Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants
Furniture World Magazine
According to our recent survey of residential furniture manufacturers and distributors, new orders fell 28 percent in October 2008 compared to October 2007. New orders were 13 percent lower in October versus September 2008. For comparison, new orders in October 2007 were 2 percent higher than October 2006.
Year-to-date, new orders for the first ten months of 2008 are now 12 percent lower than the same period a year ago, up from 10 percent below last month. The year-to-date orders in 2007 were 4 percent below the same period in 2006.
For the month, approximately 94 percent of the participants reported lower orders with almost 73 percent of the participants reporting orders off 20 percent or more. Year-to-date, 89 percent of the participants are now reporting lower orders than last year, up from 86 percent last month.
Shipments and Backlogs
Shipments for October 2008 were 20 percent lower than October 2007 and were 8 percent lower than September 2008. Shipments in October 2007 were 1 percent lower than October 2006.
Year-to-date, shipments for the first ten months were 11 percent below last year. In October 2007, shipments year-to-date were down 5 percent from the previous year.
For the month, only 76 percent of the participants reported lower shipments than last year. But 86 percent of the participants have reported lower shipments year-to-date similar to last month’s 84 percent.
With orders less than shipments, backlogs in October fell 3 percent from September. October 2008 backlogs were 24 percent lower than October 2007 levels.
Receivables and Inventories
Receivable levels in October 2008 were 11 percent below October 2007 levels, the same decline as reported last month. The concern is that receivables were up 1 percent over September levels even with shipments declining 8 percent. Since receivables were reasonably in line last month, the change may relate to timing of invoicing, but we have heard recently that payments tend to be slowing down.
Inventories levels in October were 4 percent below October 2007, again the same decline as reported in September. Inventory levels also declined 1 percent compared to September 2008 levels. With orders and shipments down double digits, it’s at least good to see that inventories are not growing.
Factory Employees and Payrolls
Factory payrolls were 24 percent lower in October 2008 compared to October 2007 and were 9 percent lower than September payrolls. The number of factory employees was 15 percent lower than October 2007, versus 13 percent reported in September.
Year-t0-date, factory payrolls were 13 percent lower than the first 10 months of 2007. It appears that companies are using shorter hour work weeks to help offset the decline in orders.
The Conference Board Consumer Confidence Index, after a moderate increase in November, fell to a new all time low in December. The index dropped to 38.0 from 44.7 in November. The Present Situation Index fell to 29.4 from 42.3 last month while the Expectations Index decreased to 43.8 from 46.2 in November.
Lynn Franco, Director of The Conference Board Consumer Research Center said: “The further erosion of the Consumer Confidence Index™ reflects the rapid and steep deterioration of economic conditions that occurred in the fourth quarter of 2008. The Present Situation Index is now close to levels last seen in the months following the 1990-91 recession, but is not as low as levels reached during the 1981-82 recession. Declines in the Expectations Index appear to be moderating, but this index continues to hover at historical lows. Both sub-indexes bear careful watching over the next several months to see if they are starting to show signs of approaching a bottom. In the meantime, however, the overall economic outlook remains quite dismal for the first half of 2009, and only a modest recovery is expected in the second half.”
Consumers’ appraisal of current conditions grew substantially worse in December. Those claiming business conditions are “bad” increased to 46.0 percent from 40.6 percent, while those claiming business conditions are “good” declined to 7.7 percent from 10.1 percent last month. Consumers’ assessment of the labor market was also considerably more negative than a month ago. Those saying jobs are “hard to get” rose to 42.0 percent from 37.1 percent in November.
The Reuters/University of Michigan Surveys of Consumers reported that their Index of Consumer Sentiment was 60.1 in December, up from 55.3 in November but substantially below the December 2007 index of 75.5 and the cycled peak of 96.9 set in January 2007. Their Index of Consumer Expectations was 54.0 in December versus 53.9 in November and below the 65.6 in December 2007.
According to the report, consumers reported that lower prices provided some needed relief, but continued job losses as well as income declines have kept consumers pessimistic about their future economic prospects. “The most significant change recorded in the December survey was the record plunge in inflation expectations,” according to Richard Curtin, the Director of the Survey. Not only did a record number of consumers report that retailers were currently offering deeply discounted prices, but consumers expected the overall rate of inflation to fall significantly in the future. “One-in-four consumers expected outright declines in the overall price level, more than any time since the 1950’s,” said Curtin. Although most consumers view the recent price declines as due to the recessionary downturn in spending, even longer term inflation expectations have decreased. While most consumers expect a rebound in prices when the economy recovers, they now anticipate a somewhat lower overall inflation rate to prevail in the future.
Given the depth of the recent declines in confidence, the relatively small December gain does not substantially change the negative outlook for spending during the year ahead. “Total consumer spending is expected to decline by about 1 percent during 2009, followed by an unusually slow recovery in 2010.” Curtin added that declines in pension accounts and home values, uncertainty about future job and income prospects, and continued restrictions on the availability of credit have made consumers much more interested in restoring their savings and reserve funds.
The personal finances of consumers remained bleak, as the majority reported their situation had recently worsened. The fewest consumers in more than a half a century reported income gains in the December survey, and despite anticipating sharp declines in the rate of inflation, the majority still anticipated that their inflation-adjusted incomes would decline during the year ahead.
Price discounts on household durables and vehicles were cited by record numbers. There was only two surveys in more than 50 years that recorded a higher proportion of consumers who mentioned that deeply discounted prices were being offered. The appeal of lower prices, however, has been largely offset by widespread uncertainty among consumers about their future job and income prospects.
Leading Economic Indicators
The Conference Board reported that the U.S. leading index decreased 0.4 percent in November, with the coincident index decreasing 0.3 percent while the lagging index increased 0.1 percent.
The report indicated that the leading index continued to fall in November, due mainly to large declines in building permits, stock prices, and initial unemployment claims, which offset the continued positive contributions from real money supply and the yield spread. Without the very large increases in inflation-adjusted money supply since September, the leading index would have been significantly weaker. The six-month change in the leading index has continued to fall -- to -2.8 percent (a -5.6 percent annual rate) in the period through November, down from -0.9 percent (a -1.7 percent annual rate) during the previous six months. In addition, the weaknesses among the leading indicators have remained widespread in recent months.
Existing-home sales declined again in November after recording gains in September, reflecting the effects of the eroding economy.
According to the National Association of Realtors® (NAR), existing-home sales – including single-family, townhomes, condominiums and co-ops – fell 8.6 percent to a seasonally adjusted annual rate of 4.49 million units in November from a downwardly revised level of 4.91 million in October, and are 10.6 percent below the 5.02 million-unit pace in November 2007.
Lawrence Yun, NAR chief economist, expected a decline. “The quickly deteriorating conditions in the job market, stock market, and consumer confidence in October and November have knocked down home sales to another level. We hope the home sales impact from the stock market crash turns out to be short-lived, as was the case in 1987 and 2001,” he said.
“It is, therefore, imperative to provide incentives for homebuyers to get back into the market. It also depends on how effectively Congress and the new administration can help facilitate the short sales process and unclog the mortgage pipeline – impediments remain for some buyers with good credit,” Yun said.
According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to 6.09 percent in November from 6.20 percent in October. Recently, Freddie Mac reported the 30-year rate fell to 5.19 percent – the lowest on record since the series began in 1971.
NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, said it’s crucial to enact sufficient housing stimulus to spark an economic recovery. “We need more than low interest rates to encourage enough buyers to enter the market and meaningfully draw down inventory, which would stabilize home prices – that, in turn, would help the economy to recover,” he said.
“We should extend the first-time buyer tax credit to all homebuyers and eliminate the repayment feature, and make permanent the higher loan limits that are vital in high-cost markets – the faster we do this, the faster housing and the economy can recover,” McMillan said.
Single-family home sales fell 8.0 percent to a seasonally adjusted annual rate of 4.02 million in November from a level of 4.37 million in October, and are 8.8 percent below a 4.41 million-unit pace a year ago. The median existing single-family home price was $180,800 in November, down 12.8 percent from November 2007.
Regionally, existing-home sales in the Northeast dropped 12.0 percent in November, and are 18.0 percent lower than a year ago. The median price in the Northeast was $257,700, down 0.1 percent from November 2007.
Existing-home sales in the Midwest fell 7.4 percent in November and are 16.0 percent below November 2007. The median price in the Midwest was $142,400, down 11.2 percent from a year ago.
In the South, existing-home sales dropped 10.9 percent in November, and are 17.6 percent below a year ago. The median price in the South was $154,500, which is 10.6 percent lower than November 2007.
Existing-home sales in the West declined 4.3 percent in November but are 17.9 percent higher than November 2007. The median price in the West was $242,500, down 25.5 percent from a year ago.
New Home Sales
According to the U.S. Census Bureau, sales of new one-family houses in November 2008 were at a seasonally adjusted rate of 407,000. This rate was 2.9 percent below the revised October rate and was 35.3 percent below the November 2007 estimate.
The median sales price of new houses sold was $220,400 while the average price was $287,500. The estimate of new homes for sale at the end of November was 374,000, representing a supply of 11.5 months at the current sales rate.
The decline from last year’s sales was reasonably consistent across all regions of the U.S. The lowest decline was 27.3 percent in the Northeast while the highest decline was in the South at 38.1 percent.
Privately-owned housing starts in November were at a seasonally adjusted annual rate of 625,000, according to the U.S. Census Bureau. This was 18.9 percent below the revised October estimate and 47.0 percent below the November 2007 rate of 1,179,000.
Single family starts were at a rate of 441,000 or 16.6 percent below the October estimate. Compared to November 2007, the declines were consistent in all regions with the Northeast leading the declines at 59.8 percent.
The U.S. Census Bureau reported that advance estimates of U.S. retail and food services sales for November, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $355.7 billion, a decrease of 1.8 percent from the previous month and 7.4 percent below November 2007. Total sales for the September through November 2008 period were down 4.5 percent from the same period a year ago.
Retail trade sales were down 2.0 percent from October 2008 and were 8.5 percent below last year. Motor vehicle and parts dealers sales were down 25.2 percent from November 2007 and gasoline stations sales were down 22.0 percent from last year.
Sales at furniture and home furnishings stores were up in November over October by 0.2 percent on an adjusted basis but were 11 percent lower than November 2007. Year-to-date, sales at these stores were reported to be down 7.4 percent. Only sales at auto and other motor vehicle dealers were off more than furniture and home furnishings stores, declining 12.6 percent for the year-to-date.
According to the U.S. Department of Labor, the Consumer Price Index for All Urban Consumers (CPI-U) decreased 1.9 percent in November, before seasonal adjustment. The November level of 212.425 (1982-84=100) was 1.1 percent higher than in November 2007.
On a seasonally adjusted basis, the CPI-U decreased 1.7 percent in November, the second consecutive record decrease. For the 12 month period ending in November the CPI was up 1.1 percent, compared to 5.6 percent for the twelve months ending July of this year. Falling energy prices, particularly gasoline, drove the decline in the overall index. Excluding energy, the index was virtually unchanged.
The energy index fell 17.0 percent in November. The decrease was about twice the October decline and energy prices are now 32.4 percent below the July peak earlier this year. The gasoline index fell 29.5 percent in November and gas prices are now 47.0 percent below their July peak.
Food prices increased 0.2 percent in November following a 0.3 percent rise in October. Excluding food and energy, the CPI was virtually unchanged in November and is up 2.0 percent since November 2007. Continuing declines in the indexes for new and used motor vehicles, lodging away from home, airline fares and some technology-related commodities offset small increases in a variety of other service and commodity items.
Nonfarm payroll employment fell sharply in November, down 533,000, according to the Bureau of Labor Statistics. November’s decline followed declines of 403,000 in September and 320,000 in October. Job losses were large and widespread across the major industry sectors.
The unemployment rate rose to 6.7 percent in November and the number of unemployed persons rose to 10.3 million. Since the official start of the recession, the number of unemployed persons increased by 2.7 million and the unemployment rate has increased by 1.7 percent.
Durable Goods Orders and Factory Shipments
According to the U.S. Census Bureau, new orders for manufactured durable goods in November decreased $1.8 billion or 1.0 percent to $186.9 billion. This was the fourth consecutive monthly decrease and followed an 8.4 percent October decrease. Excluding transportation, new orders increased 1.2 percent. Excluding defense, new orders decreased 0.9 percent.
Transportation equipment, down three of the last four months, had the largest decrease, at 7.4 percent. This was led by nondefense aircraft and parts.
Shipments of manufactured durable goods in November, down four consecutive months, decreased $5.3 billion or 2.6 percent to $195.9 billion. This followed a 3.4 percent October decrease.
Transportation equipment, down three of the last four months, had the largest decrease, $1.7 billion or 3.5 percent to $46.4 billion.
Also according to the U.S. Census Bureau, shipments of furniture and related products fell 11.3 percent in October 2008 compared to October 2007. This report indicated the year-to-date shipments in this category have declined 5.9 percent. Orders were off 6.7 percent year-to-date.
The results for October were really no surprise based on the conversations we have had, beginning at the High Point Market. Most we had talked with at market noted that orders had really dropped off in a couple of weeks prior to market.
We had a response from last month’s Insights from one of our readers that noted that our Insights were not very “insightful.” He wanted to know how deep and how long this cycle was going to be. Obviously, I told him that if I knew that answer, I would not be sitting at my current desk.
We do not expect the results for November and December to be much different from the October results. As for going forward, it is anyone’s guess as to when things will turn around. We have got to reach bottom before we can start the turnaround.
We have now technically been in a recession for a year. Typically, the longer ones last about 18 months. The question is – is this a typical recession? We think not. There are lots of things that need to happen before consumers begin to show confidence again.
The loss of jobs has got to stop and the housing market needs to hit bottom. We hope that some of the government programs that have been started and those talked about will help to settle things down. It will be interesting to see what impact they have.
Most industry leaders we have talked with have noted that they have never seen it quite this bad among most all sectors. Yet most people do believe the U.S. is still strong overall and we will come back. In this case, we surely hope history repeats itself in that regard.