Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

Monthly Results 

New Orders

According to our most recent survey of residential furniture manufacturers and distributors, new orders in August 2009 were 12 percent lower than August 2008 levels. New orders were 7 percent higher than July 2009 orders. The August to August decline was the lowest decline since September 2008. Approximately 80 percent of the participants reported lower orders, up from 73 percent last month, but the severity of the decline was not as bad for many of the participants.

Year-to-date, new orders are down 19 percent from the first eight months of 2008, down from 20 percent last month. Year-to-date, 90 percent of the participants have reported lower orders when compared to last year. 

Shipments and Backlogs 

Shipments for August declined 18 percent from August 2008 but were 15 percent higher than July. The increase over July is normal considering, for most, July was a three week month due to the vacation week. Approximately 90 percent of the participants reported lower shipments in August.

Year-to-date, shipments remained 20 percent lower than the first 8 months of 2008. Approximately 93 percent of the participants reported lower shipments.

Backlogs increased 1 percent over July as orders exceeded shipments for the month. Backlogs were 7 percent lower than last August, down from a 13 percent decline reported in July. 

Receivables and Inventories

Receivables were 23 percent lower than August of 2008 compared to a 25 percent decline reported in July. Receivables increased 7 percent over July 2009, but that was less than the increase in shipments, so those results looked good for the month.

Inventories were 24 percent lower than August 2008 up from a 22 percent decline last month. Overall, inventories appear to also be in pretty good shape.  

Factory and Warehouse Employees and Payrolls

The number of factory and warehouse employees increased 1 percent over July but were still 17 percent lower than August 2008. Factory payrolls increased 16 percent over July, again a normal increase due to the vacation week.

Year-to-date, payrolls were 21 percent lower than the first 8 months of 2008, down from a 22 percent decline reported last month. 

National 

Consumer Confidence

The Conference Board Consumer Confidence Index®, which had declined in September, deteriorated further in October. The Index now stands at 47.7 (1985=100), down from 53.4 in September. The Present Situation Index decreased to 20.7 from 23.0 last month. The Expectations Index declined to 65.7 from 73.7 in September.

Lynn Franco, Director of The Conference Board Consumer Research Center said: “Consumers’ assessment of present-day conditions has grown less favorable, with labor market conditions playing a major role in this grimmer assessment. In fact, the Present Situation Index is now at its lowest reading in 26 years (Index 17.5, Feb. 1983). The short-term outlook has also grown more negative, as a greater proportion of consumers anticipate business and labor market conditions will worsen in the months ahead. Consumers also remain quite pessimistic about their future earnings, a sentiment that will likely constrain spending during the holidays.”

Consumers’ assessment of current conditions worsened in October. Those claiming business conditions are “bad” increased to 47.1 percent from 46.3 percent, while those claiming conditions are “good” decreased to 7.7 percent from 8.6 percent. Consumers’ appraisal of the labor market was also bleaker. Those claiming jobs are “hard to get” increased to 49.6 percent from 47.0 percent, while those claiming jobs are “plentiful” decreased to 3.4 percent from 3.6 percent.

Consumers’ short-term outlook grew more pessimistic in October. Those anticipating an improvement in business conditions over the next six months decreased to 20.8 percent from 21.3 percent, while those expecting conditions to worsen increased to 18.3 percent from 14.6 percent. 

Reuters/University of Michigan Surveys of Consumers

The report from Reuters/University of Michigan Surveys of Consumers was more positive, though still lower than last month. According to the report, consumer confidence has improved substantially from the lows recorded in late 2008, and consumers expect the economy to continue to recover during the year ahead. “The ongoing economic recovery will be unlike any other due to changes in consumer spending preferences,” according to Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers. The report noted that typical recoveries are driven by resurgent spending on homes, vehicles, and other large purchases. In the past, these spending preferences were unleashed as soon as the recovery began. Consumers now put debt reduction and increased savings at the top of their agendas rather than the quick resumption of postponed spending plans. “These changed preferences are due to the extent of the financial reversals suffered by consumers, which spanned every aspect of their economic lives, as well as the widespread recognition among consumers that it will take years for them to fully recover,” Curtin said. Curtin estimated the growth of total personal consumption expenditures at just 1.6 percent during 2010, well below the typical rebound in consumer spending during the first year following a recession.

The Index of Consumer Sentiment was 70.6 in the October 2009 survey, just below the 73.5 in September, but substantially above the 57.6 recorded last October. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, was 68.6 in October, down from 73.5 in September but significantly above the 57.0 recorded last October. The Current Economic Conditions Index rose to 73.7 in October, just ahead of the 73.4 in September and well above the 58.4 recorded last October.

The majority of consumers reported that their finances had worsened in October for the thirteenth consecutive month—the longest and deepest decline in the sixty-year history of the surveys. The fewest consumers ever recorded cited income gains in the October survey—just 12 percent, about one-third the level that reported income declines (32 percent). Moreover, for the first time in sixty years, the majority of families expected their incomes to remain unchanged or to decline during the year ahead—and that record was repeated in every monthly survey conducted during 2009. 

Gross Domestic Product (GDP)

Real gross domestic product – the output of goods and services produced by labor and property located in the United States – increased at an annual rate of 3.5 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent.

The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

Motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change. Final sales of computers subtracted 0.11 percentage point from the third-quarter change in real GDP after subtracting 0.04 percentage point from the second-quarter change. 

Leading Economic Indicators

The Conference Board Leading Economic Index™ (LEI) for the U.S. increased 1.0 percent in September, following a 0.4 percent gain in August, and a 1.0 percent rise in July.

“With the sixth consecutive increase, the LEI’s six-month growth rate has improved to its highest pace since 1983,” says Ataman Ozyildirim, Economist at The Conference Board. “Except for average workweek and building permits, all the leading indicators contributed positively to the index this month. At the same time, the contraction in the coincident economic index has halted in recent months, but the continued downtrend in employment is keeping this index of current economic conditions from rising faster.”

Ken Goldstein, Economist at The Conference Board said:  “The LEI has risen for six consecutive months and the coincident economic index has increased in two of the last three months. These numbers strongly suggest that a recovery is developing. However, the intensity of that recovery will depend on how much, and how soon, demand picks up.”

The Conference Board Coincident Economic Indes™ (CEI) for the U.S. was unchanged in September, following a 0.1 percent increase in both August and July. The Conference Board Lagging Economic Index™ (LAG) declined 0.3 percent in September, following a 0.2 percent decline in August, and a 0.6 percent decline in July. 

Housing 

Existing-Home Sales

Existing-home sales bounced back strongly in September with first-time buyers driving much of the activity, marking five gains in the past six months, according to the National Association of Realtors®.

Lawrence Yun, NAR chief economist, said favorable conditions matched with a tax credit are boosting home sales. “Much of the momentum is from people responding to the first-time buyer tax credit, which is freeing many sellers to make a trade and buy another home,” he said. “We are hopeful the tax credit will be extended and possibly expanded to more buyers, at least through the middle of next year, because the rising sales momentum needs to continue for a few additional quarters until we reach a point of a self-sustaining recovery.”

Even with the improvement, Yun said the market is underperforming. “Despite spectacular gains in the stock market, principally from the financial sector recovery, most of the 75 million home owning families have more wealth tied to their homes. Home values could soon turn consistently positive and help the broad base of middle-class families, but we are not there yet,” he said. “We’re getting early indications of price stabilization, but we need a steady supply of qualified buyers to meaningfully bring inventories down and return us to a period of normal, steady price growth and to fully remove consumer fears, which would then revive the broader economy. Without a firm foundation for middle-class wealth recovery, the post-recession economic growth likely will be one of the weakest in U.S. history.”

Single-family home sales rose 9.4 percent to a seasonally adjusted annual rate of 4.89 million in September from a pace of 4.47 million in August, and are 7.7 percent above the 4.54 million-unit level in September 2008. The median existing single-family home price was $174,900 in September, which is 8.1 percent below a year ago.

Existing-home sales including single-family, townhomes, condominiums and co-ops – jumped 9.4 percent to a seasonally adjusted annual rate of 5.57 million units in September from a level of 5.10 million in August, and are 9.2 percent higher than the 5.10 million-unit pace in September 2008. Sales activity is at the highest level in over two years, since it hit 5.73 million in July 2007.

Regionally, existing-home sales in the Northeast increased 4.4 percent in September, and are 11.8 percent higher than September 2008. The median price in the Northeast was $234,700, down 7.0 percent from a year ago.

Existing-home sales in the Midwest jumped 9.6 percent in September and are 7.8 percent above a year ago. The median price in the Midwest was $147,600, which is 1.0 percent below September 2008.

In the South, existing-home sales rose 9.0 percent in September and are 10.8 percent higher than September 2008. The median price in the South was $153,500, down 7.6 percent from a year ago.

Existing-home sales in the West surged 13.0 percent in September and are 5.7 percent above a year ago. The median price in the West was $219,000, which is 15.0 percent below September 2008. 

New Residential Sales

Sales of new one-family houses in September 2009 were at a seasonally adjusted annual rate of 402,000, according to estimates released jointly by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 3.6 percent below the revised August rate of 417,000 and is 7.8 percent below the September 2008 estimate of 436,000.

Sales of new houses were up in the Northeast and Midwest, but fell in the South and were only slightly down in the West.

The median sales price of new houses sold in September 2009 was $204,800; the average sales price was $282,600. The seasonally adjusted estimate of new houses for sale at the end of September was 251,000. This represents a supply of 7.5 months at the current sales rate. 

Housing Starts

According to the U.S. Census Bureau, privately-owned housing starts in September were at a seasonally adjusted annual rate of 590,000. This is 0.5 percent above the revised August estimate of 587,000, but is 28.2 percent below the September 2008 rate of 822,000. Single-family housing starts in September were at a rate of 501,000; this is 3.9 percent above the revised August figure of 482,000. 

Retail Sales

The U.S. Census Bureau announced 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 $344.7 billion, a decrease of 1.5 percent from the previous month and 5.7 percent below September 2008. Total sales for the July through September 2009 period were down 6.6 percent from the same period a year ago.

Retail trade sales were down 1.7 percent from August 2009 and 6.4 percent below last year. Gasoline stations sales were down 25.3 percent from September 2008 and building material and garden equipment and supplies dealers were down 13.0 percent from last year.

Sales at furniture and home furnishings stores were down 6.5 percent in September versus September a year ago on an adjusted basis. For the nine months ended September, sales were down 12.7 percent in these stores.

Consumer Prices

On a seasonally adjusted basis, the Consumer Price Index for all Urban Consumers (CPI-U) rose 0.2 percent in September, according to the Bureau of Labor Statistics. The increase was less than the 0.4 percent rise in August.

The seasonally adjusted increase in the all items index was broad based, although tempered by a decline in the food index. The all items less food and energy index increased 0.2 percent in September after increasing 0.1 percent in each of the previous two months. Contributing to this increase were advances in the indexes for lodging away from home, medical care, new vehicles, used cars and trucks, and public transportation. The energy index also increased in September, as increases in the indexes for gasoline, fuel oil and electricity more than offset a decline in the index for natural gas.

In contrast to these increases, the food index declined, falling for the sixth time in the last eight months. The index for food away from home increased, but the food at home index declined as the indexes for fruits and vegetables and for meats, poultry, fish and eggs fell sharply. Both the food and energy indexes have declined over the past 12 months. The decline in the food index is the first 12-month decrease in that index in over 40 years. 

Employment

Nonfarm payroll employment continued to decline in September (-263,000), and the unemployment rate continued to trend up, according to the U.S. Bureau of Labor Statistics. The largest job losses were in construction, manufacturing, retail trade, and government.

Since the start of the recession in December 2007, the number of unemployed persons has increased by 7.6 million to 15.1 million, and the unemployment rate has doubled to 9.8 percent. 

Durable Goods Orders and Factory Shipments

New orders for manufactured durable goods in September increased $1.6 billion or 1.0 percent to $165.7 billion, the U.S. Census Bureau announced. This was the second increase in the last three months. This followed a 2.6 percent August decrease. Excluding transportation, new orders increased 0.9 percent. Excluding defense, new orders increased 0.5 percent. 

Machinery, up five of the last six months, had the largest increase, $1.7 billion or 7.9 percent to $23.4 billion.

Shipments of manufactured durable goods in September, up three of the last four months, increased $1.3 billion or 0.8 percent to $172.6 billion. This followed a 1.4 percent August decrease.

Transportation equipment, also up three of the last four months, had the largest increase, $2.4 billion or 5.6 percent to $44.9 billion. This was led by nondefense aircraft and parts, which increased $1.4 billion.

According to the U.S. Census Bureau, shipments of furniture and related products fell 20 percent in August (similar to our results) and are down 20.5 percent for the year. Orders were off 24 percent in August versus August 2008 and are off 21.4 percent year-to-date. 

Consumer Credit

Total consumer debt fell 5.8 percent (annualized rate) in August based on projections from the Federal Reserve Statistical Release. This followed a 9.1 percent decrease in July and 7.4 percent in June. Consumer debt has been decreasing since the fourth quarter of 2008. Most of the declines have been in revolving debt with the drop from $975.2 billion in the third quarter of 2008 to a projected $899.4 billion in August 2009.

Summary

The results for August, while not great, at least began to move in a better direction. We spent about 5 plus days at the recent High Point Market and noted several interesting things.

Overall, most of the people we talked with felt that business has leveled off over the last four to six months. The feeling is that we may finally have hit bottom. Most did not feel that we have started to improve significantly, but the feeling was that business was not getting much worse.

Many we talked with have adjusted their business to current conditions and feel that, as long as it doesn’t get much worse, they will be able to bump along.

Overall, the mood of market seemed better than the last two markets. As we have noted before, the “mood” of market seems to always feel better than the “business” at market since it is great for retailers and manufacturers/distributors to get together and renew friendships, see friends, make new ones, see great new product, etc.

With that said, the “business mood” did feel better this market, falling on the heels of what many described as a really good premarket. Many of the retailers and buyers noted that their inventories were getting too low and their stores needed a freshening of their looks, so the mood to buy seemed better than the last couple of markets.

One concern we have is the whole credit issue. We did not hear very many pleasant conversations about banking relations or ability to get new financing. This leads to the concern that many retailers (as well as manufacturers/ distributors) have survived by turning inventory to cash. If business does not turn around, sooner or later you run out of inventory to sell. If business gets better, getting credit to buy inventory may be tough.

But all in all, we think most were pleased with the market and several noticed some recent upticks in business. While none believed there was yet a trend, there were signs that we may be seeing some improvement. We clearly need some improvement in consumer confidence before we expect much improved activity. Somehow all the news from Washington is not doing much to help that issue. But let’s leave it on a high note about a relatively good market. Washington politics is way too negative to get into.

We saw lots of great product at market and had many comments that the buyers liked what they saw. Let’s hope all of that turns into orders and the product sells through at the retail level. 

  (R) Revised