Furniture Forecast From BDO Seidman - April 2006

Furniture World Magazine

Monthly Forecaster New Orders. The results of our monthly survey of residential furniture manufacturers and distributors were somewhat disturbing at first glance. New orders fell 13 percent from April 2005 and were down 26 percent from March. While we had heard that business was slow in April, we had not heard that it was that bad. We believe the timing of the furniture market had a great deal to do with the reported declines. In 2005, the market dates were April 14 through the 21st. Therefore market orders and some follow-up orders would have been included in April 2005 orders. The 2006 market was April 27 to May 4. Accordingly, many of the market orders may not have been included in the reported April numbers. Almost 80 percent of the participants reported decreases in April-over-April results. Year-to-date, new orders through April were up 1 percent, but again, we believe the market orders impacted those results as the orders were up 5 percent through March. We hope we see much improved May results. Shipments and Backlogs. Shipments fell 6 percent in April versus April 2005. Again some of that decrease may have been somewhat impacted by the late market, although not to the same degree. As with orders, almost 80 percent of the participants reported a decline in shipments although not to the same extent. The April decrease in shipments brought the year-to-date shipment levels to about even with the first four months of last year. We will have to see what the results are through May to see if our market theory works. Backlogs fell to 6 percent from March levels and were 3 percent lower than last April. This was caused by the lower rate of new orders and a smaller decline in shipments. Receivables and Inventories. Receivables only fell 1 percent from last April, but that is not really out of line with year-to-date shipments, although not off as much as might be expected due to the monthly decline of shipments. Again, timing may be an issue with receivables. Inventories were up 1 percent from March levels and were basically even with last April. Last April, inventories were up 6 percent over the previous year, when shipments were up 4 percent. Inventory levels appear to have stabilized over the last few months. Factory Payrolls and Employment. Factory payrolls declined 13 percent in April compared to April 2005 and were down 16 percent from March. There is normally some decline in April versus March results, but not normally as much as this report. Year-to-date, factory payrolls are now down 7 percent compared to 5 percent for the first three months. These declines do indicate that business, exclusive of the market issues, was soft in April. The number of factory employees are down 5 percent compared to last April, but were even with March results. With payrolls down, it appears that there was some short time in April. National: The Beige Book report, which is a summary report put out by the Federal Reserve, indicated that economic activity continued to expand from mid-April to early June, but indicated that there were signs of deceleration. Activity moderated in four districts, Atlanta, Kansas City, Richmond and San Francisco and the New York district noted increased concerns about the outlook for the second half. Overall, the reports were for the most part mixed. The final report was out on the Gross Domestic Product (GDP). The report indicated that the real gross domestic increased in the first quarter at an annualized rate of 5.6 percent. This compared to a 1.7 percent increase in the fourth quarter and preliminary estimates of 5.3 percent. The first quarter increase reflected positive contributions from personal consumption expenditures, exports, equipment and software, and federal government spending. Imports, a subtraction from the GDP, increased. Leading Economic Indicators: The Conference Board report indicated that the U.S. leading index decreased 0.6 percent in May, while the coincident index increased 0.1 percent and the lagging index increased 0.2 percent. The leading index decline was the third in the last six months. The largest negative contributors were initial claims for unemployment insurance (inverted) and the index of consumer expectations. Only three of the indicators increased--manufacturers’ new orders for non-defense capital goods, manufacturers’ new orders for consumer goods and materials and interest rate spread. From November to May, the index has dropped 0.2 percent. The coincident index indicators were all positive except for industrial production. Five of the seven lagging indicators advanced led by commercial industrial loans outstanding, average prime rate charged by banks and the change in labor cost per unit of output. Consumer Confidence: The Conference Board Consumer Confidence Index, which decreased in May, increased slightly in June. The index increased to 105.7 in June up from 104.7 in May. The Present Situation Index decreased to 132.7 from 134.1. The Expectation Index increased to 87.6 from 85.1 last month. “The slight bounce-back in confidence this month was a result of the moderate improvement in consumers’ expectations,” said Lynn Franco, Director of The Conference Board Consumer Research Center. “Despite the up-tick, consumers remain concerned about the short-term outlook. Furthermore, Present Situation Index lost ground for the second consecutive month, a signal that the economy is shifting into lower gear heading into the second half of this year.” The University of Michigan’s Survey of Consumers also indicated slight improvements. The Index of Consumer Sentiment was 84.9 in June, up from 79.1 in May, but well below the 96.0 recorded in June 2005. Most of the loss from last year was attributed to consumers’ future economic prospects. The Index of Consumer Expectations rose to 72.0 in June from 68.2 in May, but still significantly below the 85.0 recorded in June 2005. The Current Economic Conditions Index rose to 105.0 in June, up from 96.1 in May. “Despite high gas prices and rising interest rates, consumer confidence improved in June,” according to Richard Curtin, the Director of the University of Michigan’s Survey of Consumers. The rebound moved consumer confidence back toward its average level during the past 50 years, although it still remains substantially below the year earlier figure. “Rather than a free-fall in confidence that has sparked recessions in the past, consumers have demonstrated a resilience based on a newfound sense of long-term economic stability,” according to Curtin. While consumers will curtail their spending in the year ahead to accommodate higher gas prices and smaller cash-outs from home refinancing, the spending cutback will be moderate. “The growth rate in overall spending will slow to about 2 ¾ percent during the year ahead,” Curtin said. Housing: Sales of existing homes slipped 1.2 percent in May compared to April to a seasonally adjusted rate of 6.67 million units and were 6.6 percent below the 7.14 million-unit level of May 2005. David Lereah, NAR’s chief economist, said conditions are mixed around the country. “There’s now a clear pattern of slower home-sales activity in many higher cost markets, which are more sensitive to rises in interest rates, and higher home sales in moderately priced areas which have experienced job growth,” he said. “Although mortgage interest rates remain historically low, the uptrend in interest rates this year is affecting those buyers who are at the margins of affordability.” The national median existing home price was $230,000 in May, up 6.0 percent from May 2005. Single-family home sales fell 1.5 percent to a seasonally adjusted annual rate of 5.82 million in May from 5.91 million in April and were also 6.6 percent below May of 2005. Sales of single-family homes increased slightly in the South and West, but fell 3.8 percent in the Midwest and 4.2 percent in the Northeast. Sales of new one-family homes rose 4.6 percent above the revised April rate reaching a seasonally adjusted annual rate of 1,234,000 according to the U.S. Census Bureau. This rate was 5.9 percent below the May 2005 rate, similar to the sales of existing homes. The median price of new homes sold in May was $235,300. Sales were up in all districts except the Northeast when they were down 7.9 percent. Privately owned housing starts were up 5 percent in May over April according to the U.S. Census Bureau. Single-family housing starts were 2.1 percent above the April level. Single-family starts in May were down 7.6 percent from last May with most of the decline in the Midwest. Employment: Non-farm employment rose by 75,000 jobs in May. The unemployment rate was 4.6 percent according to the Bureau of Labor Statistics. Employment continued to trend up in some service-providing industries and mining, while retail trade and manufacturing lost jobs. Average hourly earnings were up 1 cent in May after an increase of 10 cents in April. Retail Sales and Consumer Prices: According to advance reports from the U.S. Census Bureau, U.S. retail and food services sales for May, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, increased 0.1 percent from April and were up 7.6 percent over May 2005. Sales for the three months ended May were also up 7.6 percent over the same period a year ago. Retail trade sales were also up 0.1 percent over April and 7.5 percent ahead of last year. Gasoline stations were up 21.9 percent over last May and sales of non-store retailers were up 14.1 percent. Sales at furniture and home furnishings stores were 0.5 percent down from April on an adjusted basis, but were 7.4 percent above May 2005. Year-to-date sales at these stores were reported 9.3 percent ahead of the first five months of last year. According to the Bureau of Labor Statistics, the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in May before seasonal adjustment and was up 0.4 percent on an adjusted basis. Energy costs continued to advance--up 2.4 percent in May. Within energy, the index for petroleum-based energy increased 4.8 percent while energy services fell 0.6 percent. The index for all items, less food and energy, rose 0.3 percent in May, the same as the last two months. The index for shelter again accounted for over half the monthly increase. Durable Goods Orders and Factory Shipments: According to advance reports from the U.S. Census Bureau, new orders for manufactured durable goods decreased 0.3 percent in May. This was the second consecutive monthly decline and followed a 4.7 percent decrease in April. Excluding transportation, new orders increased 0.7 percent. Excluding defense, new orders decreased 0.1 percent. Shipments of manufactured durable goods increased 2.6 percent. Shipments have now been up three of the last four months and marked the highest level since the series changed the basis for measuring in 1992. According to the final report for April, shipments of furniture and related products fell 3.6 percent in April from March and were 4.8 percent higher than last April. Obviously, “related products” must be doing better than the “furniture” piece of this category. Year-to-date, shipments in this category were reported to be up 8 percent. Summary As we noted before, we had not expected great results from April based on recent conversations, but the reports were worse than we expected, especially for orders. But, until we get the May results that would likely include most market orders, we are not too concerned. The year-to-date comparisons after May results should give us a much better feel for what the true results are. Our latest forecast after actual March results indicates a pretty flat first half of the year, even though April was worse than the latest forecast. The second half of the year is expected to improve over last year by about 5 percent. It appears that 2006 is somewhat a reversal of the 2005 results when shipments were up 5 percent in the first half of 2005, but only up 1.5 percent in the last half. This year, the opposite appears to be happening. Retail reports continue to be spotty on the furniture side. Business just does not seem to create any momentum as it gets a little better, then falls off again. The final results of our annual operating statistics are finally in. Operating profits for all companies reporting fell from 5.26 percent of sales to 3.69 percent. Case goods companies fell about 1 percent while upholstery companies fell about 1.8 percent. Most of the decline in upholstery was attributed to higher material costs as a result of higher costs of petroleum based products caused by the hurricanes. BDO Seidman serves clients through more than 35 offices and 250 independent alliance firm locations nationwide. Their Furniture Industry Services practice publishes Furniture Insights®. For more information go to http://www.bdo.com.