Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

Furniture World Magazine

Monthly Results New Orders According to our most recent survey of residential furniture manufacturers and distributors, new orders rose 2 percent in October 2007 compared to October 2006. These orders were 3 percent higher than September 2007 orders. October 2006 orders were 2 percent lower than October 2005. October was the first time since July 2007 that more participants reported increased orders than those with decreases. Some 57 percent of the participants reported increased orders in October. Some of this result could be timing of market orders so we will have to see if Novembers’ results hold. Year-to-date, new orders remained 4 percent lower than the first ten months of last year. The first ten months orders of 2006 were 2 percent lower than the same period in 2005. Approximately 70 percent of the participants have reported lower orders year-to-date. Shipments and Backlogs Shipments in October were 1 percent lower than October 2006 when they were 2 percent lower than October of 2005. The results for October were fairly balanced with just under one-half of the participants reporting increased shipments. Year-to-date, shipments were off over 5 percent for the first 10 months compared to 2006, when those shipments were 2 percent lower than 2005. Approximately 74 percent of the participants have reported lower shipments year-to-date, the same percentage as last month. Backlogs were 4 percent lower than October 2006, the same results as were reported in September. Backlogs were 3 percent higher than September due to orders exceeding shipments. Receivables and Inventories Again in October, receivables levels did not trend with shipments. Receivables were 1 percent higher than October 2006 and 2 percent higher than September, compared to a decrease in shipments of 1 percent compared to last October and 3 percent compared to September. This is two months in a row that receivables levels did not meet expectations. As we noted last month, we know there is some extended dating, but we feel that some retailers are taking a few more days to pay their invoices. Receivables need to be watched closely. Inventories were 7 percent lower than last October but were 3 percent higher than September. This change may relate to timing issues as overall, with shipments down 5 percent, a reduction in inventory levels of 7 percent is not all bad. But we know that there are more and more direct shipments to retailers of imported goods, so the decline in inventories at higher rates than shipments would be expected. Factory Employees and Payroll Factory payrolls in October 2007 were 3 percent lower than October 2006 payrolls following a 3 percent increase in September. Factory payrolls were 7 percent lower in the first ten months of 2006. At this time last year, payrolls were 8 percent lower than the first ten months of 2005. The number of factory employees held steady in October compared to September and were 8 percent lower than October 2006. In October 2006, the number of factory employees were down 6 percent compared to October 2005. National Consumer Confidence The Conference Board Consumer Confidence Index, which had been declining since the summer, posted a slight increase in December. The Index now stands at 88.6, up from 87.8 in November. The Present Situation Index, however, decreased to 108.3 from 115.7 in November. The Expectations Index rose to 75.5 from 69.1. Lynn Franco, Director of The Conference Board Consumer Research Center said, “This month’s slight gain in Confidence was due solely to an increase in the Expectations Index. Consumers’ short-term outlook regarding business conditions, employment, inflation and stock prices improved marginally. However, while consumers are less negative about the near-term future, they remain far from optimistic. Furthermore, persistent declines in the Present Situation Index indicate the economy is still losing momentum. In fact, in assessing the current job market, pessimists now outnumber optimists. Regarding business conditions, the gap between the two is almost nonexistent.” The Reuters/University of Michigan Surveys of Consumers report was somewhat similar for December. The report noted that the good news is that the decline in consumer confidence came to a near stand-still in December. The report indicated that the bad news is that confidence remained at a two year low. “It is too soon to interpret the stabilization of confidence as a signal that conditions are about to improve,” according to Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers. Consumers still express the same concerns about the high cost of fuel, food, and utilities as well as a diminished sense of financial security caused by falling home prices. Although the data does not yet signal an impending recession, it does indicate that the pace of growth in consumer spending will nearly come to a halt in the upcoming months. “The consumer confidence data indicate that personal consumption spending will grow by 2.0 percent in 2008 over 2007, with the pace of growth starting from a low of about 1.0 percent in the 1st quarter and then rising in the balance of the year,” Curtin said. The risk that a recession develops is uncomfortably high, however. “Robust job and wage growth will be critical to offset the negative impact of higher inflation and falling home values,” according to Curtin. The Index of Consumer Sentiment was 75.5 in the December 2007 survey, barely below the 76.1 in November, but significantly below the 91.7 recorded in December of 2006. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, was 65.6 in the December 2007 survey, just below the 66.2 in November, but well below the 81.2 recorded last December. The Current Economic Conditions Index was 91.0 in the December 2007 survey, slightly below the 91.5 in November, but significantly below the 108.1 recorded last December. Leading Economic Indicators The Conference Board reported that the U.S. leading index decreased 0.4 percent, the coincident index increased 0.2 percent and the lagging index increased 0.2 percent in November. The leading index decreased sharply for the second consecutive month in November, and it has been down in four of the last six months. Most of the leading indicators contributed negatively to the index in November, led by large declines in stock prices, initial claims for unemployment insurance (inverted) the index of consumer expectations, and real money supply. The vendor performance diffusion index and average workweek were the primary positive contributors to the index this month. The leading index fell 1.2 percent (a decline of 2.3 percent annual rate) from May to November, the largest six-month decrease in the index in six years. However, despite continued weakness in the housing permits and interest rate spread components, the strengths among its components remained balanced with the weaknesses during the past six months. The coincident index increased modestly in November, and all the component indicators made positive contributions to the index for this month. The coincident index increased 0.8 percent (a 1.6 percent annual rate) from May to November and the strengths among the coincident indicators remained very widespread. All four of the indicators that make up the coincident index increased in November. The positive contributors to the index ― beginning with the largest positive contributor ― were personal income less transfer payments, industrial production, employees on nonagricultural payrolls and manufacturing and trade sales. 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 4.9 percent in the third quarter of 2007, according to final estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.8 percent. The increase in real GDP in the third quarter primarily reflected positive contributions from exports, personal consumption expenditures (PCE), private inventory investment, nonresidential structures, federal government spending, equipment and software, and state and local government spending that were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased. The acceleration in real GDP growth in the third quarter primarily reflected accelerations in exports, in PCE, and in private inventory investment that were partly offset by an upturn in imports, a larger decrease in residential fixed investment, and a deceleration in non-residential structures. Housing Existing-home sales rose slightly in November, indicating a stabilization in housing in the wake of mortgage disruptions earlier this year, according to the National Association of Realtors® (NAR). Total existing-home sales ― including single-family, townhomes, condominiums and co-ops ― rose 0.4 percent to a seasonally adjusted annual rate of 5.00 million units in November from an upwardly revised pace of 4.98 million in October, but were 20.0 percent below the 6.25 million-unit level in November 2006. Lawrence Yun, NAR chief economist, said the market appears to be stabilizing. “Near term, existing-home sales should continue to hover in a narrow range, just as they have since September, and that’s good news because it’ll be a further sign that the housing market is stabilizing,” he said. “Mortgage interest rates are near historic lows and the most current data shows decelerating price declines, along with a modest reduction in the number of homes on the market.” Disruptions in mortgage availability and pricing peaked in August, which caused sales to slow in subsequent months. The national median existing-home price for all housing types was $210,200 in November, down 3.3 percent from November 2006 when the median was $217,300, but there remains a downward drag on the national median as the mix of closed sales has shifted away from expensive markets. “Just like the weather, there are large local variations in home prices,” Yun said. A quarterly examination of price performance on a metropolitan basis shows nearly two-thirds of metro areas are showing price increases. Among the many metros experiencing healthy local price gains are Farmington, N.M.; Reading, Pa; Columbia, S.C., and Fargo, N.D. Total housing inventory declined 3.6 percent at the end of November to 4.27 million existing homes available for sale, which represents a 10.3-month supply at the current sales pace, down from a 10.7-month supply in October. “Inventory is still high, and further reduction in prices may be required in some areas to induce buyers back into the market,” Yun said. Single-family home sales rose 0.7 percent to a seasonally adjusted annual rate of 4.40 million in November from 4.37 million in October, but are 19.9 percent below the 5.49 million-unit pace in November 2006. The median existing single-family home price was $208,700 in November, down 3.7 percent from a year earlier. Existing condominium and co-op sales slipped 1.6 percent to a seasonally adjusted annual rate of 600,000 units in November from 610,000 in October, and were 20.6 percent below the 756,000-unit level in November 2006. The median existing condo price was $221,100, down 0.7 percent from November 2006. Regionally, existing-home sales in the West increased 10.3 percent in November to a level of 960,000, but were 25.0 percent below a year ago. The median price in the West was $325,800, which is 6.8 percent lower than November 2006. In the Midwest, existing-home sales were unchanged at an annual rate of 1.18 million in November, but were 16.9 percent below November 2006. The median price in the Midwest was $163,000, down 0.5 percent from a year ago. Existing-home sales in the South declined 2.0 percent to an annual rate of 1.99 million in November, and were 19.4 percent below a year ago. The median price in the South was $174,200, which is 2.5 percent below November 2006. Existing-home sales in the Northeast fell 3.3 percent to an annual pace of 870,000 in November, and were 19.4 percent below November 2006. The median price in the Northeast was $258,300, down 3.2 percent from a year ago. Sales of new one-family houses in November were at a seasonally adjusted annual rate of 647,000, according to estimates released by the U.S. Census Bureau. This was 9.0 percent below the revised October rate of 711,000 and was 34.4 percent below the November 2006 estimate. The median price for new houses sold in November was $239,100. The number of new homes for sale, 505,000, represented a 9.3 months supply at the current sales rate. Privately owned housing starts were at a seasonally adjusted annual rate of 1,187,000 or 3.7 percent below the revised October rate and 24.2 percent below the November 2006 rate. Single family starts were 5.4 percent below the October 2007 rate. Consumer Prices The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in November before seasonal adjustment, according to the Bureau of Labor Statistics of the U.S. Department of Labor. The November level of 210.177 was 4.3 percent higher than in November 2006. On a seasonally adjusted basis, the CPI-U increased 0.8 percent in November, its largest advance since a 1.2 percent rise in September 2005. The index for energy advanced 5.7 percent and accounted for nearly 70 percent of the overall CPI increase in November. The index for petroleum-based energy rose 9.5 percent and the index for energy services, 0.7 percent. The food index rose 0.3 percent in November. The index for all items less food and energy advanced 0.3 percent in November, following increases of 0.2 percent in each of the preceding five months. During the first eleven months of 2007, the CPI-U rose at a 4.2 percent seasonally adjusted annual rate (SAAR). This compares with an increase of 2.5 percent for all of 2006. The index for energy, which increased 2.9 percent in 2006, advanced at an 18.1 percent SAAR in the first eleven months of 2007. Petroleum-based energy costs increased at a 30.8 percent annual rate and charges for energy services rose at a 3.2 percent annual rate. Excluding food and energy, the CPI-U advanced at a 2.4 percent SAAR in the first eleven months of 2007 after increasing 2.6 percent in 2006. Retail Sales According to the U.S. Census Bureau 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 $385.8 billion, an increase of 1.2 percent from the previous month and 6.3 percent above November 2006. Total sales for the September through November 2007 period were up 5.4 percent from the same period a year ago. Retail trade sales were up 1.3 percent from October 2007 and were 6.3 percent above last year. Gasoline station sales were up 25.0 percent from November 2006 reflecting higher gas prices and sales of nonstore retailers were up 10.7 percent from last year. Sales at furniture and home furnishings stores rose 1.0 percent on a seasonally adjusted basis and were up 1.8 percent over November 2006. For the eleven months ended November 2007, sales were reported to have increased 2.2 percent over the same period a year ago. Employment According to the Bureau of Labor Statistics, nonfarm employment rose 94,000 in November after a 166,000 gain in October. Job growth continued in professional and technical services, health care and food services. Employment continued to decline in manufacturing and also fell in several housing related industries, including construction, credit intermediation and real estate. The unemployment rate remained at 4.7 percent with the number of unemployed (7.2 million) essentially unchanged. Durable Goods Orders and Shipments New orders for manufactured durable goods in November increased $0.2 billion or 0.1 percent to $214.7 billion, according to the U.S. Census Bureau. This followed three consecutive monthly decreases including a 0.4 percent October decrease. Excluding transportation, new orders decreased 0.7 percent. Excluding defense, new orders increased 1.2 percent. Shipments of manufactured durable goods in November, down three of the last four months, decreased slightly to $213.3 billion. This followed a 0.5 percent October increase. The full report for October indicated that orders for furniture and related products increased 4.9 percent over September and were up 0.2 percent over October 2006 with year-to-date orders off 3.8 percent. Shipments in this category for October were down 2.7 percent from last year for the month and were off 4.9 percent for the year-to-date. Summary There was not much new news to talk about this month. While there was some good news with new orders in October, our talks with manufacturers and distributors do not indicate good news for most companies through December. We discussed many of the problems last month that seem to be having a negative effect on furniture sales at retail. Not much has changed since then. Most of the executives we have talked to do not see things changing for the good any time soon. In fact, since last month, we have had even more bad news. With oil prices hitting $100 a barrel, and the price of gas going up dramatically, coupled with the stock market swinging wildly and, lately mostly down, the consumer does not have a lot to feel comfortable about. Add to that the presidential debates that tell us about how bad everything is, it is no wonder that we are not selling more furniture at retail. The other bad news is that costs are going up. The news we hear from China indicates that prices of imported goods are going up (some already have) due to a variety of factors. Freight costs are going up both for domestic and imported goods. Many raw material prices are also going up along with wages. At a time when business is not that good to begin with, we expect that selling prices are going to have to go up both at wholesale and retail. While many will say that they cannot raise prices, when people are not buying anyway, we believe that for the good of those left in the industry, prices need to go up. And while many retailers do not believe they can go up, we do not buy that. We believe consumers, first of all, do not know what a piece of furniture should cost to begin with. And, while they do not like it, they are used to prices of everything else going up. We have given consumers great value. We have cut the costs of furniture by importing cheaper products and learning to cut costs at the manufacturing level. If companies are going to survive, they must be run well, but they also have to get a decent price for what they sell. Excuse us for getting on that soap box. But we need to remember that furniture is being sold and quite a bit of it. But we continue to lose manufacturers, some distributors and even more at retail. Some of this may be blamed on poor management and that is probably true in some cases. But we do not believe companies can continue to survive by letting margins continue to be squeezed to the point that companies cannot make a reasonable profit. With that said, we do believe things will get better eventually. The key is staying power until the economy improves. Most think it will be well into 2008 or early 2009 before we see much improvement. Let’s hope the improve-ments come sooner than later. 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.