Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

As we expected, new orders for residential furniture manufacturers and distributors in November 2008 were off substantially compared to the results for November 2007. According to our latest survey of these companies, new orders declined 23 percent compared to November 2007 and fell 5 percent compared to October 2008.

For the month, 81 percent of the participants reported lower orders versus last November. Almost two-thirds of the participants reported orders off 20 percent or more (down slightly from 73 percent last month).

Year-to-date, new orders fell to 13 percent below the first 11 months of last year, down from 12 percent last month and 10 percent in September. Year-to-date, now 92 percent of the participants are reporting declines in orders and 68 percent of the participants are reporting declines of 10 percent or more. 

Shipments and Backlogs 

As also expected, based on recent order flow, shipments in November were 21 percent lower than shipments in November 2007 and were 6 percent lower than October shipments. Shipments were lower than last year for 86 percent of the participants.

Year-to-date, shipments remained 11 percent below last year. As with the monthly results, 86 percent of the participants reported lower shipments year-to-date. 
 
With shipments exceeding orders, backlogs fell again in November dropping 4 percent from October. Backlogs have fallen in all but two months since December 2006.

Receivables and Inventories

Receivable levels were 16 percent lower in November than November 2007 and were 4 percent lower than October. With shipments off 21 percent from last November, we would have hoped receivables would have declined a bit more. Receivables were out of line a bit last month, but we thought it might be timing. But based on recent conversations, days sales in receivables seem to be increasing, which is not a good thing.

Inventories fell 3 percent from October but are only 1 percent below November 2007. With business off so much, we would have expected a much larger decline. While the numbers for the participants are varied, for the most part, inventories are either up slightly or down slightly with a few exceptions. Inventory levels appear to be too high, but we hear that there has been some year-end and early 2009 deals made, so hopefully we will see them decline more in December. 

Factory Employees and Payrolls

Factory payrolls were down 22 percent in November versus November 2007. Payrolls were off 8 percent compared to October. Year-to-date, these payrolls were down 14 percent. It appears that payrolls are much more in line with sales declines.

The number of factory employees was down 17 percent in November, after falling 15 percent in October compared to October a year ago. November employee levels were 3 percent lower than October 2008. 

National 

Consumer Confidence

The Conference Board Consumer Confidence Index™, which had decreased in December, moved a bit lower in January and continues to be at a historic low. The Index in January was 37.7 (1985=100), down from 38.6 in December. The Present Situation Index declined slightly to 29.9 from 30.2 last month. The Expectations Index decreased moderately to 43.0 from 44.2.

Lynn Franco, Director of The Conference Board Consumer Research Center said: “The Consumer Confidence Index™ continues to hover at all-time lows (Index began in 1967) and it appears that consumers have begun the New Year with the same degree of pessimism that they exhibited in the final months of 2008. The minor change in the Present Situation Index suggests that economic conditions did not deteriorate significantly further in January but, on the other hand, they did not improve either. Looking ahead, consumers remain quite pessimistic about the state of the economy and about their earnings. And, until we begin to see considerable improvements in the Expectations Index, we can’t say that the worst of times are behind us.”

Consumers’ assessment of overall current conditions remains pessimistic. Those saying business conditions are “bad” increased to 47.9 percent from 45.8 percent, while those saying business conditions are “good” declined to 6.4 percent from 7.7 percent last month.

Consumers’ short-term outlook remains quite pessimistic. Those expecting business conditions to worsen over the next six months decreased slightly to 31.1 percent from 32.9 percent, while those anticipating conditions to improve remained relatively unchanged at 13.3 percent in January, compared to 13.4 percent in December.

According to the Reuters/University of Michigan Surveys of Consumers, there was little change although the results of this survey did show slight improvements.

The Index of Consumer Sentiment was 61.2 in the January 2009 survey, just above the 60.1 in December but substantially below last January’s 78.4 and the cyclical peak of 96.9 set in January 2007. The report indicated that presidential honeymoons have typically translated optimistic expectations for policy changes into early gains in consumer confidence, and the recent surveys indicate a small gain since the November low of 55.3. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, was 57.8 in January, just ahead of the 54.0 in December and well below last January’s 68.1 and the January 2007 cyclical peak of 87.6.

“Nearly all consumers anticipate the deepest and longest recession in the post-WWII era, but few consumers now expect the economy to sink into a 1930’s style depression,” according to Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers. Job losses, declining work hours and smaller income gains were reported by consumers as well as falling home values and disappearing savings and pension accounts. Consumers have become defensive minded, protecting their future living standards through increased saving, even if it meant giving up some items, changing brand preferences or spending habits.

“A recovery in consumer spending will require fiscal stimulus that effectively promotes job and income growth, monetary policies that restore credit flows, and actions that reestablish economic confidence,” Curtin said. “Without each of these three legs in place, the recovery program will ultimately falter.”

Fast spreading unemployment is the chief concern of consumers. News of steep job losses were reported by an all-time record number of consumers in the January survey, rising above the levels recorded in the early 1980’s when the unemployment rate was above 10 percent. Consumers anticipated that the economy would remain too weak to stem an expected rise in joblessness in the next year or so. Overall, consumers expected the national unemployment rate to rise to nearly 9.0 percent by year-end 2009.

 Consumers were hesitant to make large purchases due to their heightened uncertainty about their future job and income prospects even though most consumers thought that current prices were now quite attractive across a broad range of household products including vehicles. 

Gross Domestic Product (GDP)

According to the Bureau of Labor Statistics, real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 3.8 percent in the fourth quarter of 2008, (that is, from the third quarter to the fourth quarter), according to advance estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP decreased 0.5 percent.

The decrease in real GDP in the fourth quarter primarily reflected negative contributions from exports, personal consumption expenditures, equipment and software, and residential fixed investment that were partly offset by positive contributions from private inventory investment and federal government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

Most of the major components contributed to the much larger decrease in real GDP in the fourth quarter than in the third. The largest contributors were a downturn in exports and a much larger decrease in equipment and software. The most notable offset was a much larger decrease in imports. 

Leading Economic Indicators

According to the Conference Board, the U.S. Leading Economic Index (LEI) increased 0.3 percent in December. The Coincident Index decreased 0.5 percent and the lagging index decreased 0.4 percent.

The LEI rose modestly in December, mainly due to the continued and very large positive contribution from real money supply. The yield spread also contributed positively to the index, helping offset the continued declines in building permits, the average workweek, supplier deliveries, and initial unemployment claims.  Since June 2008, the LEI has fallen 2.5 percent (a -5.0 percent annual rate), faster than the 0.9 percent decline (a -1.7 percent annual rate) during the previous six months through June 2008. In addition, the weaknesses among the leading economic indicators have remained widespread.

Four of the ten indicators that make up the leading economic index increased in December. The positive contributors –beginning with the largest positive contributor – were real money supply, interest rate spread, manufacturers’ new orders for consumer goods and materials and manufacturers’ new orders for nondefense capital goods. The negative contributors – beginning with the largest negative contributor – were building permits, average weekly manufacturing hours, index of supplier deliveries (vendor performance), average weekly initial claims for unemployment insurance (inverted), and stock prices. The index of consumer expectations held steady in December. 

Housing 

Existing-Home Sales

According to the National Association of Realtors® (NAR), existing home sales for single-family homes rose 7.0 percent to a seasonally adjusted annual rate of 4.26 million in December, up from 3.98 in November. This rate was 1.4 percent below the sales in December 2007. For all of 2008, single-family home sales fell 11.9 percent. The median existing single-family home price was $174,700 in December, down 14.8 percent from a year ago. For all of 2008, the single-family median was $197,100, which is 9.5 percent below 2007.

Existing-home sales – including single-family, townhomes, condominiums and co-ops – jumped 6.5 percent to a seasonally adjusted annual rate of 4.74 million units in December from a downwardly revised pace of 4.45 million units in November, but were 3.5 percent below the 4.91 million-unit pace in December 2007.

For all of 2008, there were 4,912,000 existing-home sales, which was 13.1 percent below the 5,652,000 transactions recorded in 2007. This is the lowest volume since 1997 when there were 4,371,000 sales.

Lawrence Yun, NAR chief economist, said home prices continue to fall significantly. “It appears some buyers are taking advantage of much lower home prices,” he said. “The higher monthly sales gain and falling inventory are steps in the right direction, but the market is still far from normal balanced conditions. Buyers will continue to have an edge over sellers for the foreseeable future.”

Total housing inventory at the end of December fell 11.7 percent to 3.68 million existing homes available for sale, which represents a 9.3-month supply at the current sales pace, down from a 11.2-month supply in November.

Yun said the market is underperforming and hurting the broader economy. “We’ve added 25 million people to our population over the past decade and housing affordability conditions are the best we’ve seen since 1973, but household formation is much lower than expected,” he said. “Consequently, there is a pent-up demand which could be unleashed with the right stimulus, including a non-repayable home buyer tax credit. The Obama administration and Congress need to move fast to stimulate a spring sales upturn which will help to stabilize home prices and set the foundation for a sustainable economic recovery.”

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to 5.29 percent in December from 6.09 percent in November; the rate was 6.10 percent in December 2007. Last week, Freddie Mac reported the 30-year rate was 5.12 percent.

Regionally, existing-home sales in the Northeast slipped 1.4 percent to an annual pace of 720,000 in December, and were 14.3 percent below December 2007. The median price in the Northeast was $235,000, which is 7.8 percent lower than a year ago.

Existing-home sales in the Midwest increased 4.0 percent in December to a level of 1.04 million but were 10.3 percent below a year ago. The median price in the Midwest was $140,800, down 11.4 percent from December 2007.

In the South, existing-home sales rose 7.4 percent to an annual pace of 1.74 million in December, but were 11.2 percent lower than December 2007. The median price in the South was $158,600, which is down 8.0 percent from a year ago.

Existing-home sales in the West jumped 13.6 percent to an annual rate of 1.25 million in December and are 31.6 percent higher than a year ago. The median price in the West was $213,100, down 31.5 percent from December 2007. 

New Home Sales

Sales of new one-family homes in December 2008 were at a seasonally adjusted rate of 331,000 according to the U.S. Census Bureau. This was 14.7 percent below the revised November estimate of November 2008 and was 44.8 percent below the December 2007 estimate.

The median sales price of new houses sold in December 2008 was $206,500, while the average sales price was $246,900. The inventory of new houses represented a 12.9 months supply at the current sales rate.

New home sales in December 2008 were off 50 percent in the Northeast, 31.1 percent in the Midwest, 46.0 percent in the South and 47.4 percent in the West. 

Housing Starts

Privately-owned housing starts in December were at a seasonally adjusted annual rate of 550,000 according to the U.S. Census Bureau. This was 15.5 percent below the revised November estimate and 45 percent below the revised December 2007 estimate. Single-family housing starts were 13.5 percent below the November estimate. 

Retail Sales

The U.S. Census Bureau announced that 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, were $343.2 billion, a decrease of 2.7 percent from the previous month and 9.8 percent below December 2007. Total sales for the 12 months of 2008 were down 0.1 percent from 2007. Total sales for the October through December 2008 period were down 7.7 percent from the same period a year ago.

Retail trade sales were down 2.7 percent from November 2008 and were 10.8 percent below last year. Gasoline stations sales were down 35.5 percent from December 2007 and motor vehicle and parts dealers sales were down 22.4 percent from last year.

According to the report, sales at furniture and home furnishings stores in December were off 12 percent from December 2007 (off 13 percent on an adjusted basis). For the year, the report indicated that sales at these stores were off 8 percent. For the last quarter, sales were off 12.6 percent from the last quarter of 2007. 

Consumer Prices

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 1.0 percent in December, before seasonal adjustment, according to the Bureau of Labor Statistics of the U.S. Department of Labor. The December level of 210.228 (1982-84=100) was 0.1 percent higher than in December 2007.

On a seasonally adjusted basis, the CPI-U decreased 0.7 percent in December, the third consecutive decline. The index is now only 0.1 percent higher than in December 2007. Declining energy prices, particularly for gasoline, again drove most of the decline. The energy index declined 8.3 percent in December. Within energy, the gasoline index fell 17.2 percent and accounted for almost 90 percent of the decrease in the all items index. The index for household energy declined 0.7 percent. Excluding energy, the index was virtually unchanged for the third straight month. The food index declined 0.1 percent in December, the first decrease since April 2006, as many meat, dairy, fruit, and vegetable indexes decreased. The index for all items excluding food and energy was virtually unchanged in December.

For the 12 month period ending December 2008, the CPI-U rose 0.1 percent. This was the smallest calendar year increase since a 0.7 percent decline in 1954 and compares with a 4.1 percent increase for the 12 months ended December 2007. Consumer prices declined at a seasonally adjusted annualized rate (SAAR) of 12.7 percent in the fourth quarter of 2008. This followed increases during the first three quarters at rates of 3.1, 7.9, and 2.6 percent, respectively. The index for energy declined at a SAAR of 76.6 percent during the fourth quarter and fell 21.3 percent for the 12 months ending December after rising 17.4 percent during 2007.

Excluding food and energy, the CPI declined at a 0.3 percent SAAR during the last quarter of 2008, after increasing at rates of 2.0, 2.5, and 2.7 percent during the first three quarters, respectively. The 1.8 percent increase for all of 2008 compares to 2.4 percent during 2007 and is the smallest one-year increase since 2003. 

Employment

According to the Bureau of Labor Statistics, the unemployment rate increased to 7.2 percent in December from 6.8 percent in November. Payroll employment fell by 524,000 in December and by 1.9 million in the last four months of 2008.

In December, the number of unemployed persons increased by 632,000 to 11.1 million unemployed persons. Since the start of the recession, the number of unemployed persons has grown by 3.6 million and the unemployment rate has increased 2.3 percentage points.

Durable Goods Orders and Factory Shipments

New orders for manufactured durable goods in December decreased $4.7 billion or 2.6 percent to $176.8 billion, according to the U.S. Census Bureau. This was the fifth consecutive monthly decrease and followed a 3.7 percent November decrease. Excluding transportation, new orders decreased 3.6 percent.  Excluding defense, new orders decreased 4.9 percent.

Computers and electronic products, down three of the last four months, had the largest decrease.

Shipments of manufactured durable goods in December, down five consecutive months, decreased $1.4 billion or 0.7 percent to $191.3 billion. This followed a 4.2 percent November decrease.

 Primary metals, down five consecutive months, had the largest decrease, $1.3 billion or 7.4 percent to $16.7 billion.

According to the Census Bureau reports, shipments of furniture and related products were down 15 percent in November versus November 2007. Year-to-date, shipments of these products were 6.7 percent below the first eleven months of last year. Orders in this category were reported to be off 8.1 percent year-to-date but were off 22.4 percent comparing November to November. 

Summary

As we noted last month, the results for November were not expected to be very good. Unfortunately, we were right in our expectations.

New orders fell 23 percent from November 2007 when they were down 8 percent compared to November 2006. Shipments were off 21 percent from November 2007 when they were off 5 percent from November 2006.

We have talked to bankers, listened to economists, watched the news and talked to many in the furniture industry. For the most part, what we hear is that no one has a good idea, supported by anything, as to when we will hit bottom and begin recovery.

One of the quotes we heard from a well regarded retired banker is that the money the fed’s have put back into the supply will take at least six months to have any real effect. In his opinion, it will be third quarter before that happens and well into 2010 before we see much recovery.

 One of the major concerns we see for the industry is the credit situation. Whether retailer, manufacturer or distributor, if you have debt (as most do), these are trying times. If you have or do break loan covenants, you are likely finding that the lenders are not easy to deal with. Even when no covenant violations, some are having difficulty renewing loans.

In many cases, the lenders are reducing availability in their lines of credit. They are also charging heavy fees for amendments or waivers. It is almost like they are doing all they can to help companies fail.

Add to that some of the consumer debt issues, and we are in a real mess when it comes to credit. It appears that, at least with many of the larger lenders, the days of working with companies in tough times are gone.

We believe Congress needs to do something with all its stimulus package to force lenders to stop hoarding cash. Unfortunately with many of the lenders being so large, the chances of the person calling the shots knowing anything about your company and your needs are pretty slim.

We have already seen some shake-out both at retail and wholesale. We understand that in addition to U.S. factory closings, there are also many Asian companies that are closing their factories.

For many who have said we have too many players in the game, it appears that you will have your wishes granted. But it really hurts to see so many struggling so hard to stay alive. Most of the people we talk with have cut to the bone and are operating as efficiently as they can. But all need orders.

When consumers begin to show more confidence, time will only tell. The negative media and negative comments from Washington telling us how awful things are does not help. Yes, things are bad but if we keep telling consumers that things are so bad that everyone quits spending except on necessities (such as the owner of a wine shop told me – noting wine was still a necessity and growing), then we will just dig the hole deeper.

It’s time to get off the soap box and get back to my real job. There is good news out there and some companies are taking market share and doing ok. Let’s hope you are one of them. If we can help in any way, please give us a call.

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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.

  (R) Revised