Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

Furniture Insights

Monthly Results

New Orders

New orders in June 2010 increased 9 percent over orders in June 2009, according to our recent survey of residential furniture manufacturers and distributors. This compares to a 16 percent decline when comparing June 2009 to June 2008. Approximately 69 percent of the participants reported an increase in orders for the month compared to June a year ago, up slightly from last month’s results.

Year-to-date, new orders remained at 10 percent higher than the first half of 2009, when orders for the first half of 2009 were 20 percent below the first half of 2008. This would mean that orders for the first half of 2010 were 12.5 percent below the first half of 2008. Approximately 64 percent of the participants reported increased orders for the first half, with several others down only 1 to 2 percent.

Shipments and Backlogs

Shipments in June were 13 percent higher than June a year ago, apparently catching up a bit on some of the backlog increases. Shipments in June 2009 were 19 percent below June 2008, so June 2010 was still considerably lower than June 2008. Some 67 percent of the participants reported increases in shipments, with some up substantially. The 67 percent was up slightly from last month.

Year-to-date, shipments are now up 7 percent (up from 6 percent last month) compared to the first half of last year. Last year’s first 6 months were off 20 percent from the first half of 2008.

Backlogs were up 35 percent over June 2009 (down from a 40 percent increase reported last month). Backlogs were 5 percent lower than May 2010 which was part of the reason for the 13 percent increase in shipments.

Receivables and Inventories

Receivables were 6 percent higher in June 2010 compared to June 2009. This increase appeared very reasonable in light of the monthly shipment increase, as well as, the year-to-date increase. While we continue to hear of some stretching out in days sales in receivables, we think that overall, receivables are in reasonable shape.

Inventories increased 5 percent over May and were 2 percent higher than June 2009. In June 2009, inventories were 20 percent lower than June 2008 so it appears that inventories remain under control, even considering the increases in business. From what we have heard, most companies have pretty much rid themselves of their older or obsolete inventories in order to create cash (or reduce borrowings). This seems to be allowing inventories to remain at lower levels in spite of the increase in business. Also, generally speaking, most companies appear to continue to try to keep levels low.

Factory and Warehouse Employees and Payrolls

The number of employees in June was flat with May 2010 and was up 2 percent over June 2009. June 2009 employees were 19 percent lower than June 2008.

Payrolls were 17 percent higher than June 2009 and 9 percent higher than May. June 2009 payrolls were 22 percent lower than June 2008. The increase in June over May seems to reflect the better business conditions as most companies had significantly reduced payrolls throughout 2009.
The increase in payrolls that exceeded the number of employees’ percentage appears to be the result of companies letting workers work more hours, typically from reduced schedules in prior months.

National

Consumer Confidence

The Conference Board Consumer Confidence Index® which had declined in July, improved moderately in August. The Index now stands at 53.5 (1985=100), up from 51.0 in July. The Present Situation Index decreased to 24.9 from 26.4. The Expectations Index increased to 72.5 from 67.5 last month.

Lynn Franco, Director of The Conference Board Consumer Research Center said: “Consumer confidence posted a modest gain in August, the result of an improvement in consumers’ short-term outlook. Consumers’ assessment of current conditions, however, was less favorable as employment concerns continue to weigh heavily on consumers’ attitudes.

Expectations about future business and labor market conditions have brightened somewhat, but overall, consumers remain apprehensive about the future. All in all, consumers are about as confident as they were a year ago (Aug. 2009, 54.5).”

The report noted that consumers’ expectations improved moderately in August, but overall, they remain pessimistic. Those anticipating an improvement in business conditions over the next six months increased to 17.0 percent from 15.8 percent, while those anticipating conditions will worsen declined to 13.4 percent from 15.3 percent.

Consumers were also slightly less pessimistic about future employment prospects. Those expecting more jobs in the months ahead increased to 14.6 percent from 14.2 percent, while those anticipating fewer jobs decreased to 19.4 percent from 20.9 percent. The proportion of consumers expecting an increase in their incomes held steady at 10.6 percent.

Thomson Reuters/University of Michigan Surveys of Consumers
According to this report, “the overall level of confidence remained largely unchanged in August as consumers did not panic in the face of slowing economic growth and the media’s double-dip drumbeat. The bad news is that consumers expect lackluster income and job growth for an extended period of time. This “new normal” outlook has encouraged consumers to pare down their debts and increase their reserve funds. While the data indicate a slowdown in the pace of growth in consumption that will last into 2011, outright declines in consumer spending are very unlikely. Nonetheless, the finances of consumers remain quite weak, and any additional erosion could quickly reduce their spending even more.”

Surveys of Consumers chief economist, Richard Curtin said, “Optimism has been the primary characteristic of American consumers during the past half century. To be sure, consumers repeatedly suspended that optimism around recessions, but the suspension was always considered temporary. Now economic uncertainty reigns. It is far too early to declare that consumer pessimism has become the new default outlook of consumers. Nonetheless, the economic uncertainty that now exists has caused consumers to reduce their spending and increase their precautionary saving. The lesson of the financial crisis for consumers was that their best defense against economic adversity was to reduce their own debt.”

The Sentiment Index was 68.9 in the August 2010 survey, slightly above the 67.8 in July and last year’s 65.7. The Current Conditions Index improved by 17.6 percent from a year ago, due to more favorable personal finances situation as well as improvements in the economy. More importantly, a decline of 3.2% was recorded in the Expectations Index, a component of the Index of Leading Indicators.

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 1.6 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter), according to the “second” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent.

The increase in real GDP in the second quarter primarily reflected positive contributions from nonresidential fixed investment, personal consumption expenditures, exports, federal government spending, private inventory investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the second quarter primarily reflected a sharp acceleration in imports and a sharp deceleration in private inventory investment that were partly offset by an upturn in residential fixed investment, an acceleration in nonresidential fixed investment, an upturn in state and local government spending, and an acceleration in federal government spending.

Leading Economic Indicators

The Conference Board Leading Economic Index® (LEI) for the U.S. increased slightly in July (up 0.1 percent) after declining moderately in June. The interest rate spread, supplier deliveries and the average workweek made the largest positive contributions to the index this month, more than offsetting the negative contributions from consumer expectations, building permits and real money supply. The six-month change in the index has continued to slow – to 2.0 percent (a 4.1 percent annual rate) in the period through July 2010, down from 5.0 percent (about a 10.2 percent annual rate) for the previous six months. In addition, the strengths among the leading indicators have become less widespread, and were just balanced with the weaknesses over the past six months.

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

Housing

Existing-Home Sales

Existing-home sales were sharply lower in July following expiration of the home buyer tax credit but home prices continued to gain, according to the National Association of Realtors.

Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, dropped 27.2 percent to a seasonally adjusted annual rate of 3.83 million units in July from a downwardly revised 5.26 million in June, and are 25.5 percent below the 5.14 million-unit level in July 2009.

Single-family home sales dropped 27.1 percent to a seasonally adjusted annual rate of 3.37 million in July from a pace of 4.62 million in June, and are 25.6 percent below the 4.53 million level in July 2009; they were the lowest since May 1995 when the sales rate was 3.34 million. The median existing single-family home price was $183,400 in July, which is 0.9 percent above a year ago.

Lawrence Yun, NAR chief economist, said “a soft sales pace likely will continue for a few additional months. Consumers rationally jumped into the market before the deadline for the home buyer tax credit expired. Since May, after the deadline, contract signings have been notably lower and a pause period for home sales is likely to last through September. However, given the rock-bottom mortgage interest rates and historically high housing affordability conditions, the pace of a sales recovery could pick up quickly, provided the economy consistently adds jobs.”

“Even with sales pausing for a few months, annual sales are expected to reach 5 million in 2010 because of healthy activity in the first half of the year. To place in perspective, annual sales averaged 4.9 million in the past 20 years, and 4.4 million over the past 30 years,” Yun said.
“Thanks to the home buyer tax credit, home values have been stable for the past 18 months despite heavy job losses,” Yun said. “Over the short term, high supply in relation to demand clearly favors buyers. However, given that home values are back in line relative to income, and from very low new-home construction, there is not likely to be any measurable change in home prices going forward.”

Regionally, existing-home sales in the Northeast dropped 29.5 percent in July and are 30.3 percent lower than a year ago. The median price in the Northeast was $263,800, up 4.8 percent from July 2009.

Existing-home sales in the Midwest fell 35.0 percent in July and are 33.3 percent below July 2009. The median price in the Midwest was $151,600, down 2.8 percent from a year ago.

In the South, existing-home sales dropped 22.6 percent in July and are 19.8 percent below a year ago. The median price in the South was $156,300, down 3.3 percent from July 2009.

Existing-home sales in the West fell 25.0 percent in July and are 23.0 percent below a year ago. The median price in the West was $224,800, up 3.3 percent from July 2009.

New Residential Sales

Sales of new single-family houses in July 2010 were at a seasonally adjusted annual rate of 276,000, according to estimates released by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 12.4 percent below the revised June rate of 315,000 and is 32.4 percent below the July 2009 estimate of 408,000.

The median sales price of new houses sold in July 2010 was $204,000; the average sales price was $235,300. The seasonally adjusted estimate of new houses for sale at the end of July was 210,000. This represents a supply of 9.1 months at the current sales rate.

From July 2009, new houses sold were lower in all sections of the country, with sales in the West off 54.6 percent.

Housing Starts

According to the U.S. Census Bureau, privately-owned housing starts in July were at a seasonally adjusted annual rate of 546,000. This is 1.7 percent above the revised June estimate of 537,000, but is 7.0 percent below the July 2009 rate of 587,000. Single-family housing starts in July were at a rate of 432,000; this is 4.2 percent below the revised June figure of 451,000 and 13.6 percent below July 2009.

Retail Sales

According to the U.S. Census Bureau, advance estimates of U.S. retail and food services sales for July, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $362.7 billion, an increase of 0.4 percent from the previous month, and 5.5 percent above July 2009. Total sales for the May through July 2010 period were up 5.9 percent from the same period a year ago.

Retail trade sales were up 0.4 percent from June 2010, and 5.9 percent above last year. Nonstore retailers sales were up 12.6 percent from July 2009 and gasoline stations sales were up 12.2 percent from last year.

Sales at furniture and home furnishings stores, on an adjusted basis, were off 0.3 percent from June 2010, but were up 0.5 percent from July 2009. Year-to-date, sales at these stores were up 1.7 percent over the same period a year ago.

Consumer Prices

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in July on a seasonally adjusted basis, according to the U.S. Bureau of Labor Statistics. (Before seasonal adjustment, the all items index was unchanged for the month.) Over the last 12 months, the index increased 1.2 percent before seasonal adjustment.

The energy index posted its first increase since January and accounted for over two thirds of the seasonally adjusted all items increase. Both the gasoline and household energy indexes turned up in July after a series of declines. The food index, in contrast, declined in July, largely due to the fourth consecutive decline in the fruits and vegetables index.

The index for all items less food and energy rose 0.1 percent in July after increasing 0.2 percent in June. The indexes for shelter, apparel, used cars and trucks, and tobacco all continued to increase in July. In contrast, the indexes for medical care and recreation turned down in July and the indexes for airline fares and household furnishings and operations continued to decline. The 12-month change in the index for all items less food and energy remained at 0.9 percent for the fourth month in a row.

Employment

Total nonfarm payroll employment declined by 131,000 in July, and the unemployment rate was unchanged at 9.5 percent, according to the U.S. Bureau of Labor Statistics. Federal government employment fell, as 143,000 temporary workers hired for the decennial census completed their work. Private-sector payroll employment edged up by 71,000. The number of unemployed persons, at 14.6 million, was unchanged in July.

In July, the number of long-term unemployed (those jobless for 27 weeks and over) was little changed at 6.6 million. These individuals made up 44.9 percent of unemployed persons.

Durable Goods Orders and Factory Shipments

The U.S. Census Bureau reported that new orders for manufactured durable goods in July increased 0.3 percent to $193.0 billion. This increase followed two consecutive monthly decreases including a 0.1 percent June decrease. Excluding transportation, new orders decreased 3.8 percent. Excluding defense, new orders increased 0.3 percent.
Transportation equipment, also up following two consecutive monthly decreases, had the largest increase, 13.1 percent. This was due to nondefense aircraft and parts, which increased $4.0 billion.

Shipments of manufactured durable goods in July, up four of the last five months, increased 2.2 percent. This followed a 0.2 percent June increase.
Transportation equipment, also up four of the last five months, had the largest increase at 6.9 percent.

According to the Census Bureau, shipments in June 2010 of furniture and related products increased 4.3 percent over June 2009. Year-to-date, shipments in this category were 4.4 percent ahead of 2009.

Consumer Credit

The continued talk about the slow economy, the potential for a double dip, stock market woes, and continued high unemployment, continues to keep consumers from feeling good. That coupled with consumers continuing to reduce their debt loads (see the National Section of Consumer Debt), is just not letting consumers feel good about spending on non-necessary items.

According to the Federal Reserve statistical release, consumer credit decreased at an annual rate of 3-1/4 percent in the second quarter. Revolving credit decreased at an annual rate of 9-1/2 percent, and nonrevolving credit was about unchanged. In June, consumer credit decreased at an annual rate of ¾ percent, revolving credit decreased at an annual rate of 6-1/2 percent, and nonrevolving credit increased at an annual rate of 2-1/2 percent. This report seems to prove out some of the comments in the two consumer confidence surveys.

On the other hand, we are still selling furniture with some improved results in spite of all the bad news. That’s not all bad. We just need the economy to show some strength, but most seem to feel that might be a while. In the meantime, stay lean and hold on until the overall situation gets better.