Executive Summary

First of all, I’d like to thank Ken Smith for his dedication and service to the furniture industry over the years, including this very week helping to provide for a smooth transition with the newsletter. Ken has been a long-time friend and mentor to many of us both within the industry and here at Smith Leonard and his impact cannot be overstated. I am privileged and humbled to follow behind one of the greats with the support of our great Smith Leonard team and our countless combined years of experience serving the furniture and related industries. With that said, let’s get down to business shall we.

New orders rose 26% in November 2023 compared to November 2022, which marks the 7th straight month orders have grown double-digit percentages over the prior year. Year to date, new orders were up 4% over the same period of 2022, though 2022-to-date orders were down 34% over the same period of 2021. As we’ve stated previously, comparisons to prior years have been difficult due to the unprecedented circumstances impacting the industry since mid-2020, but that does seem to be normalizing, even if still not at the levels we’d prefer.

Shipments in November 2023 were down 16% from November 2022, which were up 1% from November 2021. Year to date, 2023 shipments were down 17% over the first 11 months of 2022. So despite recent improvement in monthly new orders, annual trends continue to be affected by many companies shipping from their historically high backlogs through much of 2022. Accordingly, November 2023 backlogs were up a modest 3% from October 2023, but down 35% compared to November 2022.

Receivable levels were up 5% from October, which may be a result of timing given the slight decrease in shipments. Receivable levels were down 13% from November 2022, which is materially in line with the year-to-date decline in shipments.

Inventories and employee levels were materially in line with October 2023, but down from November 2022, indicating that companies have substantially finished adjusting levels to match current operations.

National

Consumer Confidence

The Conference Board Consumer Confidence Index® rose in January to 114.8, up from a revised 108.0 in December. The reading was the highest since December 2021, and marked the third straight monthly increase. The Present Situation Index surged to 161.3 from 147.2 last month. The Expectations Index improved to 83.8 in January, up from a revised reading of 81.9 in December.

“January’s increase in consumer confidence likely reflected slower inflation, anticipation of lower interest rates ahead, and generally favorable employment conditions as companies continue to hoard labor,” said Dana Peterson, Chief Economist at The Conference Board. Consumers’ Perceived Likelihood of a US Recession over the Next 12 Months continued to gradually ease in January, consistent with an Expectations Index rising above 80.”

Peterson added: “Assessments of the present situation rose in January, buoyed by more positive views of business conditions and the employment situation. Furthermore, when asked to assess their current family financial conditions (a measure not included in calculating the Present Situation Index), the proportion reporting ‘good’ increased while those saying ‘bad’ fell. This suggests consumers are starting off the year in good spirits about their current finances.”

However, on a month-to-month and six-month basis, buying plans for autos, homes, and big-ticket appliances declined slightly for all three categories.

Housing

Existing home sales retreated in December. Among the four major U.S. regions, sales slipped in the Midwest and South, rose in the West, and were unchanged in the Northeast. All four regions experienced year-over-year sales decreases.

Total existing home sales decreased 1.0% from November to a seasonally adjusted annual rate of 3.78 million in December. Year-over-year, sales declined 6.2%.

Single-family home sales edged lower to a seasonally adjusted annual rate of 3.4 million in December, down 0.3% from 3.41 million in November and 6.1% from the previous year. The median existing single-family home price was $387,000 in December, up 4.0% from December 2022.

According to Freddie Mac, the 30-year fixed-rate mortgage averaged 6.60% as of January 18. That’s down from 6.66% the prior week but up from 6.15% one year ago.

Sales of new single‐family houses in December 2023 were at a seasonally adjusted annual rate of 664,000, which is 8.0% above the revised November rate of 615,000 and is 4.4% above the December 2022 estimate of 636,000. Compared to December 2022, sales were up 4.4% overall with sales up 3.7% in the South, 6.0% in the Midwest, and 7.6% in the West with sales down 2.9% in the Northeast.

Other

Real gross domestic product (GDP) increased at an annual rate of 3.3% in the fourth quarter of 2023, according to the “advance” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 4.9%.

Advance estimates of U.S. retail and food services sales for December 2023, were up 0.6% from the previous month, and up 5.6% above December 2022. Total sales for the 12 months of 2023 were up 3.2% from 2022. Total sales for the October 2023 through December 2023 period were up 3.9% from the same period a year ago.

Sales at furniture and home furnishings stores in December were down 4.6% from December 2022 and down 5.4% year to date.

The Consumer Price Index for All Urban Consumers increased 0.3% in December on a seasonally adjusted basis, after rising 0.1% in November. Over the last 12 months, the all-items index increased 3.4% before seasonal adjustment. The index for shelter continued to rise in December, contributing over half of the monthly all-items increase. The energy index rose 0.4% over the month as increases in the electricity index and the gasoline index more than offset a decrease in the natural gas index.

Thoughts

The general economic indicators as well as our monthly stats continue to provide mixed results and accordingly, mixed expectations for 2024. Overall consumer confidence is trending in a positive direction, though housing remains fairly stagnant. Other factors, such as inflation, supply chain, stock market performance (though perhaps overvalued), and employment data are also favorable or at least manageable. On the flip side, there are international and election concerns to consider.

Perhaps the expected rate cuts in 2024 (Fed meeting as of publication), coupled with improving confidence, will stimulate growth in housing which drives furniture sales. However, it seems rate cuts may be slow to materialize as the Fed is able to work methodically, with the economy adequately shuffling along.

The Conference Board still suggests there will be a short recession during the middle of 2024 (Q2-Q3) before recovering late in the year. If not already feeling it, we all know that furniture tends to be one of the first to feel the effects of a recession and one of the last to recover.

So, while new orders are trending positively year-over-year, many of the companies we speak with have seemingly adjusted to operating at the “old normal” (meaning back to 2019 volumes). However through gradual implementation and holding of price increases, coupled with manageable cost inflation as of late, many have seen consistent or improved gross profits despite flat or declining revenue (as adjusted for inflation). Generally, upholstery (particularly custom) appears to be stronger than case goods and high-end stronger than low-end goods, though there are always exceptions.

With more time to breathe and look internally after returning to historical norms following an extended period of unprecedented demand, we hope companies will “control what you can control,” be open to change and opportunities, look at processes and ways to operate more efficiently throughout the organization, and to invest in relationships with their employees, customers, vendors, lenders, and most importantly, accountants.

New Orders

According to our latest survey of residential furniture manufacturers and distributors, new orders rose 26% in November 2023 compared to November 2022. While there is considerable “noise” behind these numbers (including the impact of general inflation and container rate fluctuations to name just two), this does mark the 7th straight month orders have grown double-digit percentages over the prior year, so there does appear to be some traction. Two-thirds of the participants reported increased orders in November 2023 compared to a year ago. Year to date, new orders were up 4% over the same period of 2022, though 2022-to-date orders were down 34% over the same period of 2021.

Shipments and Backlogs

Shipments in November 2023 were down 16% from November 2022, which were up 1% from November 2021. Shipments in November 2023 were down for two-thirds of the participants compared to November 2022. Year to date, shipments were down 17% over the first 11 months of 2022. So despite recent improvements in new orders, trends continue to be affected by many companies shipping from their historically high backlogs through much of 2022. Accordingly, November 2023 backlogs were up a modest 3% from October 2023, but down 35% compared to November 2022.

Receivables and Inventories

Receivable levels were up 5% from October, which may be a result of timing issues around the holidays or more slow-paying customers on average, given the slight decrease in shipments. Receivable levels were down 13% from November 2022, which is materially in line with the year-to-date decline in shipments.

Inventories were flat in October 2023 and were down 29% from November 2022 (consistent with 35% decline in backlogs), indicating that most companies have rebalanced their inventory levels to match current operations.

Factory and Warehouse Employees and Payroll

The number of factory and warehouse employees was down 6% from November a year ago and flat with October 2023, again indicating most companies have right-sized their teams, though most are still eager to add good people when available.

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