Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

Furniture World Magazine

New Orders New orders fell 8 percent in November compared to November 2006, according to our recent survey of residential furniture manufacturers and distributors. New orders were 11 percent below October 2007. After a slight pick up in October (which we wondered if that increase was attributable to market timing), the slower business that we have seen for the last year continued in November. The results were somewhat in line with expectations based on our conversations with those in the industry. After 57 percent of the participants reported increased orders in October versus October 2006, the results were reversed in November. Approximately 61 percent of the participants reported declines in orders in November with many reporting double digit declines. Year-to-date, new orders remained 4 percent below last year’s first eleven months. Some 73 percent of the participants reported lower orders year-to-date, up from 70 percent last month. Shipments and Backlogs Shipments for November were 5 percent below November 2006 and 4 percent below October reflecting the lower order rates for the last several months. Similar to new order results, some 64 percent of the participants reported lower shipments in November versus November 2006. Shipments were 4 percent lower in November than they were in October. Year-to-date, shipments remained 5 percent lower than last year’s first 11 months. Some 76 percent of the participants have now reported lower shipment levels, up slightly from 74 percent last month. Receivables and Inventories Receivables in November were even with November 2006 and down 2 percent from October. For the third month in a row, receivables levels did not meet expecta-tions. With shipments off 5 percent from last November, receivables should be down at least somewhat. Even compared to October the trends did not follow. We are very concerned, from what we hear on the street, about receivables levels. Days sales outstanding seem to be growing. We continue to hear about retailers stretching out payments. And there are more and more retailers who have either filed or are being rumored to be filing for bankruptcy. Inventories were down 1 percent from October and down 9 percent from last year. The comparison to last year was 2 percent lower than the 7 percent reported last month. It does appear that inventory levels are in pretty good shape. But as one executive told me recently, the Chinese New Year cannot get here fast enough. Factory Employees and Payroll The number of factory employees held even in November compared to October. Compared to last November, the number of factory employees was down 7 percent (8 percent last month compared to October 2006). Factory payrolls were 7 percent lower in November 2007 compared to November 2006 and were down 10 percent compared to October. We know that some took a little more time off around Thanksgiving. Year-to-date, factory payrolls were down 7 percent, similar to last month’s results. It appears that most companies have been able to adjust their payrolls to somewhat match production. But with the shift in imports, it is hard to tell if that is totally true. National Consumer Confidence The Conference Board Consumer Confidence Index, which had improved moderately in December, gave back the gain in January. The Index now stands at 87.9, down from 90.6 in December. The Expectations Index declined to 69.6 from 75.8. The Present Situation Index, however, increased to 115.3 from 112.9 in December. Lynn Franco, Director of The Conference Board Consumer Research Center said, “The modest improvement in Consumer Confidence last month was short-lived. Consumers’ appraisal of current business conditions is becoming more negative and their assessment of the job market, while slightly less negative than in December, is more negative than a year ago. Looking ahead, consumers are quite downbeat about the short-term future and a greater proportion expect business conditions and employment to deteriorate further in the months ahead. In addition, the percentage of consumers anticipating an improvement in their earnings has declined and could potentially impact spending decisions.” Consumers’ appraisal of present-day conditions, despite the slight improve-ment, is less than favorable. Those claiming business conditions are “bad” rose to 20.0 percent from 18.8 percent, while those claiming business conditions are “good” decreased to 20.7 percent from 21.2 percent. Consumers’ short-term outlook, which had improved moderately in December, turned more pessimistic. Those expecting business conditions to worsen over the next six months increased to 16.0 percent from 14.1 percent, while those anticipating business conditions to improve decreased to 11.6 percent from 13.8 percent. Leading Economic Indicators The Conference Board reported that the U.S. leading index decreased 0.2 percent, the coincident index increased 0.1 percent and the lagging index increased 0.4 percent in December. The leading index decreased again in December, the third consecutive decline, and it has been down in four of the last six months. Housing permits made the largest negative contribution to the index. Average working hours in manufacturing also made a large negative contribution to the index this month, followed by smaller declines in manufacturers’ new orders for nondefense capital goods, initial claims for unemployment insurance (inverted), the index of consumer expectations, and interest rate spread. With this month’s decline, the leading index is down 0.8 percent (a decline of 1.6 percent annual rate) from June to December, and it is 1.4 percent below its December 2006 level. While the strengths and weaknesses among its components were roughly balanced throughout most of 2007, weaknesses have become more wide-spread in the last two months. The coincident index increased modestly again in December, and all the components except for the industrial production index made small positive contributions this month. The coincident index increased 0.7 percent (a 1.5 percent annual rate) from June to December and the strengths among the coincident indicators remained very widespread. The coincident index, an index of current economic activity, has continued to increase on a steady upward trend, but its growth has been slowing in the fourth quarter. Housing According to the National Association of Realtors® (NAR), existing-home sales, including single family, townhomes, condominiums and co-ops, fell 2.2 percent to a seasonally adjusted annual rate of 4.89 million units in December. This rate was 22 percent below the 6.27 million-unit level in December 2006. For all of 2007, there were 5.65 million existing home sales, the fifth highest on record. However, the total was 12.8 percent below the 6.48 million in 2006. Lawrence Yun, NAR chief economist, said the market is experiencing uncharacteristic weakness. “Home sales remain weak despite improved afford-ability conditions in many parts of the country, but we could get a quick boost to the market if loan limits are raised in combination with the bold cut in the Fed funds rate,” he said. “Home prices are lower, mortgage interest rates continue to decline and incomes are higher, but many potential buyers are delaying a purchase.” Total housing inventory fell 7.4 percent at the end of December to 3.91 million existing homes available for sale, which represents a 9.6-month supply at the current sales pace, down from a 10.1-month supply in November. “The fall in inventory in December is encouraging, but inventories remain elevated and buyers have a clear edge over sellers in many markets,” Yun said. The national median existing-home price for all housing types was $208,400 in December, down 6.0 percent from a year earlier when the median was $221,600. Because home sales have slowed the most in higher cost markets, there is a downward distortion to the national median as the mix of closed sales has changed over the past year. For all of 2007, the median price was $218,900, down 1.4 percent from a median of $221,900 in 2006. Single-family home sales declined 2.0 percent to a seasonally adjusted annual rate of 4.31 million in December from 4.40 million in November, and are 21.6 percent below 5.50 million-unit level in December 2006. In all of 2007, single-family sales fell 13.0 percent to 4.94 million. The median existing single-family home price was $206,500 in December, down 6.5 percent from a year earlier. For all of 2007, the single-family median was $217,800, down 1.8 percent from 2006. Regionally, existing-home sales in the South slipped 1.0 percent to an annual pace of 1.97 million in December, and are 20.9 percent below December 2006. The median price in the South was $173,400, down 4.1 percent from a year ago. Existing-home sales in the Midwest declined 1.7 percent in December to a level of 1.16 million and are 20.5 percent below a year ago. The median price in the Midwest was $159,800, which is 3.9 percent lower than December 2006. In the West, existing-home sales fell 2.1 percent to an annual rate of 940,000 in December, and are 24.8 percent below December 2006. The median price in the West was $309,800, down 11.1 percent from a year ago. Existing-home sales in the Northeast dropped 4.6 percent to an annual rate of 830,000 in December, and are 22.4 percent below a year ago. The median price in the Northeast was $258,600, down 8.9 percent from December 2006. Sales of new one-family homes in December 2007 were at a seasonally adjusted rate of 604,000, according to the U.S. Census Bureau. This was 4.7 percent below the revised November rate and was 40.7 percent below the December 2006 estimate. The median sales price of new homes sold in December 2007 was $219,200. The report indicated that there was a 9.6 months supply at the current sales rate. An estimated 774,000 new homes were sold in 2007. This was 26.4 percent below the 2006 estimates. Privately owned housing starts in December were 14.2 percent below the revised estimate for November and were 38.2 percent below the revised December 2006 estimate. Consumer Prices According to the Bureau of Labor Statistics, on a seasonally adjusted basis, the CPI-U increased 0.3 percent in December, following a 0.8 percent rise in November. The index for energy advanced 0.9 percent and accounted for about one-third of the overall CPI increase in December. The index for petroleum-based energy rose 1.2 percent and the index for energy services, 0.5 percent. The food index rose 0.1 percent in December. The index for all items less food and energy advanced 0.2 percent in December, following a 0.3 percent increase in November. Smaller increases in the indexes for apparel, for medical care, for recreation, and for new vehicles were responsible for the more moderate increase in December. Consumer prices advanced at a seasonally adjusted annual rate (SAAR) of 5.6 percent in the fourth quarter of 2007. This followed increases in the first three quarters at annual rates of 4.7, 5.2, and 1.0 percent, respectively. For the 12 month period ended in December, the CPI-U rose 4.1 percent. This compares with an increase of 2.5 percent in 2006. The index for energy, which advanced at annual rates of 22.9 and 32.9 percent in the first two quarters, declined at a 14.8 percent rate in the third quarter, turned back up in the fourth quarter, advancing at a 37.1 percent annual rate. Overall energy costs rose 17.4 percent in 2007 with the index for petroleum-based energy costs (energy commodities) up 29.4 percent and charges for energy services (gas and electricity) up 3.4 percent. The food index, which rose 2.1 percent in all of 2006, advanced 4.9 percent in 2007, its largest increase since a 5.3 percent rise in 1990. Grocery store food prices increased 5.6 percent in 2007, reflecting acceleration over the last year in each of the six major groups. Excluding food and energy, the CPI-U advanced at a 2.7 percent SAAR in the fourth quarter, following increases at rates of 2.3, 2.3, and 2.5 percent in the first three quarters of 2007. The 2.4 percent advance for all of 2007 compares with a 2.6 percent rise in 2006. The deceleration reflects a smaller increase in the index for shelter, in particular the index for owners’ equivalent rent, and a small decrease in the index for apparel. Retail Sales According to the U.S. Census Bureau, advance estimates of U.S. retail and food services sales for December, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, decreased 0.4 percent from the previous month, but were 4.1 percent above December 2006. Total sales for the 12 months of 2007 were up 4.2 percent from 2006. Total sales for the October through December 2007 period were up 4.9 percent from the same period a year ago. Retail trade sales were down 0.4 percent from November 2007, but were 4.3 percent above last year. Gasoline station sales were up 18.5 percent from December 2006 and sales of nonstore retailers were up 12.1 percent from last December. Sales at furniture and home furnishings stores on an adjusted basis were up 0.6 percent from November and from last December. For the year, sales were reported to have increased 1.7 percent. As our friend Jerry Epperson has said repeatedly, there seems to be a disconnect between the government retail results versus what we are seeing at the wholesale level. Employment The employment report from the Bureau of Labor Statistics was not very positive for December. Non farm employment grew only 18,000 jobs. Job growth in service providing industries, including professional and technical services, health care, and food services, was offset by job losses in construction and manufacturing. The unemployment rate rose to 5.0 percent in December. The number of unemployed persons increased by 474,000 to 7.7 million from 6.8 million in December 2006 when the unemployment rate was 4.4 percent. Durable Goods Orders and Shipments According to the U.S. Census Bureau, new orders for manufactured durable goods in December increased $11.2 billion or 5.2 percent to $226.6 billion. This was the second consecutive monthly increase and followed 0.5 percent November increase. Excluding transportation, new orders increased 2.6 percent. Excluding defense, new orders increased 2.9 percent. Transportation equipment, up three consecutive months, had the largest increase, $7.3 billion or 11.3 percent to $71.4 billion. This was due to defense aircraft and parts, which increased $3.5 billion. Shipments of manufactured durable goods in December, down four of the last five months, decreased $0.1 billion or 0.1 percent to $212.6 billion. This followed a 0.2 percent November decrease. Transportation equipment, down four of the last five months, had the largest decrease, $0.8 billion or 1.4 percent to $55.8 billion. Summary The results of our survey for November were not surprising. Based on conver-sations with many in the industry, we do not expect December results to show improvements. We have talked to a few people who had some relatively good weeks for orders in January, but most have not reported any improvement. Some of the recent news relating to certain retailers indicates that many at retail are struggling. The economic stimulus package promised by Congress and the President will hopefully be somewhat helpful. Since the Senate has not passed anything yet, it remains to be seen how soon this money may flow into the economy. We have suggested to several people that we need to get Congress to mandate that all the refunds be spent on furniture, but that has not seemed to gain much traction. Most we talk to and read about seem to feel that it is going to be a while before we see much improvement in the economy as a whole. There really has not been anything that has changed what we have written about in the last few months, except that some reports have been even worse. The Federal Reserve Board’s reduction of rates by ¾ of a point was the largest since the existing explicit funds rate targeting regime began in the late 1980’s. From all reports, the Fed is expected to lower them again. We hope that this will help. Now is the time for staying power. We believe there will likely be some more companies, both at the retail and wholesale level, that may not be with us much longer. If you have the staying power, when business does get better (and it will eventually), those that are left may be able to do well. 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.