Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

Monthly Results

New Orders

We recently completed our monthly survey of residential furniture manufacturers and distributors. As we expected, the results for April to April comparisons were quite different due to the significant difference in High Point market dates. The April 2010 market dates were April 17 through the 22nd while April 2011 dates were the 2nd through the 7th. The dates allowed more market and after market orders to be recorded in April 2011 versus April 2010.

With that in mind, April orders were 16 percent higher than April 2010. March 2011 orders were 11 percent higher than March 2010 so the increase in orders in April may not have been all market related. Approximately 73 percent of the participants reported increased orders in April, with several reporting significant double digit growth in orders.

Year-to-date, orders are now up 7 percent through April 2011. Last year at this time, new orders were up 10 percent for the first four months, so the 7 percent increase is compared to pretty good results for the same period a year ago. Some 71 percent of the participants are now reporting increases in orders for the four months, up from 51 percent reporting increased orders last month.

Shipments and Backlogs 

Shipments, generally not affected as much by markets specifically, were up 2 percent over April 2010. Just over one half the participants reported increased shipments in April, about the same as last month.

Year-to-date, shipments are up 3 percent over last year when they were up 5 percent over 2009. Approximately 56 percent of the participants have now reported increases in shipments over last year, up from 47 percent last month.

As expected, with orders higher than shipments, backlogs increased 8 percent over March and were 6 percent higher than April 2010. Backlogs were 5 percent higher than February in March 2011.

Receivables and Inventories

Receivables were up 6 percent in April compared to the 2 percent increase in shipments and the 3 percent year-to-date increase in shipments. Hopefully, this is just a timing issue so we will see how it looks next month.

Inventories were 14 percent higher in April than a year ago, when they were down 13 percent. Inventories were down 1 percent from March. March 2011 inventories were up 16 percent over March 2010. If we recall correctly, last year inventories were probably a bit low when orders started picking up, so the increase in inventories may not be that far out of line.

Factory and Warehouse Employees and Payrolls

The number of factory and warehouse employees was even with March 2011 but down 2 percent compared to April 2010. March 2011 employees were also down 2 percent from March 2010 so no significant change there.
Factory and warehouse payrolls were even with April 2010 but down 17 percent from March. March had 23 working days while April had only 20, considering most took off a day for the Easter holiday, so that would account for most of the difference.

National

Consumer Confidence

According to The Conference Board, the Consumer Confidence Index®, which had declined in May, decreased again June. The Index now stands at 58.5 (1985=100), down from 61.7 in May. The Present Situation Index decreased to 37.6 from 39.3. The Expectations Index declined to 72.4 from 76.7 last month.

Lynn Franco, Director of The Conference Board Consumer Research Center said: “This month’s decline in consumer confidence was driven by a less favorable assessment of current conditions and continued pessimism about the short-term outlook. Consumers rated both current business and labor market conditions less favorably than in May, and fewer consumers than last month foresee conditions improving over the next six months.

Inflation fears eased considerably in June, but concerns about income prospects increased. Given the combination of uneasiness about the economic outlook and future earnings, consumers are likely to continue weighing their spending decisions quite carefully.”

Consumers’ appraisal of present conditions was less favorable than in May. Those claiming business conditions are “good” remained the same at 14.3 percent, while those claiming business conditions are “bad” increased to 38.0 percent from 37.2 percent. Consumers’ assessment of the job market was also less favorable. Those stating jobs are “hard to get” increased to 43.8 percent from 43.5 percent, while those stating jobs are “plentiful” decreased to 5.2 percent from 5.7 percent.

Consumers’ short-term outlook, which had weakened in May, declined further in June. The proportion of consumers expecting business conditions to improve over the next six months declined to 16.4 percent from 17.2 percent. However, those anticipating business conditions will worsen decreased to 14.7 percent from 15.4 percent.

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 1.9 percent in the first quarter of 2011, (that is, from the fourth quarter to the first quarter), according to the “third” estimate released by the Bureau of Economic Analysis up from 1.8 percent reported in the “second” estimate. In the fourth quarter, real GDP increased 3.1 percent.

The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, and nonresidential fixed investment that were partly offset by negative contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the first quarter primarily reflected a sharp upturn in imports, a deceleration in PCE, a larger decrease in federal government spending, and a deceleration in nonresidential fixed investment that were partly offset by a sharp upturn in private inventory investment.

Leading Economic Indicators

According to The Conference Board, the Leading Economic Index® (LEI) for the U.S. rebounded in May, following a moderate decline in April. The interest rate spread, consumer expectations and building permits made large positive contributions to the index this month, more than offsetting the negative contribution from the index of supplier deliveries. The six-month change in the index has continued to moderate ― to 3.0 percent (a 6.0 percent annual rate) in the period through May 2011, down from 4.0 percent (an 8.2 percent annual rate) in February 2011. However, the strengths among the leading indicators have remained widespread in recent months.

The Conference Board Coincident Economic Index® (CEI) for the U.S., a measure of current economic activity, continued to increase in May. The index rose 1.2 percent (a 2.4 percent annual rate) between November 2010 and May 2011, faster than the growth of 0.6 percent (a 1.2 percent annual rate) for the previous six months. In addition, the strengths among the coincident indicators have remained very widespread, with all components advancing over the past six months. The lagging economic index continued to increase faster than the CEI.

The Conference Board Lagging Economic Index® (LAG) for the U.S. resumed increasing in May, after declining in April for the first time since mid-2010. However, its six-month growth rate has continued to moderate. Taken together, the current behavior of the composite indexes and their components suggest that economic activity will continue to expand at a modest pace in the near term.

Housing

Existing-Home Sales

Existing-home sales were down in May as temporary factors and financing problems weighted on the market, according to the National Association of Realtors® (NAR).

Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, fell 3.8 percent to a seasonally adjusted annual rate of 4.81 million in May from a downwardly revised 5.00 million in April, and are 15.3 percent below a 5.68 million pace in May 2010 when sales were surging to beat the deadline for the home buyer tax credit.

Single-family home sales declined 3.2 percent to a seasonally adjusted annual rate of 4.24 million in May from 4.38 million in April, and are 15.4 percent below a surge to 5.01 million one year ago. The median existing single-family home price was $166,700 in May, down 4.5 percent from May 2010.

Lawrence Yun, NAR chief economist, said temporary factors held back the market in May, as implied from prior data on contract signings. “Spiking gasoline prices along with widespread severe weather hurt house shopping in April, leading to soft figures for actual closings in May,” he said. “Current housing market activity indicates a very slow pace of broader economic activity, but recent reversals in oil prices are likely to mitigate the impact going forward. The pace of sales activity in the second half of the year is expected to be stronger than the first half, and will be much stronger than the second half of last year.”

Yun said the market also is being constrained by the lending community. “Even with recent economic softness, this is a disappointing performance with home sales being held back by overly restrictive loan underwriting standards,” he said. “There’s been a pendulum swing from very loose standards which led to the housing boom to unnecessarily restrictive practices as an overreaction to the housing correction ― this overreaction is clearly holding back the recovery.”

There were notable regional differences in home sales. “A large decline in Midwestern existing-home sales can be attributed partly to the flooding and other severe weather patterns that occurred, but this also implies a temporary nature of soft market activity,” Yun explained.

The national median existing-home price for all housing types was $166,500 in May, down 4.6 percent from May 2010. Distressed homes ― typically sold at a discount of about 20 percent ― accounted for 31 percent of sales in May, down from 37 percent in April; they were 31 percent in May 2010.

“Home prices are rising or very stable in local markets with improved employment conditions, such as in North Dakota, Alaska, Washington, D.C., and many parts of Texas,” Yun noted.Total housing inventory at the end of May fell 1.0 percent to 3.72 million existing homes available for sale, which represents a 9.3-month supply at the current sales pace, up from an 9.0-month supply in April.

Regionally, existing-home sales in the Northeast declined 2.5 percent to an annual level of 770,000 in May and were 13.5 percent below May 2010. The median price in the Northeast was $241,500, up 6.1 percent from a year ago.

Existing-home sales in the Midwest dropped 6.4 percent in May to a pace of 1.02 million and were 22.7 percent below a year ago. The median price in the Midwest was $136,400, which is 8.5 percent below May 2010.
In the South, existing-home sales fell 5.1 percent to an annual level of 1.85 million in May and were 14.4 percent below May 2010. The median price in the South was $149,200, down 3.1 percent from a year ago.

Existing-home sales in the West were unchanged at an annual pace of 1.17 million in May but were 10.0 percent lower than a year ago. The median price in the West was $192,300, which is 12.6 percent below May 2010.

New Residential Sales

Sales of new single-family houses in May 2011 were at a seasonally adjusted annual rate of 319,000, according to estimates released by the U.S. Census Bureau and the Department of Housing and Urban Development. This was 2.1 percent below the revised April rate of 326,000, but was 13.5 percent above the May 2010 estimate of 281,000.

The median sales price of new houses sold in May 2011 was $222,600; the average sales price was $266,400. The seasonally adjusted estimate of new houses for sale at the end of May was 166,000. This represents a supply of 6.2 months at the current sales rate.

Sales were mixed across the regions. May 2011 sales compared to May 2010 were down 18.5 percent in the Northeast, but were up 5 percent in the Midwest, 13.9 percent in the South and 31.7 percent in the West.

Housing Starts

According to the joint release of the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, privately-owned housing starts in May were at a seasonally adjusted annual rate of 560,000. This was 3.5 percent above the revised April estimate of 541,000, but was 3.4 percent below the May 2010 rate of 580,000. Single-family housing starts in May were at a rate of 419,000; this was 3.7 percent above the revised April figure of 404,000.

Housing starts for single units, comparing May to April 2011, were down 19.1 percent in the Northeast, but were up 12.5 percent in the Midwest, 1.9 percent in the South and 15.6 percent in the West.

Retail Sales

The U.S. Census Bureau announced that 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 $387.1 billion, a decrease of 0.2 percent from the previous month, but 7.7 percent above May 2010. Total sales for the March through May 2011 period were up 7.5 percent from the same period a year ago.

Retail trade sales were down 0.3 percent from April 2011, but 8.0 percent above last year. Gasoline stations sales were up 22.3 percent from May 2010 and nonstore retailers sales were up 15.9 percent from last year.
Sales at furniture and home furnishings stores (on an adjusted basis) were down 0.7 percent from April but were up 0.4 percent from May 2010. Year-to-date, sales at these stores were up 0.4 percent over the same period a year ago.

Consumer Prices

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in May on a seasonally adjusted basis, according to the U.S. Bureau of Labor Statistics. Over the last 12 months, the all items index increased 3.6 percent before seasonal adjustment.

The index for all items less food and energy increased 0.3 percent in May, its largest increase since July 2008. The indexes for apparel, shelter, new vehicles, and recreation all contributed to the acceleration, rising more in May than in April. These increases more than offset declines in the indexes for airline fare, tobacco, and personal care.

The food index rose in May as well. The food at home index repeated its April increase of 0.5 percent as four of the six major grocery store food group indexes increased, with the index for meats, poultry, fish, and eggs rising the most. In contrast, the energy index, which had been rising sharply, declined in May. The gasoline index decreased for the first time since last June, although the index for household energy increased.

The upward trend among the 12 month increases of major indexes continued in May. The 12 month change in the all items index, which was 1.1 percent as recently as November, reached 3.6 percent in May. The energy index has increased 21.5 percent over the last 12 months, the food index has risen 3.5 percent and the index for all items less food and energy has increased 1.5 percent. All of these figures have been rising in recent months.

Employment

Nonfarm payroll employment changed little (+54,000) in May, and the unemployment rate was essentially unchanged at 9.1 percent, according to the latest report from the U.S. Bureau of Labor Statistics. Job gains continued in professional and business services, health care, and mining. Employment levels in other major private-sector industries were little changed, and local government employment continued to decline.
The number of unemployed persons (13.9 million) was essentially unchanged in May. The labor force, at 153.7 million, was little changed over the month.

Durable Goods Orders and Factory Shipments

New orders for manufactured durable goods in May increased $3.6 billion or 1.9 percent to $195.6 billion, according to the U.S. Census Bureau. This increase, up two of the last three months, followed a 2.7 percent April decrease. Excluding transportation, new orders increased 0.6 percent. Excluding defense, new orders increased 1.9 percent.

Transportation equipment, also up two of the last three months, had the largest increase, 5.8 percent. This was due to nondefense aircraft and parts which increased $2.7 billion.

Shipments of manufactured durable goods in May, up five of the last six months, increased $0.6 billion or 0.3 percent to $194.6 billion. This followed a 1.4 percent April decrease.

This report indicated that orders for furniture and related products were up 12.6 percent for April over April 2010, with year-to-date orders up 9.5 percent. Shipments in this category were up 8.3 percent over April a year ago and up 9.1 percent for the four months ended April.

Consumer Credit

Consumer credit increased at an annual rate of 3 percent in April, according to the Federal Reserve Statistical Release. Non-revolving credit increased at an annual rate of 5¼ percent, while revolving credit decreased at an annual rate of 1.4 percent.

Summary

The results for April among most of our participants were good even considering the effects of market timing. Hopefully we will see those orders shipped in May and June as we need to turn orders to cash.
Recent conversations have been somewhat mixed regarding current business conditions. For the most part, it seems that business is not really good but not really bad either. Certainly weather has had a significant impact on furniture shopping in many areas of the country. From the winter snows to the spring time flooding and tornados, there has clearly been a negative impact on consumers, even those who would be willing to spend.

For furniture sales, we have got to get consumer confidence back. Unfortunately, it seems to be the same old story. Gas prices are high, news of the economy is bad, housing remains in a ditch and bad weather has not helped either. To add to that, we are now just starting all the political news as we deal with presidential election. Usually, this creates a substantial amount of negative news.

On the good side, gas prices seemed to be heading down, with projections of lower prices. While the employment picture is not great, it seems to have stabilized. If we can keep the stock market at least at current levels (at least for those who stayed in, most of the decline we saw in 2008 and 2009 has recovered), that will also help consumers.

We have a good ways to go until the industry is consistently improving. On a good note, we just finished our annual survey of operating statistics and overall we saw improvements in profitability. Certainly not back to historical levels or even levels that are needed, but at least the results were positive. It appears that many companies have adjusted to current volume levels which hopefully will continue to improve even with modest growth.