Monthly Furniture Insights from Smith and Leonard

Furniture World News Desk on 4/1/2019

MONTHLY RESULTS

New Orders
According to our latest survey of residential furniture manufacturers and distributors, new orders in January 2019 were 8% higher than January 2018 orders. January 2018 orders were 2% higher than January 2017 orders. The January orders were slightly higher than December 2018.
While new orders were up 8% overall, the results were not necessarily good for all participants as only one half of the participants reported increased orders for the month versus last year. Many of those with reduced orders reported small declines but there were also some very positive results from those with increased order rates.

Shipments and Backlogs
For only the second time in the last six months, shipments in January exceeded new orders. Shipments in January were 14% higher than January 2018 shipments. January 2018 shipments were about even with January 2017 shipments.

Some 75% of the participants reported increased shipments compared to the same month a year ago.

With shipments exceeding orders, backlogs fell 6% from December levels. January backlogs were now only 9% ahead of January 2018, down from 13% reported last month.

Receivables and Inventories
In January 2019, receivable levels were 12% higher than January 2018 levels, certainly in line with the 14% increase in shipments for the month. While 2% higher than December with shipments flat, overall receivable levels appear very much in line. We are not sure if the reports we received reflected potential write-offs of two fairly large bankruptcy filings.

Inventories were up 5% over January 2018 and up from December. In December inventory levels were 6% higher than the previous December, so overall inventory levels appear to be in good shape considering current business conditions, at least through January.

Factory and Warehouse Employees and Payroll
The number of factory and warehouse employees fell 1% from December and were 2% below January 2018. Factory and warehouse payrolls were up 1% from December but up 6% from January 2018. Last January, payrolls were down 1% from the previous year.

With shipments and orders increasing through January, the 6% increase is not all that surprising. Part of the increase could also be timing, so we will see as we get through February and March where the levels are then.

NATIONAL

Consumer Confidence
The Conference Board’s Consumer Confidence Index® declined in March, after increasing in February. The Index now stands at 124.1 (1985=100), down from 131.4 in February. The Present Situation Index – based on consumers’ assessment of current business and labor market conditions – declined, from 172.8 to 160.6. The Expectations Index – based on consumers’ short-term outlook for income, business and labor market conditions – decreased from 103.8 last month to 99.8 this month.

“Consumer Confidence decreased in March after rebounding in February, with the Present Situation the main driver of this month’s decline,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Confidence has been somewhat volatile over the past few months, as consumers have had to weather volatility in the financial markets, a partial government shutdown and a very weak February jobs report. Despite these dynamics, consumers remain confident that the economy will continue expanding in the near term. However, the overall trend in confidence has been softening since last summer, pointing to a moderation in economic growth.”

Consumers’ assessment of current conditions declined in March. The percentage of consumers stating business conditions are “good” decreased from 40.6% to 33.4%, while those saying business conditions are “bad” increased from 11.1% to 13.6%. Consumers’ assessment of the labor market was less upbeat. Those stating jobs are “plentiful” decreased from 45.7% to 42.0%, while those claiming jobs are “hard to get” increased from 11.7% to 13.7%.

Consumers’ optimism about the short-term future moderated in March. The percentage of consumers expecting business conditions will improve over the next six months declined from 19.6% to 17.7%, while those expecting business conditions will worsen remained relatively flat, 9.3% versus 9.2% last month.

Regarding their short-term income prospects, the percentage of consumers expecting an improvement rose slightly, from 20.6% to 21.0%, while the proportion expecting a decrease declined, from 8.3% to 7.6%.

University of Michigan Surveys of Consumers
Surveys of Consumers Chief Economist, Richard Curtin, said “Consumer confidence rebounded in March to 98.4 from last month’s 93.8, slightly above the average of 97.2 recorded in the past 26 months. The March gain in the Sentiment Index was entirely due to households with incomes in the bottom two-thirds of the income distribution, posting a gain of +7.1 Index-points, while households with incomes in the top third fell by 1.1 Index-points.

Middle and lower income households more frequently reported income gains than last month, although income gains were still widespread among upper income households. Indeed, the last time a larger proportion of households reported income gains was in 1966. Rising incomes were accompanied by lower expected year-ahead inflation rates, resulting in more favorable real income expectations. Moreover, all income groups voiced more favorable growth prospects for the overall economy. While no further decline in interest rate expectations was recorded in March, the data suggest that consumers anticipated additional increases in 2019.

Finally, it should be noted that too few interviews were conducted following the summary release of the Mueller report to have any impact on the March data; if there is any, it may affect the April data. Overall, the data do not indicate an emerging recession but point toward slightly lower unit sales of vehicles and homes during the year ahead.”

Leading Economic Indicators
The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.2% in February to 111.5 (2016=100), following no change in January, and a 0.1% decline in December.

“The U.S. LEI increased in February for the first time in five months,” said Ataman Ozyildirim, Director of Economic Research at The Conference Board. “February’s improvement was driven by accommodative financial conditions and a rebound in stock prices, which more than offset weaknesses in the labor market components. Despite the latest results, the U.S. LEI’s growth rate has slowed over the past six months, suggesting that while the economy will continue to expand in the near-term, its pace of growth could decelerate by year end.”

The Conference Board Coincident Economic Index® (CEI) for the U.S. increased 0.2% in February to 105.9 (2016=100), following a 0.1% increase in January, and a 0.4% increase in December.

The Conference Board Lagging Economic Index® (LAG) for the U.S. was unchanged in February at 107.0 (2016=100), following a 0.6% increase in January and a 0.4% increase in December.

Gross Domestic Product
Real gross domestic product (GDP) increased at an annual rate of 2.2% in the fourth quarter of 2018, according to the “third” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.4%.

In the initial estimate, the increase in real GDP was 2.6%. With this estimate for the fourth quarter, the general picture of economic growth remains the same; personal consumption expenditures (PCE), state and local government spending, and nonresidential fixed investment were revised down; imports, which are a subtraction in the calculation of GDP, were also revised down.

The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, exports, private inventory investment, and federal government spending. Those were partly offset by negative contributions from residential fixed investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP growth in the fourth quarter reflected decelerations in private inventory investment, PCE, and federal government spending and a downturn in state and local government spending. These movements were partly offset by an upturn in exports and an acceleration in nonresidential fixed investment. Imports increased less in the fourth quarter than in the third quarter.

HOUSING

Existing-Home Sales
Existing-home sales rebounded strongly in February, experiencing the largest month-over-month gain since December 2015, according to the National Association of Realtors® (NAR). Three of the four major U.S. regions saw sales gains, while the Northeast remained unchanged from last month.

Total existing-home sales, completed transactions that include single-family homes, townhomes, condominiums and co-ops, shot up 11.8% from January to a seasonally adjusted annual rate of 5.51 million in February. However, sales were down 1.8% from a year ago (5.61 million in February 2018).

Single-family home sales sit at a seasonally adjusted annual rate of 4.94 million in February, up 13% from 4.36 million in January and down 1.4% from a year ago. The median existing single-family home price was $251,400 in February, up 3.6% from February 2018.

Existing condominium and co-op sales were recorded at a seasonally adjusted annual rate of 570,000 units in February, unchanged from last month and down 5.0% from a year ago. The median existing condo price was $233,300 in February, which was up 3.1% from a year ago.
The median existing-home price for all housing types in February was $249,500, up 3.6% from February 2018 ($240,800). February’s price increase marks the 84th straight month of year-over-year gains.

Total housing inventory at the end of February increased to 1.63 million, up from 1.59 million existing homes available for sale in January, a 3.2% increase from 1.58 million a year ago. Unsold inventory is at a 3.5-month supply at the current sales pace, down from 3.9 months in January but up from 3.4 months in February 2018.

“It is very welcoming to see more inventory showing up in the market,” says Yun. “Consumer foot traffic consequently is rising as measured by the opening rate of SentriLockỏ _key boxes.”

Properties remained on the market for an average of 44 days in February, down from 49 days in January but up from 37 days a year ago. Forty-one percent of homes sold in February were on the market for less than a month.

“For sustained growth, significant construction of moderately priced-homes is still needed. More construction will help boost local economies and more home sales will help lessen wealth inequality as more households can enjoy in housing wealth gains.” A typical homeowner accumulated an estimated $8,700 in housing equity over the past 12 months and $21,300 over the past 24 months.

According to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage decreased to 4.37% in February from 4.46% in January. The average commitment rate across all of 2018 was 4.54%.

First-time buyers were responsible for 32% of sales in February, up from last month and a year ago (both 29%). NAR’s 2018 Profile of Home Buyers and Sellers - released in late 2018- revealed that the annual share of first-time buyers was 33%.

Regional
February existing-home sales numbers in the Northeast were identical to last month. The annual rate of 690,000 was 1.5% above a year ago. The median price in the Northeast was $272,900, which was up 3.8% from February 2018.

In the Midwest, existing-home sales rose 9.5% from last month to an annual rate of 1.27 million, roughly even to February 2018 levels. The median price in the Midwest was $188,800, which was up 5.4% from last year.

Existing-home sales in the South grew 14.9% to an annual rate of 2.39 million in February, down 0.4% from last year. The median price in the South was $219,300, up 2.5% from a year ago.

Existing-home sales in the West rocketed 16.0% to an annual rate of 1.16 million in February, 7.9% below a year ago. The median price in the West was $379,300, up 3.0% from February 2018.

Housing Starts
The U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly announced that privately-owned housing starts in February were at a seasonally adjusted annual rate of 1,162,000. This was 8.7% below the revised January estimate of 1,273,000 and was 9.9% below the February 2018 rate of 1,290,000. Single-family housing starts in February were at a rate of 805,000; this was 17.0% below the revised January figure of 970,000. The February rate for units in buildings with five units or more was 352,000.

New privately-owned single unit home starts in February 2019 compared to February 2018 were up 0.9% in the Midwest and 0.4% in the South but were down 27.7% in the Northeast and 32.0% in the West.

Privately-owned housing completions in February were at a seasonally adjusted annual rate of 1,303,000. This was 4.5% above the revised January estimate of 1,247,000 and was 1.1% above the February 2018 rate of 1,289,000. Single-family housing completions in February were at a rate of 816,000; this was 10.0% below the revised January rate of 907,000 and down 7.5% from February 2018.

New Residential Sales
The U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly announced that sales of new single-family houses in January 2019 were at a seasonally adjusted annual rate of 607,000, according to estimates released jointly by the U.S. Census Buread and the Department of Housing and Urban Development. This was 6.9% below the revised December rate of 652,000 and was 4.1% below the January 2018 estimate of 633,000.

Sales in January 2019 compared to January 2018 were down 11.4% in the Northeast, 41.9% in the Midwest and 3.2% in the West. Sales were up 6.2% over last year in the South.

Retail Sales
Advance estimates of U.S. retail and food services sales for January 2019, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $504.4 billion, an increase of 0.2% from the previous month, and 2.3% above January 2018, according to the U.S. Census Bureau. Total sales for the November 2018 through January 2019 period were up 2.6% from the same period a year ago.

Retail trade sales were up 0.2% from December 2018, and 1.9% above last year. Building material and garden equipment and supplies dealers were up 8.7% from January 2018, while nonstore retailers were up 7.3% from last year.

Sales at furniture and home furnishings stores were down 2.5% from January 2018 and down 1.2% from December.

Consumer Prices
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2% in February on a seasonally adjusted basis after being unchanged in January, according to the U.S. Bureau of Labor Statistics. Over the last 12 months, the all items index increased 1.5% before seasonal adjustment.

The indexes for shelter and food increased, and the gasoline index rose after recent declines to result in the seasonally adjusted all items increase. The food index rose 0.4%, its largest monthly increase since May 2014, as both the food at home and food away from home indexes increased. The gasoline index rose 1.5% in February, following three consecutive monthly declines, resulting in the energy index rising 0.4% despite declines in the electricity and natural gas indexes.

The index for all items less food and energy increased 0.1% in February after rising 0.2% in January. Along with the shelter index, the indexes for personal care, apparel, and education all increased. The indexes for recreation, medical care, used cars and trucks, and new vehicles all declined in February.

The all items index increased 1.5% for the 12 months ending February, a smaller increase than the 1.6% rise for the 12-months ending January. The index for all items less food and energy rose 2.1% over the last 12 months, a slightly smaller figure than the 2.2% increase for the period ending January. The food index rose 2.0% over the past year, its largest 12-month increase since the period ending April 2015. In contrast, the energy index declined 5.0% over the last 12 months.

Employment
Total nonfarm payroll employment changed little in February (+20,000), and the unemployment rate declined to 3.8%, according to the U.S. Bureau of Labor Statistics report. Employment in professional and business services, health care, and wholesale trade continued to trend up, while construction employment decreased.

The unemployment rate declined by 0.2 percentage point to 3.8% in February, and the number of unemployed persons decreased by 300,000 to 6.2 million. Among the unemployed, the number of job losers and persons who completed temporary jobs (including people on temporary layoff) declined by 225,000. This decline reflects, in part, the return of federal workers who were furloughed in January due to the partial government shutdown.

In February, the number of long-term unemployed (those jobless for 27 weeks or more) was essentially unchanged at 1.3 million and accounted for 20.4% of the unemployed.

Manufacturing employment changed little in February (+4,000), after increasing by an average of 22,000 per month over the prior 12 months.

Durable Goods Orders and Factory Shipments
New orders for manufactured durable goods in January increased $0.9 billion or 0.4% to $255.3 billion, according to the U.S. Census Bureau. This increase, up three consecutive months, followed a 1.3% December increase. Excluding transportation, new orders decreased 0.1%. Excluding defense, new orders increased 0.7%. Transportation equipment, up five of the last six months, drove the increase, $1.0 billion or 1.2% to $90.9 billion.

Shipments of manufactured durable goods in January, down following two consecutive monthly increases, decreased $1.3 billion or 0.5% to $257.9 billion. This followed a 0.7% December increase. Transportation equipment, also down following two consecutive monthly increases, drove the decrease, $1.3 billion or 1.4% to $90.0 billion.

According to the full report for January 2019 results, new orders for furniture and related products were up 3.4% from January 2018 and shipments were up 3.7%.

EXECUTIVE SUMMARY

As we noted last month, many of our conversations since the first of the year have indicated that business seemed a little slow, but as we see, at least through January, new orders have continued to grow at a decent level, with new orders up 8% over January 2018. January 2018 orders were 2% higher than January 2017. December 2018 orders were up 7% over December 2017.

The not so good news is that everyone was not participating in these good results. In January, only one-half of the participants reported increased orders for the month. This was up from approximately 45% reporting increases last month. There were a good number of participants reporting only slight declines, but clearly these results do not reflect the rising tides that we would hope for.

The good news for January was that shipments were up 14% over January 2018 and some 75% of the participants reported increased shipments for the month. New orders are critical but shipments and subsequent collections pay the bills.

Shipments exceeded orders so backlogs fell 6% from December. Backlogs remained 9% ahead of last year, down from a 13% increase reported last month.

Receivable levels were up 12% but with the 14% increase in shipments, those levels seem in line. Inventories are 6% higher than January 2018, but again, these levels do not seem out of line considering the overall order and shipment rates.

Factory and warehouse payrolls and employees also seem in line. While the number of employees was down a bit, payrolls were up but not seemingly out of line.

NATIONAL

Consumer Confidence
Consumer Confidence fell in December and January but came back a bit in February. Unfortunately, according to the Conference Board, confidence fell again in March. The report noted that “Confidence has been somewhat volatile over the past few months, as consumers have had to weather volatility in the financial markets, a partial government shutdown and a very weak February jobs report.” But it does appear from the survey that consumers are confident that the economy will continue to expand in the near term.

The outlook for business conditions fell as well as labor markets. The outlook for short-term income though held steady.

The University of Michigan Surveys of Consumers report was different than the Conference Board’s report. The report noted that consumer confidence increased in March due primarily to households with incomes in the bottom two-thirds of the income distribution posting significant gains versus those in higher income brackets. Both groups voiced favorable growth prospects for the overall economy.

Housing
We saw mixed results in the housing markets. Existing home sales rebounded in February, reporting the largest month over month gain since December 2015. Three of the four regions reported gains in February with the Northeast unchanged. Sales remained 1.8% below a year ago. The report noted that a combination of lower mortgage rates, more inventory, rising income and relatively high consumer confidence was driving the sales rebound.

New home sales in January were 6.9% below December 2018 and 4.6% below January 2018. (This report was delayed due to government shutdown.) Sales were down in three regions with only the South reporting an increase.

Housing starts were also disappointing in February. Starts were 8.7% below January and 9.9% below February 2018. Starts were down significantly in the Northeast and West, while only up slightly in the Midwest and South.

The good news was that housing completions in February were 4.5% ahead of January and 1.1% ahead of February 2018

Other
The Conference Board’s Leading Economic Index for the U.S. (LEI) increased 0.1% in February following no change in January and a 0.1% decline in December. The report noted that while growth has slowed in the past six months, the economy should continue to expand in the near term, though the pace of growth could decelerate by year end.

Advance reports for U.S. retail and food services sales for January indicated an increase in sales of 0.2% over December and were up 2.3% over last January. Unfortunately, the report noted that sales at furniture and home furnishings stores were down 2.5% from January 2018 after showing a 3.5% increase for all of 2018 compared to 2017.

The Consumer Price Index increased 0.2% in February due to increases in shelter and food costs as well as an increase in the gasoline index. Over the last 12 months, the all items index increased 1.5%, down from 1.6% reported through January.

The most disappointing national news came from the nonfarm payroll employment, as while the unemployment rate dropped down to 3.8%, total employment only increased an estimated 20,000. The number of unemployed fell 300,000 affected somewhat by the temporary layoffs of government employees.

THOUGHTS

The results of our survey continue to show pretty decent results, especially considering much of the conversations over the last few months. But keep in mind that these results reported this month were through January. Last month we noted that some of the increase may have related to potential tariff issues. We also imagine some of January results could also have been affected by trying to beat any tariffs.

But obviously, not all the participants have had the same success with only 50% reporting increases this month and 45% in December.

Most recently, and we are borrowing from a client conversation yesterday, the words being used at retail and wholesale are “challenging.” It was also noted that traffic has been off. Maybe “traffic” has been off because weather has been so lousy for so long. That seems to be true for most parts of the country.

Add to that the volatility in the financial markets the government shutdown, the continued political rhetoric, and the slowdown of the economy in general, it seems to have slowed growth in certain areas.

The two consumer confidence surveys were once again at odds with each other. The whole reports included in our deeper dive are worth reading, especially the University of Michigan report.

Spring time is coming and so is an early High Point Market. We hope all retailers and designers will come. While business may be not all that great, it is hard to imagine being in the furniture business and not coming to see the latest in the best fashions available anywhere. We hope to see you.