Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

Furniture World Magazine

Furniture Insights Monthly Results New Orders According to our latest survey of residential furniture manufacturers and distributors, new orders in December 2008 were 21 percent lower than orders in December 2007. New orders in December 2007 were 8 percent lower than orders in December 2006. Orders in December 2008 were 9 percent lower than November 2008 orders, a normal decline between those two months. The results for December were pretty much in line with what we were expecting. For the 2008 year, new orders were off 14 percent compared to 2007, when they were off 4 percent from the year before (remember we thought the results of 2007 were not good). For the fourth quarter of 2008, new orders were 26 percent lower than the same quarter a year ago. Some 89 percent of the participants reported declines in orders in 2008. More than two-thirds of the participants reported orders off 10 percent or more. Shipments and Backlogs Shipments in December were 22 percent lower than December 2007 and were 2 percent off from November. Shipments in December 2007 were 5 percent lower than shipments in December 2006. For the fourth quarter of 2008, shipments were 21 percent lower than the fourth quarter of 2007. For the year, shipments were off 12 percent from the 2007 year when they were 5 percent lower than 2006 shipments. Some 84 percent of the participants reported lower shipments in 2008 versus 2007. Just over 70 percent of the participants reported shipments off 10 percent or more. Backlogs fell again in December showing a 23 percent decline from December 2007. Backlogs were 9 percent below November 2008 levels. Receivables and Inventories Receivables in December were 8 percent lower than November levels, but that decline compared to a 2 percent drop in shipments is impacted by very little shipping the last week of December for most companies, while cash collections continue to come in. Receivable levels were 17 percent lower than December 2007, compared to a 22 percent decline in shipments. We have noted that receivable levels are a little out of line with shipments. From what we are seeing at clients and hearing on the streets, customers are starting to stretch out payments. These will need to be watched closely over the next few months, as some of these customers may not make it. Inventory levels were 2 percent lower than November and off 6 percent from December 2007. While much better than the 1 percent decline reported last month, inventory levels remain too high based on current business conditions. As has been noted, some of the inventory levels are impacted by imports which were ordered months ago, before the fourth quarter fall off in orders from retailers. Factory and Warehouse Employees and Payrolls Factory and warehouse payrolls declined 22 percent compared to December 2007, similar to last month’s results. For the year, payrolls were down 15 percent compared to 2007, up from 14 percent in last month’s results. The number of employees dropped 1 percent from November and finished the year down 17 percent from last December. December 2007 employees were off 6 percent from the year before. National Consumer Confidence According to the Conference Board, the Consumer Confidence Index™, which had decreased moderately in January, declined again in February, reaching an all-time low. The Index fell to 25.0 (1985=100) from 37.4 in January. The Present Situation Index fell to 21.2 from 29.7 last month. The Expectations Index decreased to 27.5 from 42.5 in January. Lynn Franco, Director of The Conference Board Consumer Research Center said: “The Consumer Confidence Index™, which was relatively flat in January, reached yet another all-time low in February (Index began in 1967). The decline in the Present Situation Index, driven by worsening business conditions and a rapidly deteriorating job market, suggests that overall economic conditions have weakened even further this quarter. Looking ahead, increasing concerns about business conditions, employment and earnings have further sapped confidence and driven expectations to their lowest level ever. In addition, inflation expectations, which had been easing over the past several months, have moderately picked up. All in all, not only do consumers feel overall economic conditions have grown more dire, but just as disconcerting, they anticipate no improvement in conditions over the next six months.” Consumers’ short-term outlook turned significantly more negative this month. Consumers anticipating business conditions will worsen over the next six months increased to 40.5 percent from 31.1 percent, while those expecting conditions to improve declined to 8.7 percent from 12.8 percent in January. The employment outlook was also much grimmer. The percentage of consumers expecting fewer jobs in the months ahead increased to 47.3 percent from 36.9 percent, while those expecting more jobs declined to 7.1 percent from 9.1 percent. The proportion of consumers expecting an increase in their incomes declined to 7.6 percent from 10.3 percent. Reuters/University of Michigan The Reuters/University of Michigan Surveys of Consumers also reported lower confidence. The report indicated that the Index of Consumer Sentiment was 56.3 in February, down from 61.2 in January and 70.8 last February. The cyclical peak was 96.9 in January 2007. The Index of Consumer Expectations was 50.5 in February, down from 57.8 in January and 62.4 last February. This was the largest decline recorded during the past half century, falling 42 percent from the cyclical peak. The report indicated that consumers came to the consensus view that the economy would remain in recession throughout 2009. Moreover, nearly two-thirds anticipated that the downturn would last five more years. “More consumers than at any other time in the past fifty years have voiced their concerns about the deepening recession and rising unemployment,” according to Richard Curtin, the Director of the Reuters/ University of Michigan Surveys of Consumers. Few consumers now expect the recession to end anytime soon even with the aid of the new stimulus package recently signed into law. Recent economic developments reported by consumers have been quite negative, ranging from bailouts of banks and manufacturers, mortgage foreclosures and bankruptcies, the freezing of credit markets, and plunging home and stock prices. “Despite the many aspects of the current economic crisis, the single event that has dominated the concerns of consumers has been the rapid increase in joblessness,” Curtin noted. Consumers expect the unemployment rate to rise to 9 percent before the end of 2009, and their heightened concerns about their future job and income prospects have prompted consumers to reduce their spending. Overall, the data indicate that total real personal consumption spending is expected to decline by -1.6 percent in 2009, twice as steep as the worst prior annual decline since WWII. Buying plans remained largely unchanged at depressed levels in February. Consumers favored postponing planned purchases because of their heightened uncertainty about their future job and income prospects despite the widespread recognition that steep price discounts were now available. This was true for a wide range of household durables as well as vehicles. Record proportions of homeowners reported declines in the value of their homes as well as anticipated additional declines during the year ahead. This soured conditions for selling their homes, and as a consequence, their plans to purchase a new home. Gross Domestic Product (GDP) 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 6.2 percent in the fourth quarter of 2008, (that is, from the third quarter to the fourth quarter), according to preliminary 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 contribution from 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. Real GDP increased 1.1 percent in 2008 (that is, from the 2007 annual level to the 2008 annual level), compared with an increase of 2.0 percent in 2007. The major contributors to the increase in real GDP in 2008 were exports, personal consumption expenditures (PCE) for services, federal government spending, nonresidential structures, and state and local government spending. These were partly offset by negative contributions from residential fixed investment, PCE for goods, private inventory investment, and equipment and software. Imports, which are a subtraction in the calculation of GDP, decreased. Leading Economic Indicators The Conference Board Leading Economic Index™ for the U.S. increased 0.4 percent in January, following a 0.2 percent increase in December and a 0.7 percent decline in November. Ken Goldstein, Economist at The Conference Board said, “The economy has been in recession for over a year, but the level of intensity may begin to ease over the next few months. The second half of 2009 may see a period of anemic growth. In fact, a return to robust growth may not occur until well into 2010, even if the long climb starts a few months from now.” The Conference Board Coincident Economic Index™ for the U.S. declined 0.5 percent in January, following a 0.5 percent decline in December, and a 0.5 percent decline in November. The Conference Board Lagging Economic Index™ for the U.S. declined 0.1 percent in January, following a 0.2 percent decline in December, and a 0.6 percent increase in November. Housing Existing-Home Sales Existing-home sales declined in January with some buyers waiting to see how details of the economic stimulus package would affect them, according to the National Association of Realtors® (NAR). At the same time, inventories fell to a two-year low. Existing-home sales – including single-family, townhomes, condominiums and co-ops – fell 5.3 percent to a seasonally adjusted annual rate of 4.49 million units in January from a level of 4.74 million units in December, and are 8.6 percent lower than the 4.91 million-unit pace in January 2008. Single-family home sales fell 4.7 percent to a seasonally adjusted annual rate of 4.05 million in January from a pace of 4.25 million in December, and were 7.1 percent less than a 4.36 million-unit level in January 2008. The median existing single-family home price was $169,900 in January, which is 13.8 percent below a year ago. Regionally, existing-home sales in the Northeast dropped 14.7 percent in January, and were 23.8 percent lower than January 2008. The median price in the Northeast was $228,200, down 14.7 percent from a year ago. Existing-home sales in the Midwest fell 5.7 percent in January and were 16.7 percent below a year ago. The median price in the Midwest was $138,100, which was 6.8 percent lower than January 2008. In the South, existing-home sales declined 5.7 percent in January, and were 15.9 percent below January 2008. The median price in the South was $152,100, down 7.4 percent from a year earlier. Existing-home sales in the West were unchanged in January and were 29.0 percent stronger than a year ago. The median price in the West was $220,000, which is 25.5 percent below January 2008. Lawrence Yun, NAR chief economist, said there was understandable hesitation by some home buyers. “Given so much stimulus package discussion in January, some would-be buyers simply sat out for clarity and certainty on the nature of housing stimulus,” he said. “The housing market will soon get a lift from very favorable buying conditions ― not only from improved affordability, but also from the stimulus of an $8,000 first-time home buyer tax credit, and higher conforming loan limits that will allow more people to tap into 50-year low mortgage rates.” Total housing inventory at the end of January fell 2.7 percent to 3.60 million existing homes available for sale, which represents a 9.6-month supply at the current sales pace. Because sales were down, the January supply is up from a 9.4-month supply in December. “The drop in total inventory is an encouraging sign because the number of homes on the market has declined steadily since peaking in July 2008, and inventory is at the lowest level in two years,” Yun said. In January 2007 there were 3.54 million homes for sale. New Residential Sales Sales of new one-family homes in January 2009 were at a seasonally adjusted rate of 309,000 according to estimates from the U.S. Census Bureau. This was 10.2 percent below the revised December 2008 rate and was 48.2 percent below the January 2008 rate. The median sales price of new houses sold in January was $201,100 while the average sales price was $234,600. The inventory of new houses represented a 13.3-month supply at the current rate. As has been the case, the sales of new homes was off across the country, with sales down 50.9 percent in the Northeast, 33.8 percent in the Midwest, 45.9 percent in the South and 59.9 percent in the West. Housing Starts Single family housing starts in January were 12.2 percent below December. For all privately owned housing, starts were 16.8 percent below the revised December rate and were 50.5 percent below January 2008. Retail Sales According to the U.S. Census Bureau, advance estimates of U.S. retail and food services sales for January, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, increased 1.0 percent from the previous month, but were 9.7 percent below January 2008. Total sales for the November 2008 through January 2009 period were down 9.5 percent from the same period a year ago. The November to December 2008 percent change was revised from -2.7 percent to -3.0 percent. Retail trade sales were up 1.1 percent from December 2008, but were 11.0 percent below last year. Gasoline stations sales were down 35.5 percent from January 2008 and motor vehicle and parts dealers sales were down 22.2 percent from last year. Sales at furniture and home furnishings stores were down 1.3 percent from December and were 14.3 percent lower than January 2008 on an adjusted basis. On a non-adjusted basis, sales for January dropped 13.9 percent. In addition to a 22.6 percent drop at motor vehicle and parts dealers and the 34.5 percent drop at gasoline stations (due to the drop in oil prices), sales at building materials and garden equipment and supplies dealers dropped 15.5 percent. Consumer Prices The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in January, before seasonal adjustment, according to the Bureau of Labor Statistics of the U.S. Department of Labor. The January level of 211.143 (1982-84=100) was virtually unchanged from January 2008. On a seasonally adjusted basis, the CPI-U increased 0.3 percent in January after declining in each of the three previous months. The energy index climbed 1.7 percent in January; its first increase in six months, but it was still 31.4 percent below its July 2008 peak level. Within energy, the gasoline index rose 6.0 percent in January after a 19.3 percent decline in December. The food index, which rose sharply during the summer and moderated through the fall, increased 0.1 percent in January after being virtually unchanged in December. The food index has risen 5.3 percent over the past year. Employment Nonfarm payroll employment fell sharply in January (-598,000) and the unemployment rate rose from 7.2 to 7.6 percent, according to the Bureau of Labor Statistics of the U.S. Department of Labor. Payroll employment has declined by 3.6 million since the start of the recession in December 2007; about one-half of this decline occurred in the past 3 months. In January, job losses were large and widespread across nearly all major industry sectors. The number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 2.6 million in January. Over the past 12 months, the number of long-term unemployed was up by 1.3 million. The number of persons unemployed less than 5 weeks rose to 3.7 million in January. By category, the report indicated losses in manufacturing employment of 207,000; construction − 111,000; temporary help − 76,000 and retail trade − 45,000. Since the recent peak, construction has lost 1 million; temporary help was down 695,000 and retail trade was down 592,000. Durable Goods Orders and Factory Shipments According to the U.S. Census Bureau, new orders for manufactured durable goods in January decreased $9.0 billion or 5.2 percent. This was the sixth consecutive monthly decrease and followed a 4.6 percent December decrease. Excluding transportation, new orders decreased 2.5 percent. Excluding defense, new orders decreased 2.3 percent. Transportation equipment, down five of the last six months, had the largest decrease, 13.5 percent. Shipments of manufactured durable goods in January, down six consecutive months, decreased $6.9 billion or 3.7 percent. This followed a 1.4 percent December decrease. Machinery, down three of the last four months, had the largest decrease at 8.6 percent. Based on the full report from the Census Bureau, all manufacturing industries shipments were up 2.0 percent for the year, while durable goods shipments were off 2.7 percent and orders were off 5.8 percent. For the furniture and related products category, the report noted that shipments in December were off 13.1 percent from last year and were down 7.2 percent for the year ― considerably less than our survey. The survey showed orders in this category down 14.7 percent for the month. Consumer Credit According to the Federal Reserve, consumer credit outstanding fell 3.1 percent in December with revolving credit falling 7.8 percent after an 8.5 percent decline in November. For the quarter ending December, total consumer debt was down 3.1 percent with revolving credit down 5.4 percent ― following a 4.5 percent increase in the third quarter. Summary As we noted above, December results were in line with expecta-tions based on all the conversations we had in late December and early January. We are not expecting January results to be much better based on recent conversations. Most of the current economic reports are not predicting much of an upturn for the rest of 2009, although some are thinking (may be hoping) that there could be some improvement in the third and fourth quarters of 2009. We think the best advice now is to try to right size your business to today’s volume levels in order to get costs in line with today’s levels. Many of you have taken those steps (or at least some of them) and we know there have been and will be more tough decisions to make. Most companies that are doing 30 to 100 or even 200 million or more, did not start at that level. So if you are off 20 percent, think back to where you were when you were doing 20 percent less. Yes, we know margins have shrunk as well and factories are not full so there are fixed costs that have to be absorbed. Yet it is worth taking a look at where your costs are today versus where they were however many years ago when volume had not grown to last years’ levels. We have also noted before, to quote on many who use this term, cash is king. So clear out all that old stuff that sits in the plants and warehouses and convert what you can to cash. If nothing else, it will help efficiencies when business gets better by not having those items cluttering up the plants and warehouses. Ok, we know that’s easier said than done, but it is still worth looking at the possibilities. Now, for those of you who constantly critique the negative news we report, we would like to share some thoughts from our article given to us by a tall good looking client of ours. (No, I won’t name him but you all know some tall good looking guy, don’t you?) The article written by a Victor Hanson talks about comparing the current economic environment to the great depression, but more importantly takes a different look at the economy. Quoting from the article, it notes “Nearly 93 percent of those Americans in the workforce are still employed. The difference between what the banks pay out in interest on depositors’ savings and what they charge borrowers for loans is one of the most profitable in recent memory. The sudden crash in energy prices may be hurting Iran, the Gulf monarchies, Russia, and Venezuela. Yet Americans, who import 60 percent of their transportation fuel, along with natural gas, have been given about a half-trillion-dollar annual reprieve. The reduced price of energy could translate into more than $1,500 in annual savings for the average driver and hundreds of dollars off the heating and cooling bills for the homeowner. For the vast majority of Americans with jobs, the fall in prices for almost everything from food to cars has, in real dollars, meant an actual increase in purchasing power. The loss in value of home equity is serious for those who need to relocate for work or want to downsize and move to an apartment or a retirement community. But when averaged over the last decade, real estate still shows a substantial annual increase in value. Moreover, the vast majority of American homeowners ― well over 90 percent ― meet their mortgage payments. They have no plans to flip their homes for profit. For them, the fact that they have lost paper equity, or even owe more than their homes are currently appraised at, is scary ― but not equivalent to a depression. Most are confident that after a few years their houses will appreciate again. As for now, working young couples have a chance to buy a house that would have been impossible just two years ago.” These were just a few of the things mentioned in his article. So yes, things are bad in many cases, but we are probably not as bad as we continue to hear in the news. Riding out this storm is tough and some will not make it, but for those who figure a way to survive, there could be some good times coming. With consumer debt down and many consumers holding off on non-essential purchases, there could be a great deal of pent up demand when things return to a somewhat normal state. So says Edgar Allan Smith – fiction writer. ___________________________ 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