Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

Monthly Results 

New Orders

The April results of our latest survey of residential furniture manufacturers and distributors were not very encouraging. But, we need to remember that the High Point Market was held from April 25 through the 30^th while in 2008, the Market was early in the month. We believe those dates most likely had a significant impact, especially on orders for the month.

New orders in April were down 27 percent from April 2008. The decline in orders was the largest since October 2008 comparing to October 2007. April orders were off 19 percent from March. For the month, 92 percent of the participants reported lower orders for April compared to April 2008 versus an 85 percent rate in March, but the decline in orders for many participants was quite severe.

Year-to-date, new orders are now off 22 percent for the first four months compared to a 26 percent drop in the last quarter of 2008. Some 93 percent of the participants reported a decline in orders for the year-to-date with 71 percent of the participants off 20 percent or more. 

Shipments and Backlogs 

Shipments in April were 21 percent lower than April 2008 and 15 percent lower than March. March shipments were 17 percent lower than March a year ago. Approximately 90 percent of the participants reported declines in shipments compared to 88 percent last month. 
 
Year-to-date, shipments are off 21 percent from the first four months of last year, the same as last month. Last year, through the first four months, shipments were down 8 percent so we have seen a significant decline over the two years.

Backlogs fell again as shipments for the month exceeded orders. Backlogs were 26 percent lower than April 2008 compared to 21 percent last month.  

Backlogs fell 5 percent from last month. As we noted last month, backlogs are at the lowest level we have seen and are really almost non-existent at many companies. 

Receivables and Inventories

Receivables fell 20 percent from April 2008, the same results as last month. The 20 percent decline is reasonably in line with the shipments decline for the month and year-to-date.

Receivables were flat with March in spite of a decline in shipments from March to April, but that result is likely just timing of collections. So far, so good, though we are hearing of some write-offs of some of the smaller accounts. The latest big one was the Hendricks group, but it was small in comparison to some of the big ones in the past.

Inventories were 12 percent lower than April 2008 levels up from 11 percent last month. April levels were 2 percent lower than March. Most companies we talk with are trying hard to reduce inventories for cash, including selling off some slow movers at discounts. 

Factory and Warehouse Employees and Payrolls

The number of factory and warehouse employees fell 3 percent from March, resulting in a 21 percent drop from April a year ago. This result was up from a 20 percent decline comparing March to March.

Factory and warehouse payrolls were down 10 percent from March and 22 percent compared to April last year. In March, payrolls were down 24 percent both from the previous year and year-to-date. The April year-to-date drop of 23 percent is in line with the decline in shipments. 
 

National 

Consumer Confidence

According to The Conference Board the Consumer Confidence Index™, which had improved considerably in May, fell back in June. The Index now stands at 49.3 (1985=100), down from 54.8 in May. The Present Situation Index decreased to 24.8 from 29.7. The Expectations Index declined to 65.5 from 71.5 in May.

 Lynn Franco, Director of The Conference Board Consumer Research Center said: “After back-to-back months of strong gains, Consumer Confidence retreated in June. The decline in the Present Situation Index, caused by a less favorable assessment of business conditions and employment, continues to imply that economic conditions, while not as weak as earlier this year, are nonetheless weak. Looking ahead, Expectations continue to suggest less negative conditions in the months ahead, as opposed to strong growth.”

Consumers’ appraisal of present-day conditions was less favorable in June. Those claiming business conditions are “good” decreased to 8.0 percent from 8.8 percent, while those saying conditions are “bad” increased to 45.6 percent from 44.5 percent. Consumers’ assessment of the labor market was also less favorable. Those stating jobs are “hard to get” increased to 44.8 percent from 43.9 percent. Those saying jobs are “plentiful” decreased to 4.5 percent from 5.8 percent.

Consumers’ short-term outlook also waned in June. Consumers anticipating an improvement in business conditions over the next six months decreased to 21.2 percent from 22.5 percent, while those expecting conditions will worsen increased to 20.2 percent from 18.0 percent in May. 

Gross Domestic Product (GDP)

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 5.5 percent in the first quarter of 2009, (that is, from the fourth quarter to the first quarter), according to final estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP decreased 6.3 percent.

The decrease in real GDP in the first quarter primarily reflected negative contributions from exports, equipment and software, private inventory investment, nonresidential structures, and residential fixed investment that were partly offset by a positive contribution from personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, decreased.

The smaller decrease in real GDP in the first quarter than in the fourth reflected an upturn in PCE and a larger decrease in imports that were partly offset by larger decreases in private inventory investment and in nonresidential structures.

Motor vehicle output subtracted 1.26 percentage points from the first-quarter change in real GDP after subtracting 2.01 percentage points from the fourth-quarter change. Final sales of computers added 0.09 percentage point to the first-quarter change in real GDP after subtracting 0.02 percentage point from the fourth-quarter change. 

Leading Economic Indicators

The Conference Board Leading Economic Index™ (LEI) for the U.S. increased 1.2 percent in May, following a 1.1 percent increase in April, and a 0.3 percent decline in March.

Ken Goldstein, Economist at The Conference Board said:  “The leading economic index increased for the second consecutive month. The coincident economic index is still declining, but the declines are less intense. The recession is losing steam. Confidence is rebuilding and financial market volatility is abating. Even the housing market appears to be stabilizing. If these trends continue, expect a slow recovery beginning before the end of the year. However, employment will take longer to turn around.”

The Conference Board Coincident Economic Index™ (CEI) for the U.S. declined 0.2 percent in May, following a 0.3 percent decline in April, and a 0.7 percent drop in March. The Conference Board Lagging Economic Index™ (LAG) declined 0.2 percent in May, following a 0.8 percent decline in April, and a 0.6 percent decrease in March. 

Housing 

Existing-Home Sales

According to the National Association of Realtors® (NAR), sales of existing homes showed another gain in May after another increase in April. This was the first back to back monthly gain since September 2005.

Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 2.4 percent to a seasonally adjusted annual rate of 4.77 million units in May from a downwardly revised level of 4.66 million units in April, but remained 3.6 percent below the 4.95 million-unit pace in May 2008.

Single-family home sales rose 1.9 percent to a seasonally adjusted annual rate of 4.25 million in May from a pace of 4.17 million in April, but are 3.0 percent below the 4.38 million-unit level in May 2008. The median existing single-family home price was $172,900 in May, down 16.1 percent from a year ago.

Lawrence Yun, NAR chief economist, said “Historically low mortgage interest rates clearly drew buyers into the Market, and housing remains very affordable even with a recent uptick in rates. First-time buyers also are being drawn off the sidelines by the $8,000 tax credit, which is helping to absorb inventory. However, the increase in sales is less than expected because poor appraisals are stalling transactions. Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan.”

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage edged up to 4.86 percent in May from a record low 4.81 percent in April; the rate was 6.04 percent in May 2008.

Total housing inventory at the end of May fell 3.5 percent to 3.80 million existing homes available for sale, which represents a 9.6-month supply at the current sales pace, down from a 10.1-month supply in April.

Yun said the appraisal problem is serious. “Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales,” he said. “In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment. There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected.”

The national median existing-home price for all housing types was $173,000 in May, down 16.8 percent from a year earlier. Distressed properties, which declined to 33 percent of all sales in May from 45 percent in April, continue to downwardly distort the median price because they generally sell at a discount relative to traditional homes.

Regionally, existing-home sales in the Northeast rose 3.9 percent in May, but were 10.1 percent below a year ago. The median price in the Northeast was $243,600, which was 12.5 percent below May 2008.

Existing-home sales in the Midwest jumped 9.0 percent in May but were 4.4 percent below May 2008. The median price in the Midwest was $145,800, which was 10.4 percent lower than a year ago.

In the South, existing-home sales were unchanged in May but were 8.9 percent below a year ago. The median price in the South was $157,400, down 9.9 percent from May 2008.

Existing-home sales in the West slipped 0.9 percent in May, but were 11.8 percent higher than May 2008. The median price in the West was $197,700, down 30.6 percent from a year ago. 

New Residential Sales

Sales of new one-family houses in May 2009 were at a seasonally adjusted annual rate of 342,000, according to estimates released by the U.S. Census Bureau and the Department of Housing and Urban Development. This was 0.6 percent below the revised April rate of 344,000 and was 32.8 percent below the May 2008 estimate of 509,000.

The median sales price of new houses sold in May 2009 was $221,600; the average sales price was $274,300. The seasonally adjusted estimate of new houses for sale at the end of May was 292,000. This represents a supply of 10.2 months at the current sales rate. 

Housing Starts

According to the U.S. Census Bureau, privately-owned housing starts in May were at a seasonally adjusted annual rate of 532,000. This was 17.2 percent above the revised April estimate of 454,000, but is 45.2 percent below the May 2008 rate of 971,000.

Single-family housing starts in May were at a rate of 401,000; this was 7.5 percent above the revised April figure of 373,000. The May rate for units in buildings with five units or more was 314,000. 

Retail Sales

Advance estimates of U.S. retail and food services sales for May, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $340.0 billion, an increase of 0.5 percent from the previous month, but 9.6 percent below May 2008, according to reports by the U.S. Census Bureau. Total sales for the March through May 2009 period were down 9.7 percent from the same period a year ago.

Retail trade sales in May were up 0.5 percent from April 2009, but 10.8 percent below last year. Gasoline stations sales were down 33.8 percent from May 2008 and motor vehicle and parts dealers sales were down 19.6 percent from last year.

Sales on an adjusted basis at furniture and home furnishings stores were off 0.5 percent from April to May. Compared to May 2008, sales at these stores were off 15 percent, about the same as the April to April comparisons.

Year-to-date, sales at these stores were off 14.8 percent according to the report. As with recent months, the only sectors off more than furniture and home furnishings stores were motor vehicle and parts dealers and gasoline stations (which were obviously affected by significantly reduced selling prices of gasoline from last year’s record prices). 

Consumer Prices

According to the Bureau of Labor Statistics, the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in May before seasonal adjustment. Over the last 12 months the index has fallen 1.3 percent. This is the largest decline since April 1950 and is due mainly to a 27.3 percent decline in the energy index.

On a seasonally adjusted basis, the CPI-U increased 0.1 percent in May after being unchanged in April. The index for energy, which had declined the previous two months, rose 0.2 percent in May as an increase in the gasoline index more than offset declines in other energy indexes. The food index decreased for the fourth consecutive month, falling 0.2 percent as the indexes for all major grocery store food groups declined.

The index for all items less food and energy rose 0.1 percent in May following a 0.3 percent increase in April. The smaller increase was partly due to the tobacco and smoking products index, which turned down in May after rising sharply in March and April. In May, the indexes for shelter, new and used motor vehicles, and medical care posted increases, while the public transportation index fell 1.0 percent and the indexes for apparel and tobacco declined slightly. The index for all items less food and energy has increased 1.8 percent over the last 12 months. 

Employment

Nonfarm payroll employment fell by 345,000 in May, about half the average monthly decline for the prior 6 months, according to the Bureau of Labor Statistics of the U.S. Department of Labor. The unemployment rate continued to rise, increasing from 8.9 to 9.4 percent. Steep job losses continued in manufacturing, while declines moderated in construction and several service-providing industries.

The number of unemployed persons increased by 787,000 to 14.5 million in May. Since the start of the recession in December 2007, the number of unemployed persons has risen by 7.0 million, and the unemployment rate has grown by 4.5 percentage points. 

Durable Goods Orders and Factory Shipments

The U.S. Census Bureau reported that new orders for manufactured durable goods in May increased $2.8 billion or 1.8 percent. This was the third increase in the last four months and followed a 1.8 percent April increase. Excluding transportation, new orders increased 1.1 percent. Excluding defense, new orders also increased 1.4 percent.

Machinery, up three of the last four months, had the largest increase, $1.6 billion or 7.7 percent.

Shipments of manufactured durable goods in May, down ten consecutive months, decreased $3.6 billion or 2.1 percent. This was the longest streak of consecutive monthly decreases since the series was first published on a NAICS basis in 1992 and followed a 0.5 percent April decrease.

Transportation equipment, down two consecutive months, had the largest decrease, $2.7 billion or 6.0 percent to $42.2 billion.

Shipments in the furniture and related products category were reported to be down 21.7 percent, similar to the results of our survey. Year-to-date, shipments in this category were down 20.1 percent. Orders in this category were off 19.5 percent compared to our results of 22 percent. 

Consumer Credit

Consumer credit was projected to be off 7.4 percent in April according to the Federal Reserve Statistical Release. This compared to a revised 7.8 percent decline in March and 5.1 percent in February. The major decline was in revolving debt which was down 11 percent in April, similar to the 11.2 percent reported for March. 

Summary

We were hoping that the March results which seemed to be showing a “decline in the declines” was a start of something better. The April results returned to more in the 20 percent plus “off” category. We do believe, especially with orders, the timing of the Market had a significant effect. Since Market ended on April 30, it is highly likely that a number of Market orders did not get posted until May. Plus, many retailers do not make their final decisions until they get home, so those orders would also not be reflected. Last year, the April Market ended in mid April, so we will have to see if May results reflect some of the timing differences.

Overall, the economy in general, while still suffering, appears to be nearing bottom in most cases and actually showing some life in others. Reading the Beige Book report from the Federal Reserve, the comments are mostly negative, but there were reports of “stabilizing” or some upticks in certain districts.

As for furniture, there are some signs of life, but for everyone I talk to that has had a good week, the next one I talk to is in the dumps. I spoke with a President of a major mid-western retailer last week. I asked him if he found some silver bullets, would he send me some. He replied that he would take even a “heavily tarnished” bullet or two.

We think he is probably right for the near term. We are looking at baby step improvements over the next several months, if not longer. As with historical results, we don’t seem to come back by leaps and bounds. So as much as we don’t like it, we need to be prepared to enjoy any improvement we can find. And just so you know, there are a few that are starting to surface here and there. Unfortunately, this is historically not the best selling season for furniture, but as fast as this year seems to be flying by, it won’t be long until we get to the historically better selling seasons.

We have just completed our annual operating statistics for residential manufacturers and distributors. The picture for profits or lack thereof was pretty dismal for 2008 and we suspect, the first few months of 2009 are not significantly better, as proven by many of the first quarter reports from the public companies. This is clearly a time where there is much truth to the saying “only the strong survive.”

We do believe it will get better and we also believe that many companies have adjusted to current conditions. Business just fell off so fast in the second half of last year, that adjustments just could not be made fast enough. Plus a lot of what was selling was sold at little or no profit. Hopefully, managements have been able to at least adjust their operations to current levels so that they can stop the bleeding until the times do get better.
 

(R) Revised 
 

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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