Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

Furniture World Magazine

Monthly Results New Orders New orders for April 2008 were 8 percent lower than orders reported in April 2007 according to our recent survey of furniture manufacturers and distributors. New orders for April were 3 percent lower than March. Approximately 71 percent of our participants reported lower orders comparing April to April results. Year-to-date, new orders remained 8 percent lower than the first four months of last year. Approximately 86 percent of the participants are now reporting lower orders than last year. Last month, just over 80 percent of the participants reported lower orders as some participants that were on the edge, fell into negative territory in April. While the mood at the April Market was good, it does not appear that orders were as good as the mood, at least by the end of the month. Shipments and Backlogs Shipments in April were 5 percent lower than April 2007 and 9 percent lower than March 2008. Shipments in April 2007 were off 4 percent from April 2006. Surprisingly, only 66 percent of the participants reported lower shipments compared to last year’s April results, down from 83 percent last month. Year-to-date, shipments remain 7 percent lower than the first four months of 2007. Approximately 74 percent of the participants have reported lower year-to-date shipments, similar to last month’s results. Backlogs were 11 percent lower than last year (10 percent last month) but were 4 percent higher than March as the volume of new orders was slightly higher than the volume of shipments. Receivables and Inventories Receivable levels fell 5 percent from last April in line with the shipments decline but increased 1 percent from March even with shipment comparisons off from March. Timing of shipments may cause this shift, but receivables need to be watched. We continue to hear of customers stretching out payment terms. Inventory levels were 7 percent below last April, the same as last month. These levels continue to indicate reasonable comparisons. Factory Employees and Payroll The number of factory employees were 7 percent lower than April 2007, the same as the March 2008 to March 2007 comparison. It should be noted that the number of employees in April 2007 was down 15 percent from April 2006. Factory payrolls were 12 percent lower than last April when they were 8 percent lower than April 2006. Payrolls fell 8 percent from March 2008 levels. Year-to-date, payrolls were 11 percent below the same period last year. National Beige Book Report: The Beige Book reports from the Federal Reserve Districts indicated that economic activity remained weak in April and May. Most districts reported slower, softer, weaker or lower or sluggish growth. Five districts including Philadelphia, Cleveland, Atlanta, St. Louis and San Francisco described activity as stable or little changed in recent weeks. The report noted that consumer spending has been pinched by rising energy and food costs. Rising energy costs have dampened domestic tourism. Residential real estate markets remained weak across most districts. Consumer Confidence The Conference Board Consumer Confidence Index which had declined in May, fell further in June. The Index now stands at 50.4 (1985 = 100) down from 58.1 in May. The Present Situation Index decreased to 64.5 from 74.2. The Expectations Index declined to 41.0 from 47.3 in May. Lynn Franco, Director of The Conference Board Consumer Research Center said, “This month’s Consumer Confidence Index is the fifth lowest reading ever. Consumers’ assessment of present-day conditions continues to grow more negative and suggests the economy remains stuck in low gear. Looking ahead, consumers’ economic outlook is so bleak that the Expectations Index has reached a new all-time low. Perhaps the silver lining to this otherwise dismal report is that Consumer Confidence may be nearing a bottom.” The report also noted that consumers’ assessment of present conditions grew dimmer in June. Those claiming business conditions are “bad” increased to 32.5 percent from 29.7 percent, while those claiming business conditions are “good” declined to 11.5 percent from 13.0 percent last month. Consumers’ appraisal of the job market was also more pessimistic. Those saying jobs are “hard to get” increased to 30.5 percent from 28.3 percent in May. Those claiming jobs are “plentiful” declined to 14.1 percent from 16.1 percent. Consumers’ short-term expectations deteriorated further in June. Those expecting business conditions to worsen over the next six months rose to 33.9 percent from 32.9 percent, while those anticipating business conditions to improve decreased to 8.8 percent from 10.6 percent in May. According to the Reuters/University of Michigan Surveys of Consumers, consumer confidence fell to its lowest level since June of 1980. The decline was due to surging food and fuel prices, falling home prices, shrinking employment and smaller income gains. “Consumers are painfully aware that their living standards are shrinking under the weight of higher food and fuel prices and see little hope for improvement any time soon,” according to Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers. Consumers’ ability to buy has been diminished by smaller income gains, fewer jobs, higher prices of necessities, falling home prices, rising credit standards, and record levels of outstanding debt. Consumers have become more cautious spenders and are determined to rebuild their reserve funds. “For consumers to increase their savings as well as cope with the higher costs of food and fuel will require a prolonged shift in budgets away from discretionary spending,” Curtin said. The Index of Consumer Sentiment was 59.8 in the May 2008 survey, down from 62.6 in April, and significantly below the 88.3 recorded last May and the peak of 96.9 recorded in January of 2007. The last time it was lower was in June 1980 when it was 58.7. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, was 51.1 in the May 2008 survey, down from 53.3 in April, and well below the 77.6 recorded in May 2007 and the peak of 87.6 in January 2007. The all-time low in the Expectations Index (44.1) was recorded in July 1979 and real personal consumption expenditures fell in 1980 by three-tenths of one percent (0.3 percent). The recent decline is not quite as deep and the slowdown in spending is expected to be smaller than in 1980. Total real personal consumption expenditure growth is expected to be just under 1 percent in 2008, with the pace weakening until early 2009. “While it is still unlikely, a somewhat deeper downturn in spending can no longer be easily dismissed,” Curtin added. Nine-in-ten consumers thought that the economy was in recession in May, with record numbers citing unfavorable news about rising prices, lost jobs, slowing economic growth, and the continuing fallout from the credit and housing crises. “Three-in-four consumers expected bad times financially in the economy during the year ahead, the highest proportion to anticipate such negative economic prospects in more than a quarter century,” said Curtin. Buying plans for vehicles and household durables, such as furniture, appliances, and home electronics, were the least favorable since the early 1980’s. “When asked to explain the views, consumers said that they favored the postponement of purchases given their uncertainty about their future income and job prospects as well as concerns about the future course of gas and food prices,” Curtin said. Leading Economic Indicators The June report from The Conference Board indicated that the U.S. leading index increased 0.1 percent, the coincident index increased 0.1 percent and the lagging index increased 0.2 percent so at least all indicators are not negative. According to the report, the leading index increased slightly in May, following a small increase in April. The interest rate spread and stock prices continued to make large positive contributions to the index, more than offsetting May’s declines in real money supply, consumer expectations, and building permits. In May, the six-month rate of decline in the leading index slowed to -0.7 percent (a -1.4 percent annual rate), from -2.4 percent (a -4.7 percent annual rate) in the six-month period through January. However, the weaknesses among the leading indicators have remained fairly widespread in recent months. The coincident index also increased slightly in May, the first increase in seven months, and the index was revised down modestly for March and April as new component data became available. The growth rate of the coincident index stands at -0.4 percent (a -0.7 percent annual rate) in the six-month period through May, down from 0.3 percent (a 0.6 percent annual rate) from July 2007 to January 2008, and the weaknesses among its components have remained widespread in recent months. The leading index has risen in the past two months, following a steady decline that began in the middle of last year. However, the number of components that are falling continues to be greater than the number of components that are rising over the past six months. Housing Existing-Home Sales: Sales of existing-home sales increased in May with buyers responding to lower home prices, according to the National Association of Realtors® (NAR). Existing-home sales – including single-family, townhomes, condominiums and co-ops – increased 2.0 percent to a seasonally adjusted annual rate of 4.99 million units in May from a level of 4.89 million in April, but are 15.9 percent below the 5.93 million-unit pace in May 2007. Single-family home sales rose 1.6 percent to a seasonally adjusted annual rate of 4.41 million in May from 4.34 million in April, but are 14.5 percent below the 5.16 million-unit pace in May 2007. The median existing single-family home price was $206,700 in May, which is 6.8 percent below a year ago. The national median existing-home price for all housing types was $208,600 in May, down 6.3 percent from a year ago when the median was $222,700. Lawrence Yun, NAR chief economist, said there’s still a lot of inventory in the market. “The large supply of homes on the market clearly favors buyers, and it should take several months to draw the inventory down,” he said. “Stabilization in home prices can only occur with buyers returning to the market, so we are encouraged by rising home sales, particularly in distressed markets. Foreclosures and short sales appear to be a larger part of the market, particularly in California, and are creating a drag on current home prices.” Total housing inventory at the end of May fell 1.4 percent to 4.49 million existing homes available for sale, which represents a 10.8-month supply at the current sales pace, down from a 11.2-month supply in April. Although conditions remain mixed around the country, unpublished snapshot data shows a number of areas are experiencing much higher sales activity than May 2007, including Sacramento, the San Fernando Valley and Monterey County in California; Sarasota, Florida; and Battle Creek, Michigan. “Keep in mind that the volume of home sales is the primary driver of economic activity that is tied to housing,” Yun said. “It’d be premature to say the improvement marks a turnaround. The market is fragile, so a first-time home buyer tax credit and a permanent raise in loan limits would be important steps to get the housing engine humming.” New Residential Sales The June report from the U.S. Census Bureau indicated that sales of new one-family houses in May 2008 were at a seasonally adjusted annual rate of 512,000. This level was 2.5 percent below the revised April rate and was 40.3 percent below the May 2007 estimate of 857,000. (April results were 42 percent below April 2007.) The media selling price of new homes sold in May 2008 was $231,000 with the average at $311,300. The seasonally adjusted estimate of new houses for sale at the end of May was 453,000. This represents a supply of 10.9 months at the current sales rate, up from 10.6 months last month. Housing Starts The U.S. Census Bureau reported that privately owned housing starts in May were at a seasonally adjusted annual rate of 975,000. This was 3.3 percent below the revised April estimate and is 32.1 percent below the May 2007 rate of 1,436,000. Single family starts in May were at a rate of 674,000 which was 1.0 percent below April 2008. As with new home sales, the weakness was similar in all regions. Consumer Prices According to the Bureau of Labor Statistics, the Consumer Price Index for all Urban Consumers (CPI-U) for May 2008 increased 0.8 percent before seasonal adjustment. The May level was 4.2 percent higher than in May 2007. On a seasonally adjusted basis, the CPI-U increased 0.6 percent in May following a 0.2 percent increase in April. The index for energy, which was basically unchanged in April, increased 4.4 percent in May. The index for petroleum-based energy advanced 5.8 percent and the index for energy services increased 2.3 percent. The food index rose 0.3 percent in May. The report noted that upturns in the indexes for lodging away from home, public transportation and household furnishings and operations more than offset a downturn in the index for apparel. During the first five months of 2008, the CPI-U rose at a 4.0 percent seasonally adjusted annual rate, compared to a 4.1 percent increase for all of 2007. Petroleum-based energy costs increased at a 13.9 percent annual rate in the first five months. Retail Sales U.S. retail and food services sales for May, adjusted for seasonal variation and holiday and trading-day differences, increased 1.0 percent from April and were 25 percent above May 2007 according to the U.S. Census Bureau. Retail trade sales were up 1.0 percent from April as well and were 2.2 percent above last year. On an unadjusted basis, sales at furniture and home furnishings stores were off 4.1 percent from May 2007 but were up 7.3 percent over April 2008. Year-to-date, sales at these stores were off 4.4 percent. Employment The unemployment rate rose to 5.5 percent in May from 5.0 percent in April and nonfarm payroll employment continued to trend down (-49,000) according to the Bureau of Labor Statistics. In May, employment continued to fall in construction, manufacturing, retail trade and temporary help services, while health care continued to add jobs. Average hourly earnings increased by 5 cents, or 0.3 percent, over the month. Durable Goods Orders and Shipments The U.S. Census Bureau reported that new orders for manufactured durable goods increased slightly in May. This was the first increase in three months and followed a 1 percent decrease in April. Excluding transportation, new orders decreased 0.9 percent. Excluding defense, new orders decreased 0.6 percent. Shipments of manufactured durable goods decreased 1.1 percent in May, following a 1.8 percent increase in April. Shipments have been down three of the last four months. As reported by the U.S. Census Bureau, shipments of furniture and related products in April 2008 were 3.9 percent lower than April 2007. Shipments in this category are down 5.5 percent for the first four months this year compared to the same period a year ago. New orders were reported 6 percent lower for the first four months compared to 2007. Summary The results for April were somewhat disappointing even though most of the street talk had pointed to continuing slow business at retail. Unfortunately, the national news continues to bring more bad news. We are continually jabbed for not having more positive things to say, but the overall news on the economy in general is not very pleasant. Consumer confidence, which we believe is the real key to furniture sales, is really in the dumps. And all the latest news has not been anything that has shown signs of bringing it back. We spoke with a very high end manufacturer recently who said that his business was off the worst he has ever seen it, as he has typically not been significantly affected in slow economic times. The stock market results last week will not help much especially at the high end. We have talked with quite a few people lately, and most of what we have heard has been pretty much the same – business is tough at both retail, manufacturing, distribution and with the suppliers. We did hear that Memorial Day at retail was decent for many, but business has fallen off since then. As indicated in the consumer confidence reports, consumers are holding off spending on most deferrable purchases. Unfortunately, furniture is one of those items. We hope that once the election rhetoric is over, that some of the national news might not be so gloomy. In the meantime, as we said last month, it’s time to settle in and hunker down for what most likely will be a very difficult summer and fall for many. Also, if you haven’t raised prices at retail or wholesale, you probably should now. At least then when consumers do come back, there may be enough margin to make it worth while. If everything else the consumer is buying costs more, why shouldn’t furniture. ___________________________ 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.