Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

New Orders

For the first month since October 2007, new orders for residential furniture were not lower than the same month a year ago. This is according to our most recent survey of residential furniture manufacturers and distributors. Admittedly, the October 2009 results compared to a 28 percent decline in October 2008 when comparing to October 2007. But at least, for one month, the bleeding appeared to stop. These results were pretty much what we had been hearing from our conversations.

October 2008 was the first month in 2008 where orders fell into the minus 20+ percent range. For October 2009, the other good news was that 41 percent of the participants reported increases in orders versus October 2008, up from 33 percent last month, and 20 percent in August.

Year-to-date, new orders were 16 percent lower than 2008 year-to-date, down from 18 percent in September and 19 percent in August. Similar to last month, 93 percent of the participants are reporting lower orders compared to the same period a year ago. 

Shipments and Backlogs 

Shipments in October were 10 percent lower than shipments in October 2008 and were off 4 percent from September. This compared to a 14 percent drop last month. Shipments in October 2008 were off 20 percent from October 2007. 

Year-to-date, shipments are off 18 percent from the same period a year ago. As with orders, 93 percent of the participants reported lower shipments than the first ten months of 2008.

Backlogs grew 5 percent from last month with orders exceeding shipments. Backlogs were up 1 percent compared to October 2008, the first time backlogs have increased over the prior year in quite some time. 

Receivables and Inventories

Receivables in October 2009 were 20 percent lower than October 2008. This was down from a 24 percent decline last month, although these levels continue to compare favorably with shipments. With so many retailers hurting financially, these results are much better than many would expect.

Inventories in October were 26 percent below October 2008, the same comparison as September to September. We hope this means that most of the excess inventories in warehouses have been moved out. Selling off discontinued and obsolete merchandise takes the place of selling goods with reasonable margins. The glut of sales of excess inventories has clearly hurt profitability among most manufacturers and distributors and likely hurt retail profitability by selling items with lower margin dollars. 

Factory and Warehouse Employees and Payrolls

The number of factory and warehouse employees was 13 percent lower than October 2008 down from a 17 percent decline last month. The number was about the same as September levels. October 2008 levels were down 15 percent from October 2007.

Payrolls were down 7 percent versus October 2008 (when they were down 24 percent from October 2007). Payrolls fell 3 percent from September and were 19 percent lower for the first ten months compared to the same period a year ago. 

National 

Consumer Confidence

The Conference Board Consumer Confidence Index®, which had increased in November, rose again in December. The Index now stands at 52.9 (1985=100), up from 50.6 in November. The Expectations Index increased to 75.6 from 70.3 last month. The Present Situation Index declined to 18.8 from 21.2 in November.

Lynn Franco, Director of The Conference Board Consumer Research Center said: “Consumer Confidence posted yet another moderate gain in December as expectations for the short-term future increased to the highest level in two years (Index 75.8, Dec. 2007). The Present Situation Index, however, continued to lose ground and remains at a 26-year low (Index 17.5, Feb. 1983). A more optimistic outlook for business and labor market conditions was the driving force behind the increase in the Expectations Index. Regarding income, however, consumers remain rather pessimistic about their short-term prospects and this will likely continue to play a key role in spending decisions in early 2010.”

Consumers’ short-term outlook improved in December. Those anticipating business conditions will improve over the next six months increased to 21.3 percent from 19.7 percent, while those expecting conditions will worsen decreased to 11.9 percent from 14.6 percent. 

Thomson Reuters/University of Michigan Surveys of Consumers

According to the Thomson Reuters/ University of Michigan Surveys of Consumers, “Confidence improved in December mainly due to widespread price discounting by merchants attempting to spark holiday sales as well as somewhat more positive expectations for economic growth and employment. More consumers cited the availability of deep price discounts on a wide range of household goods than ever before in the sixty-year history of the surveys. News reports of job gains were more common in December—22 percent reported hearing news of job gains in early December, up from just 1 percent last December. News reports of job losses, however, were still more dominant, although they have declined to 45 percent from 60 percent last December. While just one-in-five expected the economy to further worsen during the year ahead, consumers were evenly split between the expectation of continued improvement and unchanged conditions in the economy. Consumers can be accurately described as much less pessimistic than a year ago—54 percent expected unfavorable economic conditions, down from 76 percent last December—largely due to the impact of the stimulus on overall economic conditions.”

Surveys of Consumers chief economist, Richard Curtin said, “Consumers reported that the economy was slowly improving and thought that the unemployment rate would only marginally increase. While most think the worst is over; the problem is that consumers are still quite uncertain about when prospects for their own finances will improve. Even when consumers become convinced that sustained gains will be forthcoming, there will still be strong spending headwinds, including intentions to add to their savings and reserve funds and to decrease their indebtedness as well as continued restraints on the availability of credit. Overall, the data suggest consumer spending will rise by just 1.6 percent in 2010. 

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 2.2 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the “third” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent. This report was lower than the “second” estimate of 2.8 percent.

The report indicated that 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.

Real personal consumption expendi-tures increased 2.8 percent in the third quarter, in contrast to a decrease of 0.9 percent in the second. Real nonresidential fixed investment decreased 5.9 percent, compared with a decrease of 9.6 percent. Nonresidential structures decreased 18.4 percent, compared with a decrease of 17.3 percent. Equipment and software increased 1.5 percent, in contrast to a decrease of 4.9 percent. Real residential fixed investment increased 18.9 percent, in contrast to a decrease of 23.3 percent. 

Leading Economic Indicators

The Conference Board Leading Economic Index™ (LEI) for the U.S. increased 0.9 percent, The Conference Board Coincident Economic Index™ (CEI) increased 0.2 percent and The Conference Board Lagging Economic Index™ (LAG) decreased 0.4 percent in November.

For the LEI, the interest rate spread, initial unemployment claims (inverted), average weekly hours and housing permits made large positive contributions to the index this month, more than offsetting negative contributions from the index of supplier deliveries and the index of consumer expectations. The six-month growth in the index has slowed somewhat in recent months – to 4.7 percent (about a 9.6 percent annual rate) in the period through November, but it remains substantially higher than the increase of 1.2 percent (a 2.4 percent annual rate) from November 2008 to May 2009. In addition, the strengths among the leading indicators have remained widespread in recent months.

The Conference Board LEI for the U.S. now stands at 104.9 (2004=100). Based on revised data, this index increased 0.3 percent in October and increased 1.2 percent in September. During the six-month span through November, the leading economic index increased 4.7 percent, with eight out of ten components advancing. 

Housing 

Existing-Home Sales

Existing-home sales rose again in November as first-time buyers closed sales before the original November 30 deadline for the recently extended and expanded tax credit, according to the National Association of Realtors®.

Existing home sales – including single-family, townhomes, condominiums and co-ops – rose 7.4 percent to a seasonally adjusted annual rate of 6.54 million units in November from 6.09 million in October, and are 44.1 percent higher than the 4.54 million-unit pace in November 2008. Current sales remain at the highest level since February 2007 when they hit 6.55 million.

Single-family home sales jumped 8.5 percent to a seasonally adjusted annual rate of 5.77 million in November from a level of 5.32 million in October, and are 42.1 percent above the pace of 4.06 million in November 2008. The median existing single-family home price was $171,900 in November, down 4.4 percent from a year ago.

Lawrence Yun, NAR chief economist, said the rise was expected. “This clearly is a rush of first-time buyers not wanting to miss out on the tax credit, but there are many more potential buyers who can enter the market in the months ahead,” he said. “We expect a temporary sales drop while buying activity ramps up for another surge in the spring when buyers take advantage of the expanded tax credit, which hopefully will take us into a self-sustaining market in the second half of 2010. In all, 4.4 million households are expected to claim the tax credit before it expires and balance should be restored to the housing sector with inventories continuing to decline.”

An NAR practitioner survey shows first-time buyers purchased 51 percent of homes in November, compared with an upwardly revised 50 percent of transactions in October.

Total housing inventory at the end of November declined 1.3 percent to 3.52 million existing homes available for sale, which represents a 6.5-month supply at the current sales pace, down from a 7.0-month supply in October.

Regionally, existing-home sales in the Northeast rose 6.6 percent in November, and were 52.7 percent higher than November 2008. The median price in the Northeast was $223,400, down 13.1 percent from a year ago.

Existing-home sales in the Midwest increased 8.4 percent in November and were 53.5 percent above a year ago. The median price in the Midwest was $140,800, a decline of 0.4 percent from November 2008.

In the South, existing-home sales rose 4.8 percent in November and were 44.8 percent higher than a year ago. The median price in the South was $151,400, down 1.4 percent from November 2008.

Existing-home sales in the West increased 10.6 percent in November and were 28.1 percent above November 2008. The median price in the West was $231,100, which is 4.1 percent below a year ago. 

New Residential Sales

Sales of new one-family houses in November 2009 were at a seasonally adjusted annual rate of 355,000, according to estimates released jointly by the U.S. Census Bureau and the Department of Housing and Urban Development. This was 11.3 percent below the revised October rate of 400,000 and was 9.0 percent below the November 2008 estimate of 390,000.

The median sales price of new houses sold in November 2009 was $217,400; the average sales price was $280,300. The seasonally adjusted estimate of new houses for sale at the end of November was 235,000. This represents a supply of 7.9 months at the current sales rate.

The results for new home sales were very mixed with gains reported in the Midwest of 23.6 percent offset by declines of 23.7 percent in the Northeast, 14.8 percent in the South and 9.2 percent in the West. 

Housing Starts

According to the U.S. Census Bureau, privately-owned housing starts in November were at a seasonally adjusted annual rate of 574,000. This was 8.9 percent above the revised October estimate of 527,000, but was 12.4 percent below the November 2008 rate of 655,000.

Single-family housing starts in November were at a rate of 482,000; this was 2.1 percent above the revised October figure of 472,000.

Retail Sales

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 $352.1 billion, an increase of 1.3 percent from the previous month and 1.9 percent above November 2008. Total sales for the September through November 2009 period were down 2.1 percent from the same period a year ago.

Retail trade sales were up 1.4 percent from October 2009 and 2.2 percent above last year. Building material and garden equipment and supplies dealers were down 9.3 percent from November 2008, but gasoline stations sales were up 8.9 percent from last year.

Sales at furniture and home furnishings stores were reported down 0.75 percent from October and down 8 percent from November 2008 on an adjusted basis. Year-to-date, sales at these stores were down 12.1 percent compared to 12.4 percent reported last month. 

Consumer Prices

According to the U.S. Bureau of Labor Statistics, on a seasonally adjusted basis, the Consumer Price Index for all Urban Consumers (CPI-U) rose 0.4 percent in November. Over the last 12 months the index increased 1.8 percent before seasonal adjustment, the first positive 12-month change since February 2009.

The seasonally adjusted increase in the all items index was due to a 4.1 percent increase in the energy index. The index for gasoline rose sharply and the indexes for electricity, fuel oil, and natural gas also increased, creating the fourth consecutive rise in the energy index and the largest increase since August. In contrast, the index for all items less food and energy was unchanged in November, after ten consecutive monthly increases. Declines in shelter indexes offset increases in the indexes for new and used motor vehicles, medical care, airline fares, and tobacco. 

Employment

The U.S. Bureau of Labor Statistics reported that the unemployment rate edged down to 10.0 percent in November, and nonfarm payroll employment was essentially unchanged (-11,000). In the prior 3 months, payroll job losses had averaged 135,000 a month. In November, employment fell in construction, manufacturing, and information, while temporary help services and health care added jobs.

In November, the number of unemployed persons, at 15.4 million, edged down. At the start of the recession in December 2007, the number of unemployed persons was 7.5 million, and the jobless rate was 4.9 percent. 

Durable Goods Orders and Factory Shipments

According to the U.S. Census Bureau, new orders for manufactured durable goods in November increased $0.3 billion or 0.2 percent. This was the second monthly increase in the last three months. This followed a 0.6 percent October decrease. Excluding transportation, new orders increased 2.0 percent. Excluding defense, new orders decreased slightly.

Computers and electronic products, also up two of the last three months, had the largest increase, 3.7 percent.

Shipments of manufactured durable goods in November, up three consecutive months, increased $0.5 billion or 0.3 percent. This followed a 0.7 percent October increase.

Machinery, up two of the last three months, had the largest increase, $0.4 billion or 2.0 percent to $22.6 billion.

Shipments of furniture and related products were off 17.4 percent according to this report. Year-to-date, shipments in this category were off 20.3 percent. New orders in this category were off 20.4 percent year-to-date. 

Summary

We have mentioned the last few months that most of the people we have talked with seemed to feel that we may have hit bottom over the last several months. We were pleased to see that October results were at least slightly positive to the terrible results from October 2008.

October 2008 was the first month last year to start the 20+ percent declines in orders. If we had seen further declines from those numbers, there would have been more cause for concern. Yet, keep in mind that 59 percent of our participants continued to report declines, so we are not out of the woods yet. But also, timing of market orders always has an impact on October results so we will see what combined October and November results bring.

Overall though we’re hearing more positive news out of conversations than we have heard in a long time. Not that anyone is overly excited, but business does seem to be improving, if ever so slightly.

We hope that we are right in our thinking that much of the excess inventory is about gone. Not only have we lived with two years of reduced sales, but much of that has been at deep discounted selling prices, especially in case goods. Add to that, pressures to keep prices down, profitability has been hurt.

We hope we have in fact hit bottom and will begin to dig out in 2010. We do not expect major improvements over the next few months, but we believe that many companies have adjusted their business to current volume levels and hopefully stopped the bleeding. If that is the case, any decent improvement in volume should return companies to decent profitability.

We wish you all a very happy and at least improved New Year for 2010. Let’s hope this decade is a good one.  

  (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