest peak to trough decline in the history of the survey. The Index of Consumer Expectations was 57.0 in October, down from 67.2 in September and 70.1 in October 2007. The Expectations Index has declined 35 percent since the January 2007 peak. “Consumer confidence had already declined by mid 2008 by more than prior to any past recession and the steep October loss indicates that accelerated cutbacks in spending can be expected during the months ahead,” according to Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers. Overall, the data indicate that this will be the bleakest holiday spending season since 1980. “Consumers held the least favorable assessments of their finances in more than a half century and viewed their job prospects more negatively than at any other time since the end of 1980,” according to Curtin. The data indicate that a long and deep recession is likely to occur, with spending expected to decline through most of 2009. Consumers anticipated an unemployment rate reaching 8 percent by the end of 2009. Total real personal consumption expenditures are expected to fall by -0.50 percent to -0.75 percent in 2009 compared with 2008, followed by unusually slow paced recovery in 2010. Consumers reported the most dismal assessments of their current financial situation ever recorded. Just one-in-five consumers reported that their finances had improved in October. Three times as many reported financial reversals. Declines in gas prices could not offset the larger negative impact of widespread income declines. “More families reported income declines in October than in any other survey during the past half century,” noted Curtin. Restrictions on available credit as well as heightened uncertainty about future job and income prospects have caused more consumers to postpone purchases. When asked to explain their buying plans, more than half of all consumers cited losses and uncertainty about jobs and incomes than ever before in the sixty year history of the surveys. This was true for vehicles as well as for furniture, appliances, home electronics, and other durables. “The more the purchase was associated with the use of credit, the more likely consumers voiced their intent to postpone the purchase,” Curtin said. Tightening credit conditions have increasingly constrained purchase plans, with one-in-ten consumers mentioning that they had recent problems obtaining credit. Gross Domestic Product (GDP) 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 – decreased at an annual rate of 0.3 percent in the third quarter of 2008, (that is, from the second quarter to the third quarter), according to advance estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.8 percent. The decrease in real GDP in the third quarter primarily reflected negative contributions from personal consumption expenditures (PCE), residential fixed investment, and equipment and software that were largely offset by positive contributions from federal government spending, exports, private inventory investment, nonresidential structures, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased. Most of the major components contributed to the downturn in real GDP growth in the third quarter. The largest contributors were a sharp downturn in PCE for nondurable goods, a smaller decrease in imports, a larger decrease in PCE for durable goods, and a deceleration in exports. Notable offsets were an upturn in inventory investment and acceleration in federal government spending. Leading Economic Indicators The Conference Board reported that the U.S. leading index increased 0.3 percent, the coincident index decreased 0.5 percent and the lagging index decreased 0.2 percent in September. The leading index increased in September due primarily to positive contributions from real money supply, consumer expectations, the interest rate spread, and the index of supplier deliveries, more than offsetting the negative contributions from building permits, stock prices, initial claims for unemployment insurance (inverted) and the average workweek in manufacturing. However, the weaknesses among the leading indicators have remained widespread over the past six months and will likely continue based on October results. With consistently widespread weakness among its components, the leading index has been falling since July 2007. Following the leading index, the coincident index, a monthly measure of current economic conditions, has also been decreasing, and its rate of decline has accelerated in recent months. Meanwhile, real GDP growth slowed to a 1.8 percent average annual rate in the first half of the year, down from an average annual rate of 2.3 percent in the second half of 2007. Taken together, the behavior of the composite indexes suggests that the economy is unlikely to improve in the near term. Housing Existing-Home Sales According to the National Association of Realtors® (NAR), existing-home sales increased in September. Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 5.5 percent to a seasonally adjusted annual rate of 5.18 million units in September from a level of 4.91 million in August, and are 1.4 percent higher than the 5.11 million-unit pace in September 2007. ingle-family home sales increased 6.2 percent to a seasonally adjusted annual rate of 4.62 million in September from a pace of 4.35 million in August, and are 3.8 percent above the 4.45 million-unit level a year ago. The median existing single-family home price was $190,600 in September, which is 8.6 percent below September 2007. Lawrence Yun, NAR chief economist, said more markets are seeing year-over-year gains. “The sales turnaround which began in California several months ago is broadening now to Colorado, Kansas, Minnesota, Missouri and Rhode Island,” he said. “The South was hampered by much lower home sales in Houston in the aftermath of Hurricane Ike.” NAR President Richard F. Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, California, said low home prices and low interest rates have been attracting buyers. “This is the first time since November 2005 that home sales have been above year-ago levels,” he said. “Credit tightened at the end of September, but the improvement demonstrates that buyers who’ve been on the sidelines want to get into the market to make a long-term investment in their future.” Total housing inventory at the end of September fell 1.6 percent to 4.27 million existing homes available for sale, which represents a 9.9-month supply at the current sales pace, down from a 10.6-month supply in August. This marks two consecutive monthly declines since inventories peaked in July. The national median existing-home price for all housing types was $191,600 in September, down 9.0 percent from a year ago when the median was $210,500. “Compared to a fairly small share of foreclosures or short sales a year ago, distressed sales are currently 35 to 40 percent of transactions. These are pulling the median price down because many are being sold at discounted prices,” Yun explained. “The current market is not being dominated by speculative investors. Rather, 80 percent of current buyers are purchasing a primary residence, which is a bit higher than historic norms.” Regionally, existing-home sales in the West jumped 16.8 percent in September, and are 34.4 percent higher than September 2007. The median price in the West was $253,600, down 18.5 percent from a year ago. In the Midwest, existing-home sales increased 4.4 percent in September, but are 2.5 percent below a year ago. The median price in the Midwest was $152,500, which is 7.9 percent lower than September 2007. Existing-home sales in the South rose 2.2 percent in September but remain 7.8 percent below September 2007. The median price in the South was $167,200, down 4.1 percent from a year ago. In the Northeast, existing-home sales slipped 1.2 percent in September, and are 7.7 percent lower than a year ago. The median price in the Northeast was $246,800, down 5.4 percent from September 2007. New Home Sales Sales of new one-family houses in September 2008 were at a seasonally adjusted annual rate of 464,000, according to estimates from the U.S. Census Bureau. This was 2.7 percent above the revised August rate of 452,000 but was 33 percent below the September 2007 estimate of 694,000. The median price of new houses sold in September was $218,400 while the average sales price was $275,500. The estimate of new houses for sale at the end of September represented 10.4 months at the current sales rate. Sales in the West were up 22.7 percent over August. The South was up 0.7 percent while sales in the Midwest were off 5.8 percent and sales in the Northeast were off 21.4 percent. Housing Starts According to the U.S. Census Bureau, privately-owned housing starts in September were at a seasonally adjusted annual rate of 817,000. This was 6.3 percent below the revised August estimate and 31.1 percent below the September 2007 rate. Retail Sales The U.S. Census Bureau reported that advance estimates of U.S. retail and food services sales for September, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $375.5 billion, a decrease of 1.2 percent from the previous month and 1.0 percent below September 2007. Total sales for the July through September 2008 period were up 0.8 percent from the same period a year ago. Retail trade sales were down 1.2 percent from August 2008 and were 1.4 percent below last year. Gasoline station sales were up 17.8 percent from September 2007 and sales of food and beverage stores were up 5.1 percent from last year. Unadjusted sales in September at furniture and home furnishings stores were 8.4 percent below August and were 9.2 percent below September a year ago. On an adjusted basis, sales were 2.3 percent below August and 10.7 percent below September a year ago. Year-to-date, sales at these stores were reportedly off 6.2 percent from the first nine months of 2007. The year-to-date percentage decrease was the second highest decrease among all the categories, behind auto and other motor vehicle dealers which fell 9.3 percent. Sales year-to-date at electronics and appliance stores were up 2.5 percent. Consumer Prices The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.1 percent in September, before seasonal adjustment, according to the Bureau of Labor Statistics of the U.S. Department of Labor. The September level was 4.9 percent higher than in September 2007. On a seasonally adjusted basis, the CPI-U was virtually unchanged in September following a 0.1 percent decrease in August. The index for energy fell 1.9 percent in September following a 3.1 percent decline in August. The motor fuel index declined 0.8 percent in September but was 31.8 percent higher than a year ago. The index for household energy fell 3.4 percent in September after a 1.6 percent decrease in August. The index for all items less food and energy increased 0.1 percent in September, decelerating for the second straight month. Contributing to the deceleration were downturns in the indexes for apparel and for airline fares, a smaller increase in the index for recreation, and a steeper decline in the index for new and used motor vehicles. Consumer prices increased at a seasonally adjusted annualized rate (SAAR) of 2.6 percent in the third quarter of 2008 following increases in the first and second quarters at annual rates of 3.1 and 7.9 percent, respectively. This brings the year-to-date annual rate to 4.5 percent and compares with an increase of 4.1 percent for all of 2007. The index for energy fell at a 4.9 percent annual rate in the third quarter of 2008, following increases at rates of 8.6 percent and 53.6 percent in the first two quarters, respectively. So far this year, the energy index has risen at a 16.6 percent rate after increasing 17.4 percent in all of 2007. Within energy, petroleum-based energy costs (energy commodities) advanced at a 19.1 percent rate and energy services (gas and electricity) rose at a 12.4 percent rate in the first nine months of 2008. Employment The Bureau of Labor Statistics reported that nonfarm payroll employment declined by 159,000 in September. The unemployment rate held steady at 6.1 percent after rising 0.4 percent in August. Employment continued to fall in construction, manufacturing, and retail trade, while mining and health care continued to add jobs. In September, the number of long-term unemployed (those jobless for 27 weeks or more) rose by 167,000 to 2.0 million. This represented an increase of 728,000 over the past 12 months. Durable Goods Orders and Factory Shipments According to the U.S. Census Bureau, new orders for manufactured durable goods increased 0.8 percent in September. This represented the fourth increase in the last five months. Excluding transportation, new orders decreased 1.1 percent. Excluding defense, new orders decreased 0.6 percent. Shipments of manufactured durable goods, up three of the last four months, increased 0.2 percent. This followed a 4.2 percent decrease in August. The final report for August indicated that shipments for furniture and related products fell 7 percent from August 2007 but were up 5 percent over July. Year-to-date, shipments in this category were reported to be off 5.2 percent from the same period a year ago. This same report noted that new orders in this category were off 1.9 percent from August 2007 with year-to-date orders off 4.7 percent. Summary Unfortunately, most of the national and even furniture statistics in this report do not reflect current condi-tions. October has not been good to the nation in general with the whole financial mess we are in – including the stock market, banking relations and just about all the areas in the financial world. At least the last week of October brought overall good news to the stock market. The market started the week at around 8,300 and finished off the week at 9,325. According to Bloomberg, this was the biggest weekly gain since 1974. October saw the largest drop in the S&P 500 since 1987, but the rally at the end of the month was certainly some good news among all the bad we have been hearing. The High Point Market seemed to beat most exhibitors’ expectations, which admittedly were low. Yet the players were here and they placed some orders. Many of the retailers we heard from did not need to buy a lot, but the smart ones know they needed to freshen their floors for when business does get better. And – there were some deals to be made as well. Most exhibitors we talked to noted that orders had really fallen off since the beginning of October, even more so than usual. Normally orders do fall off just before the market, as people are waiting to see what is available at market. We are very concerned over the credit situation for both retailers and manufacturers and distributors. In the good ole days, when the economy was tough, we could talk to the bankers, who understood the big picture and were willing to work with companies until overall business conditions improved. Unfortu-nately, that is not what we are seeing today. We hope that the government will put pressure on the banks to take some of the money they are putting into the system and push the banks to loosen up. Otherwise, we believe they will force some companies into bankruptcy that really do not need to be there. Back to some good news – gas prices are down and down significantly. Consumers really need that in this economy. At least now when I see that the person before me that bought $10 worth of gas is getting 4 gallons now instead of 2 ½, which was not getting him/her very far. And even more good news, by the time you get this, the election will be almost over (or over). While you may or may not be happy with the winners, at least all the negative campaigning will be over. That has got to help consumer confidence. When you can’t turn on the TV or radio without hearing everything that is wrong with the nation, the economy and anything else you can think of, it has to bring everyone’s confidence down (mine included). We’ve got a lot to fix in the nation before we will see a good deal of improvement in the furniture industry. Most likely, not all will survive. But for those with staying power, we believe that when times do get better, those survivors will do well. We just need to make sure our bankers understand that. ___________________________ 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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