Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

Furniture Insights 
Monthly Results 

New Orders

According to our most recent survey of residential furniture manufacturers and distributors, new orders in September 2009 fell 10 percent from September 2008, the lowest decline since May 2008 when orders were off 6 percent. Last year, September 2008 orders were off 12 percent from September 2007. New orders were 17 percent higher than August orders, but it is usual for orders to be higher in September compared to August.

The results for September were significantly different among the participants with some participants reporting significant increases while others reported very significant declines. On the good news side, approximately 1/3 of our participants reported an increase in orders over last September, compared to 20 percent reporting increases last month.

Year-to-date, new orders are now down 18 percent compared to the first three quarters of last year down from 19 percent last month and 20 percent in July. Approximately 93 percent of our participants have reported lower year-to-date orders compared to last year, similar to last month. 

Shipments and Backlogs 

Shipments in September 2009 were 14 percent lower than September 2008 when they were 14 percent lower than September 2007. Shipments were 9 percent higher than August shipments. The results for shipments were not as widespread as with orders. Approximately 90 percent of the participants reported lower shipment levels, the same as last month.

Year-to-date, shipments are down 19 percent from last year down from a 20 percent decline reported last month. As with August results, some 93 percent of the participants reported lower shipments year-to-date. 
 
Backlogs were 7 percent lower than September of 2008 but were 9 percent higher than August as orders exceeded shipments by a healthy margin. The decline of the September 2009 versus 2008 compares to a 15 percent decline when comparing 2008 to 2007 September results. 

Receivables and Inventories

Receivables levels fell 24 percent in September versus September 2008 and were up 4 percent over August. Receivables levels continue to compare favorably with shipment levels and in most cases are in reasonably good shape when talking with various manufacturers and distributors. In August, receivables were 23 percent lower than August 2008.

Inventories fell another 2 percent from August levels and are now 26 percent lower than September 2008. We would expect inventory levels to fall more than shipments due to more direct shipments, but we also believe that most manufacturers and distributors have done a very good job of trimming inventory levels to create cash and reduce borrowing needs. 

Factory and Warehouse Employees and Payrolls

The number of factory and warehouse employees increased 1 percent in September compared to August 2009 levels. Compared to September 2008, the numbers were down 17 percent ― the same as the August comparison. The number of factory and warehouse employees were down 13 percent last year comparing September 2008 to September 2007.

Factory and warehouse payrolls were down 12 percent compared to September 2008 but were up 10 percent over August. Year-to-date, payrolls were off 20 percent compared to 21 percent last month. 

National 

Consumer Confidence

The Conference Board Consumer Confidence Index®, which had declined in October, increased slightly in November. The Index now stands at 49.5 (1985=100), up from 48.7 in October. The Present Situation Index was virtually unchanged at 21.0 versus 21.1 last month. The Expectations Index increased to 68.5 from 67.0 in October.

Lynn Franco, Director of The Conference Board Consumer Research Center said: “Consumer Confidence posted a slight gain in November. The Present Situation Index, however, was virtually unchanged and remains at levels not seen in 26 years (Index 17.5, Feb. 1983). The moderate improvement in the short-term outlook was the result of a decrease in the percent of consumers expecting business and labor market conditions to worsen, as opposed to an increase in the percent of consumers expecting conditions to improve. Income expectations remain very pessimistic and consumers are entering the holiday season in a very frugal mood.”

Consumers’ appraisal of present-day conditions was virtually unchanged in November. Those claiming business conditions are “bad” decreased to 45.7 percent from 46.7 percent, while those claiming conditions are “good” increased to 8.1 percent from 7.8 percent. Consumers’ assessment of the labor market deteriorated moderately.

Consumers’ short-term outlook improved slightly in November. The percentage of consumers expecting an improvement in business conditions over the next six months decreased slightly to 20.0 percent from 20.8 percent, but those expecting conditions to worsen decreased to 15.1 percent from 18.2 percent. 

Ruters/University of Michigan Surveys of Consumers

There was somewhat different news from the Reuters/University of Michigan Surveys of Consumers. Their report indicated that consumer confidence suffered a small setback in November as consumers reported continued reversals in their personal financial situation. “The grim financial realities faced by consumers rose to the worst levels ever recorded in more than sixty year history of the survey,” according to Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers. According to the report, consumers’ assessments of their finances have been the grimmest since 1946, and have remained at those record low levels for most of the past two years. As each month passes, the capacity of families to withstand the cumulative losses has pushed more and more households into financial hardship. “Consumers cite their deteriorating finances as well as their uncertainty about future job and income prospects more than ever before, and this has made them very cautious spenders,” Curtin noted. Nonetheless, the 22 percent gain in the Sentiment Index from last year’s low points toward growth rather than declines in consumer spending in the year ahead. Inflation-adjusted total consumer spending, however, is expected to advance by a scant 1.5 percent in 2010.

The Index of Consumer Sentiment was 67.4 in the November 2009 survey, down from 70.6 in October and 73.5 in September, but substantially above the 55.3 recorded last November (the cyclical lowpoint). The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, was 66.5 in November, down from 68.6 in October and 73.5 in September, but significantly above last November’s 53.9. The Current Economic Conditions Index was 68.8 in November, down from 73.7 in October and 73.4 in September, but above the 57.5 recorded last November.

When asked to explain in their own words how their finances had changed, the smallest proportion in the sixty-year history of the survey reported income gains—just 9 percent—and the largest proportion voluntarily cited income declines—38 percent. Income losses were described in connection with everything from job losses and shorter work hours to the loss of bonuses and even wage give-backs. “Even more distressing, the fewest consumers anticipated income gains and the gains expected were the smallest ever recorded,” Curtin said.

While there is widespread agreement among consumers that the worst of the downturn is over, there is no agreement on when the economy will be strong enough to significantly lower the unemployment rate. The report indicated that consumers no longer expect steep increases during the year ahead, as the data indicate that consumers believe the unemployment rate will peak at 10.7 percent by mid 2010. “The problem is that consumers do not expect the unemployment rate to fall below 10 percent throughout the year ahead,” Curtin added.

Uncertainty about job and income prospects caused a partial reversal in buying plans. When asked about purchases of large durables, like furniture, appliances, and home electronics, 39 percent mentioned that income uncertainty had caused them to postpone any purchases. Robust gains in employment are required for more robust gains in consumer spending, which will wait until at least 2011. “It is hard to imagine how the Obama administration will resist, during an election year, a new federal stimulus plan focused on relieving the economic stress caused by rising unemployment and lackluster income gains to avoid a potential relapse in consumer spending in mid to late 2010,” according to Curtin. 

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 – increased at an annual rate of 2.8 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the “second” 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 that were partly offset by a negative contribution from nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

Motor vehicle output added 1.45 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 0.13 percentage point from the third-quarter change in real GDP after subtracting 0.04 percentage point from the second-quarter change. Real personal consumption expenditures increased 2.9 percent in the third quarter, in contrast to a decrease of 0.9 percent in the second. 

Leading Economic Indicators

The Conference Board Leading Economic Index™ (LEI) for the U.S. increased 0.3 percent in October, following a 1.0 percent gain in September, and a 0.4 percent rise in August.

Ataman Ozyildirim, Economist at The Conference Board said: “After half a year of consecutive increases, the month-to-month growth of the LEI is stabilizing and the gains continue to be broad-based. Meanwhile, the coincident economic index has been essentially flat since June, after declining since November 2007. The composite indexes suggest the recovery is unfolding and economic activity should continue improving in the near term.”

Ken Goldstein, Economist at The Conference Board said:  “The data indicate that economic recovery is finally setting in. We can expect slow growth through the first half of 2010. The pace of growth, however, will depend critically on how much demand picks up, and how soon.”

The Conference Board Coincident Economic Index™ (CEI) for the U.S. was unchanged in October, following a 0.1 percent decline in September, and a 0.1 percent increase in August. The Conference Board Lagging Economic Index™ (LAG) declined 0.2 percent in October, following a 0.5 percent decline in September, and a 0.4 percent decline in August.

Housing 

Existing-Home Sales

Driven by the first-time buyer tax credit, existing-home sales showed another big gain in October with a strong uptrend established over the past seven months, while inventories continue to decline, according to the National Association of Realtors® (NAR).

The NAR report indicated that existing-home sales including single-family, townhomes, condominiums and co-ops — surged 10.1 percent to a seasonally adjusted annual rate of 6.10 million units in October from a downwardly revised pace of 5.54 million in September, and are 23.5 percent above the 4.94 million-unit level in October 2008. Sales activity is at the highest pace since February 2007 when it hit 6.55 million.

Single-family home sales rose 9.7 percent to a seasonally adjusted annual rate of 5.33 million in October from a pace of 4.86 million in September, and are 21.4 percent above the 4.39 million-unit pace in October 2008. The median existing single-family home price was $173,100 in October, down 6.8 percent from a year ago.

Lawrence Yun, NAR chief economist, said: “Many buyers have been rushing to beat the deadline for the first-time buyer tax credit that was scheduled to expire at the end of this month, and similarly robust sales may be occurring in November. With such a sales spike a measurable decline should be anticipated in December and early next year before another surge in spring and early summer.”

Now that the tax credit has been extended and expanded, potential buyers have until April 30 to have a contract in place. “There is still a large pent-up demand that can be tapped before the tax credit expires. Our recent consumer survey further shows that 13 percent of successful first-time buyers had a previous contract that was cancelled or fell through ― there likely are many more buyers who were attempting to purchase but simply ran out of time,” Yun said.

NAR President Vicki Cox Golder, owner of Vickie L. Cox & Associates in Tucson, Ariz., said strong demand by first-time buyers is creating some unusual conditions. “In parts of the country, especially in Southwestern states but also in Florida and suburban Washington, D.C., we’ve been getting many reports of multiple bids in the lower price ranges with foreclosed properties getting absorbed quickly,” she said.

Total housing inventory at the end of October fell 3.7 percent to 3.57 million existing homes available for sale, which represents a 7.0-month supply at the current sales pace, down from an 8.0-month supply in September. Unsold inventory totals are 14.9 percent below a year ago.

The national median existing-home price for all housing types was $173,100 in October, down 7.1 percent from October 2008. Distressed properties, which accounted for 30 percent of sales in October, continue to downwardly distort the median price because they usually sell at a discount relative to traditional homes in the same area.

Regionally, existing-home sales in the Northeast rose 11.6 percent in October, and are 27.7 percent higher than October 2008. The median price in the Northeast was $235,400, down 2.6 percent from a year ago.

Existing-home sales in the Midwest surged 14.4 percent in October and are 28.8 percent above a year ago. The median price in the Midwest was $146,600, a gain of 1.1 percent from October 2008.

In the South, existing-home sales rose 12.7 percent in October and are 25.7 percent higher than October 2008. The median price in the South was $151,100, down 6.3 percent from a year ago.

Existing-home sales in the West increased 1.6 percent in October and are 12.0 percent above a year ago. The median price in the West was $220,200, which is 14.7 percent below October 2008. 

New Residential Sales

Sales of new one-family houses in October 2009 were at a seasonally adjusted annual rate of 430,000, according to estimates released by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 6.2 percent above the revised September rate of 405,000 and is 5.1 percent above the October 2008 estimate of 409,000.

The increase in sales compared to last year was 5.7 percent in the Northeast, 8.4 percent in the South and 8.1 percent in the West. There was a decrease in sales of 11.1 percent in the Midwest.  Over three fourths of the sales were in the under $300,000 range with slightly over one-half of those under $200,000.

The median sales price of new houses sold in October 2009 was $212,200; the average sales price was $261,100. The seasonally adjusted estimate of new houses for sale at the end of October was 239,000. This represents a supply of 6.7 months at the current sales rate. 

Housing Starts

The report from the U.S. Census Bureau indicated that privately-owned housing starts in October were at a seasonally adjusted annual rate of 529,000. This was 10.6 percent below the revised September estimate of 592,000, but was 30.7 percent below the October 2008 rate of 763,000. Single-family housing starts in October were at a rate of 476,000; this was 6.8 percent below the revised September figure of 511,000.  

Retail Sales

The U.S. Census Bureau reported that advance estimates of U.S. retail and food services sales for October, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $347.5 billion, an increase of 1.4 percent from the previous month, but 1.7 percent below October 2008. Total sales for the August through October 2009 period were up 1.5 percent from the same period a year ago.

Retail trade sales were up 1.4 percent from September 2009, but 2.1 percent below last year. Gasoline stations sales were down 15.0 percent from October 2008 and building material and garden equipment and supplies dealers were down 15.0 percent from last year.

Sales at furniture and home furnishings stores, on an adjusted basis, were down 7.6 percent from last October but only down 0.8 percent from September (the decline from September to October last year was 0.3 percent).

Year-to-date, sales at these stores are off 12.4 percent from the same period a year ago, according to the report. 

Consumer Prices

On a seasonally adjusted basis, the Consumer Price Index for all Urban Consumers (CPI-U) rose 0.3 percent in October, according to the U.S. Bureau of Labor Statistics. The index has decreased 0.2 percent over the last 12 months on a not seasonally adjusted basis.

The seasonally adjusted all items increase largely reflected advances in the indexes for energy and for new and used motor vehicles. The energy index rose for the fifth time in the last six months, advancing 1.5 percent as the indexes for gasoline, fuel oil, natural gas, and electricity all increased. The index for all items less food and energy rose 0.2 percent in October, the same increase as in September. The indexes for used cars and trucks and for new vehicles both rose sharply and together they accounted for over 90 percent of the increase in the index for all items less food and energy.  

Employment

The Bureau of Labor Statistics reported that the unemployment rate rose from 9.8 to 10.2 percent in October, and nonfarm payroll employment continued to decline (-190,000). The largest job losses over the month were in construction, manufacturing, and retail trade.

In October, the number of unemployed persons increased by 558,000 to 15.7 million. The unemployment rate at 10.2 percent was the highest rate since April 1983. Since the start of the recession in December 2007, the number of unemployed persons has risen by 8.2 million, and the unemployment rate has grown by 5.3 percentage points. 

Durable Goods Orders and Factory Shipments

New orders for manufactured durable goods in October decreased 0.6 percent, according to the latest report from the U.S. Census Bureau. This was the second monthly decrease in the last three months. This followed a 2.0 percent September increase. Excluding transportation, new orders decreased 1.3 percent. Excluding defense, new orders increased 0.4 percent. Machinery, down following two consecutive monthly increases, had the largest decrease, $1.9 billion or 8.0 percent.

Shipments of manufactured durable goods in October, down two of the last three months, decreased $0.3 billion or 0.2 percent to $173.8 billion. This followed a 1.6 percent September increase.

Transportation equipment, also down two of the last three months, had the largest decrease, $1.9 billion or 4.2 percent. This was led by defense aircraft and parts, which decreased $1.0 billion.

The final report for September 2009 indicated the shipments of furniture and related products fell 20.6 percent from September 2008. Year-to-date, shipments in this category were down 20.6 percent.

Orders in September in this category were off 20.1 percent compared to September 2008. Orders in this category were off 21.3 percent year-to-date. 

Consumer Credit

Consumer credit was down 7.2 percent in advance estimates of September as a percent change at an annual rate. The largest decline (13.3 percent) was in revolving debt versus a 3.7 percent decline in non-revolving.  

Summary

The results for September, while still not positive, did show some softening of the decline. October 2008 was the month when orders and shipments fell off the charts. That was when the 20 plus percent declines were first reported.

It will be interesting to see the October comparisons. While most felt that the High Point Market was good, the Market was somewhat late in the month so those that wait to get home to make decisions may not get orders in by the end of the month.

We are starting to have some more pleasant conversations with manufacturers and distributors. While the news out of Washington continues to keep consumers concerned, it does appear that things are loosening up a bit. Initial reports from “Black Friday” sales appear to be very positive versus expectations.

The housing results continue to improve — aided by the stimulus money or not. Of course, the media and naysayers continue to report that we are headed for another drop. We hope though that the improvements in housing results will create some more need for furniture.

As we noted earlier, the orders results of our survey were all over the place. In looking at the details of that 1/3 of the participants reporting increases, there was no particular pattern that we could see. Some were lower end and some were higher end. Some were upholstery and some were case goods. The good news is that September was the first month in quite some time that we had that high a percentage reporting increased orders. 

Let’s hope that September was the start to an upward trend. We hope that all of you had a great Thanksgiving and that the holiday weekend was a good one. 

  (R) Revised