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Statistically Speaking: Furniture Industry Sees Demographic Shifts In Prime Consumers

The net impact was that a lot of money was pumped into households. In addition, the stay-at-home nesting frenzy contributed to the furniture industry surge initially, but it was the inflationary price increases that followed that drove growth, especially over the last year. Regardless of the reasons for the industry growth, one thing is certain, the demographics of consumer spending on furniture products changed. People went back to work in the midst of surging increases in wages along with competition for workers whose work habits had also changed. The roller coaster ride of the pandemic in 2020, gave way to post-pandemic 2021 when inflation began to take hold late in the year, followed by the economic chaos of as the furniture industry has been unsure exactly what to do to right the ship going forward. Will the furniture industry eventually retreat to the prepandemic days or build on lessons learned? Consumer spending on furniture slowed at the beginning of the pandemic in 2020 Q1, then picked up steam through the second wave in August/September. The industry received an additional bump when with the vaccine rollout in the first quarter of 2021, then slowed briefly September to December 2021 as the Delta variant surged.

Table A

But when inflation took hold and prices rose, growth has been steady through the third quarter of this year. Table A shows the progression.

It has been more difficult to quantify whether after the initial store re-openings in the second quarter of 2020 what portion of the spiraling industry growth can be attributed to more consumers purchasing furniture versus the increase in prices. However, data available on traditional furniture stores, one of the prime furniture distribution channels, shows that, especially this year, growth came in most cases from increased prices as opposed to selling more product to more customers. (See the sidebar article, “Traditional Furniture Store Average Ticket Sales Rise as Traffic and Number of Purchasers Falls”. Data from FurnitureCore, LLC. a subsidiary of Impact Consulting Services, Inc., parent company of HFB.)

Building on this background of COVID stimulus packages, heightened consumer interest in home furnishings and spiraling inflation, the remainder of this installment of Statistically Speaking examines consumer spending on furniture at the demographic consumer unit/household level looking at age (tied to generations), income and living arrangement (marital status). Data from the Bureau of Labor Statistics’ Consumer Expenditure Survey (CE) helps to bring into focus how the final impact of the pandemic in 2020 and 2021 compared to the “way it was” in 2019 before COVID changed the course of consumer spending, whether temporarily and permanently. The Methodology is presented in Figure 1.

The terms consumer unit, family and household are often used interchangeably for convenience; however, the proper technical term for purposes of the CE data is consumer unit. References to households in this article are synonymous with consumer unit. Also, the reader should keep in mind that even though average expenditures and sales went up dramatically in many segments, much of it was due to inflation.

Generational Furniture Expenditures Millennials (ages 26 to 41) are now the largest cohort of the generations as Baby Boomers continue to age. And they showed up in numbers both during and post-pandemic buying a lot of furniture in the process. Millennials increased average consumer unit furniture expenditures 44.1% between 2019 and 2021 from $583 to $840 (Table B, expenditures; Table C, growth). This large generation that the furniture industry has waited patiently to set up households, proved during the pandemic and recovery that they are ready to finally take over control of the furniture industry as the older Millennials beginning to age into the higher income categories. Meanwhile, GenXers (ages 42 to 57), though much smaller number, are still the most affluent workers and spend the most on furniture, surpassing the Millennials. In 2019, GenXers averaged $640 in annual furniture expenditures and grew that number to $909 in 2021, an increase of 42%. Of concern to the furniture industry is that the high-income GenXers (ages 42 to 57) are beginning to age out of this key prime 45 to 54 age group and as they age into the 55 to 64 age group will spend less on furniture. The industry is hopeful that the onslaught of Millennials will reach their same economic affluence as they age. Baby Boomers (58 to 76), who have been the heart of the furniture industry for decades, were more conservative spenders during the pandemic increasing average furniture spending from $514 in 2019 to $601 in 2021, a growth of only 16.9%. Baby Boomers should continue to slow expenditures as they age and their numbers dwindle (Table B, expenditures; Table C, growth).

Millennials (ages 26 to 41) continued to form households during the pandemic and recovery, increasing 6.1% and now represent 26.2% of total households increasing their share by 1.2 percentage points. As the youngest members of this Millennial generation continue to form households, they should soon surpass the GenXers (ages 42 to 57), who represent 26.5% of households, but have slowed their household growth (Table D). New to the scene is Generation Z (ages 10 to 25), only 4.5% of adult households in 2021, who are now beginning their assent into adulthood. The furniture industry will see their impact for decades to come as they continue to age in to the furniture buying population (Table D, growth in consumer units; Table E, percent of households). GenXers (ages 42 to 57) still have the largest share of industry sales at 33.7% with growth of 41.7% in 2021 compared to 2019. But the high growth in spending by the trailing Millennials during the pandemic of 52.8% 2019 to 2021, moved them closer to first place at 30.8% in share of industry sales (Table F, growth in total industry sales; Table G, percent of industry sales). Millennials (ages 26 to 41), being a larger cohort than GenZers will most likely take over their rightful place as the primary consumers of furniture in the near future. Baby Boomers, prior to the pandemic, controlled 32.2%, the second highest total dollar purchasers of furniture in 2019 behind the GenXers but ahead of the Millennials. Their purchases increased 18.2 during the two years of the pandemic and recovery. But as they continue to age, the Baby Boomer influence will continue to wane.

Furniture Industry Growth by Income Range Between 2019 and 2021, the average expenditure on furniture per household grew 37.3% from $521 to $716, and total furniture expenditures grew 38.7% (Table H). (Note: The BLS CE Survey’s consumer spending on furniture growth number here is higher than the 33.2% growth published by the Bureau of Economic Analysis, Personal Consumption Expenditures data. See “Figure 1: Methodology” for an explanation of the differences.) Three income ranges had higher growth than the U.S. household average, two being the lowest income ranges and the other being the highest income range. The two lowest income ranges, (1) less than $15,000 and (2) $15,000 to $29,999, increased their average furniture expenditures by 135.6% and 38.4% over the duration of the pandemic 2019 to 2021. These large increases suggest the major pandemic stimulus programs had a significant impact on lower-income household spending on furniture, as well as other durable and non-durable goods. On the other end of the spectrum, households over $200,000 annual income increased average furniture spending by 44.6% to $2,054 annually (Table H, average furniture expenditures; Table I, growth).

When the COVID-19 pandemic had calmed by the end of 2021, there were 1% more households than 2019 just before the pandemic began, but the economic structure of those consumer units had changed dramatically. The number of high-income households $150,000 to $199,999 had increased 16.2% 2019 to 2021, and households with income over $200,000 had grown an astounding 23.8%. Meanwhile middle- and low-income households with incomes under $70,000 declined in 4.7% in total between 2019 and 2021, with the only exception being households $15,000 to $29,999 which grew 1.4% (Table J).

The decline in the number of lower- and middle-income households again reflects the impact of the pandemic stimulus and unemployment programs. In 2021, 44.8% of U.S. households made $70,000 or more (Table K).

The additional expenditures in 2021 versus 2019 by the lower income groups provided an additional $5 billion in furniture sales based on the BLS Consumer Expenditure total of $98 billion in 2021 (see Figure 1. Methodology). However, these two brackets under $30,000 total only 6% of industry sales, up from 4% in 2019. It should be noted that this income group declined in number of households, but gained industry share with increased spending. Meanwhile, with the increase in household counts and spending, high-income households over $200,000 or more annual income gained 3.9 percent points in share of industry sales, growing from 20.7% of industry sales in 2019 to 24.6% in 2021, adding an additional $9.2 billion in CE calculated furniture expenditures (Table L).

The Future? As the leading edge of high-income GenXers (ages 42 to 57) begin to age into their 60s, they will still make a significant and positive impact on the furniture industry for the next 15 to 20 years. They will provide industry stability as they age, as did their parents, the Baby Boomers, just not to the same degree.

And if the economy does not throw the Millennials another catastrophic economic downturn next year as it did during the Great Recession when they were mostly in high school, college and their mid-20s and starting out, they will continue to form households, have children and buy furniture. Much of the future is in their hands.

And it will be interesting to see how the up-and-coming Generation Z (ages 10 to 25) will begin to make their mark. Early data suggests they may behave very different as consumers.

COVID-19 Pandemic Stimulus and Unemployment Benefits

Economic Impact Payments (EIPs). Research has shown that some of the furniture industry growth can be attributed to the three government stimulus packages as well as lengthy regular and special pandemic unemployment packages initiated by the government The distribution of pandemic stimulus payments began in late March 2020, with the last two payments occurring in the first quarter of 2021

Unemployment Benefits

The severity of the COVID-19 crisis was evident on March 21, 2020, when a then-record 2.9 million people filed initial claims for unemployment. The government acted quickly creating the Pandemic Unemployment Assistance (PUA) program which expanded eligibility to workers not covered by regular UI, including self-employed workers, gig workers, independent workers and others. According to the Department of Labor roughly $400 billion was spent on unemployment expansions.

Traditional Furniture Store Average Ticket Sales Rise as Traffic and Number of Purchasers Falls Traditional furniture stores spent years watching other durable and non-durable goods increase prices, only to see furniture prices fall further behind the curve. After the mandatory shutdowns issued by the Federal government at the start of COVID, other furniture distribution channels stayed open and gained ground, including online retailers, home improvement centers, mass merchants, and warehouse price clubs. The COVID-19 pandemic and subsequent recovery brought with it spiraling inflation, and for the traditional furniture stores, higher profits.

FurnitureCore’s industry database of traditional furniture store sales, tracked the pattern of growth, shown in the graphic below, including average store traffic/ups, average ticket sales and number of purchasers. This growth is also compared to the Census Bureau’s data on total furniture stores sales among all traditional furniture stores. Data is presented in indexed format with 2019 Q4 = 100 as the base quarter, just before COVID began. Indexing growth against a base year is an effective way to compare graphically dissimilar data with dissimilar formats.

After the initial shutdown at the beginning of COVID in 2020, average ticket sales rose gradually as shown in the graphic below until the fourth quarter of 2021, when inflation really took off. Meanwhile, since 2021 Q3, traffic has slowly declined and the number of purchasers with it.

Editors Note: Say It Isn’t So – It’s Not!

But what about furniture purchasers who have established a home (own or rent) and have the ability to make a significant furniture purchase? Home Furnishings Business provides the most recent statistics.

More importantly, how much furniture is being purchased by those households and specifically at traditional furniture stores? The percentage of purchasers is presented in the graphics below. Obviously these statistics are only meaningful compared to the number of households by age group. The matrix below presents the concentration.

As may be seen from the matrix, the older Millennials (35-44) are beginning to purchase but the front runner is Generation X (45-54), the often-forgotten demographic sector. READING THE CONCENTRATION, X.XX IS THE PROBABILITY OF PURCHASE BY THIS AGE GROUP OF A SIGNIFICANT FURNITURE PURCHASE FROM A TRADITIONAL FURNITURE STORE.

The take-away – start anticipating how to serve better the Millennials but don’t forget the Baby Boomers who still account for 43% of furniture purchases in traditional furniture stores.

Cover Story: State of the Industry: “Is the party over or just postponed until next year?”

Along with this surge in consumers returning to the stores came a surge in product cost initially driven by the increase in the cost of containers followed by an increase in production driven by growing raw material costs. This surge in costs resulted in a well-deserved consumer price increase as illustrated in Table B. The growth period coming out of the pandemic was unlike the industry growth in 2008/2009 coming out of the Great Recession where consumer prices did not increase. The pandemic increase was driven by other factors. Retailers quickly realized this relationship between units/revenue and reacted to the pricing shift with gross margins increasing accordingly to protect against future price increases. In 2021, gross margins increased industry wide 1.5 percentage points (48.9% - 50.4%) adding to the increase in the Consumer Price Index. (See Home Furnishings Business May/June 2022 issue Retail Metrics.)

Manufacturers’ prices increased and inbound freight added to the total causing a 21.7% growth in prices in 2021. Table C illustrates the impact on a traditional fabric sofa comparing 2019 to 2021. The result is a 10%+ increase in average unit selling price.

The residential furniture industry enjoyed an unprecedented lift in demand (and prices) during the bulk of the COVID years of 2020 through early 2022, as homeowners invested in their indoor furnishings and outdoor/patio environments. However, by Q2 of 2022 demand began to soften due to a variety of factors including rising interest rates, lower new-home formations and rising costs and inflationary pressures. Also, the consumer saw a shift in mentality from “I need this” purchases to “I want this” discretionary spending. And with the COVID-19 pandemic mostly over, the world has re-opened as consumers have become more comfortable traveling and getting on airplanes, going out to restaurants and generally resuming a normal life. That said consumer demand in 2022 should still exceed pre-COVID volumes – despite soaring inflation, recession talk, and wobbly public stock markets.

Looking forward to 2023, we are optimistic that the U.S. economy will settle into a “new normal” and that home furnishings will resume a nice steady growth over the pre-COVID years. Container rates are coming down, gas prices are finally decreasing, raw material price increases have slowed, and the stock market is showing some strength. All these elements should boost consumer confidence and drive solid growth in furnishings’ purchases. Some key points to watch:

E-Commerce:

Adoption to buying furniture online continues and we are increasingly seeing companies take an omni-channel approach via marketplaces like Wayfair, One Kings Lane, and Overstock.com, while the big box stores offer their massive web-portals (WalMart, Costco, Target, etc.), and the lifestyle stores like RH, PB/West Elm, Arhaus and Crate & Barrel offer tremendous in-person and on-line shopping experiences. And increasingly we see consumers bypassing these more legacy retail brands and buying direct from brands like Joybird, Albany Park, and Burrow. We expect to see significant M&A activity in this space as legacy furniture companies seek this higher growth e-commerce channel.

Whole Home and broader furnishings: Increasingly we are hearing about the “whole home” as consumers want to make purchases that can create a holistic environment, the focus not just on one sofa or table but the entire room and a house that flows onto the patio as an extension of the interior of the home. Lighting, rugs, accessories and wall art will play a leading role in how CEO’s guide product development road maps and revenue growth. We also believe patio and casual furniture will remain a high-growth sector and prime acquisition target for legacy furniture companies.

Global Sourcing Rebalanced:

After a tumultuous several years of supply chain strife, our industry is scrambling to find the right combination of U.S.-made, vs. China, Vietnam, India, Mexico and the rest of the world. Tariffs, container rates and factory shutdowns have wreaked havoc with the global supply chain over the last 18 months, and our leaders are trying to assess what the new balance for supply will be. Labor pressures and geo-political strife continue to make this a complicated issue around the world. We anticipate continued exploration of increased reliance on India and Mexico and smaller outfits in Eastern Europe and Portugal, as well as the continued desire to re-shore manufacturing to the U.S. to the extent possible. Blurring lines of Resi-mercial Furniture: Home and non-home furniture continues to look more alike, as historically segmented players increasingly compete in each other’s spaces. MillerKnoll (the merger of Herman Miller and Knoll) has a huge home furnishings presence with its various brands including DWR, Muuto and HermanMilleronline.com. Steelcase has an alliance with several home furnishings companies. Haworth has huge residential product offerings. HNI has several online portals for home and home office furniture. Competition is growing around every corner, and we expect this to continue, and we expect these players to be major contenders for residential market share and digitally native direct-to-enterprise plays.

Shows/Showrooms:

There is increasing pressure on the markets to become modern and relevant in this new economy. The casual market is leaving Chicago and moving to Atlanta. The Neocon show for commercial furniture now has two competing properties. The Las Vegas and High Point shows continue their relentless cadence of four “can’t miss” residential shows per year, amidst various challenges such as the 100+ degree weather of the Vegas market in July and staggering vacancies in the main buildings in High Point as more exhibitors are building their own destination venues, no doubt drawn by the allure of year-round showcases to key customers. More and more vendors are no longer showing at all and are using alternative marketing tools to reach their customers. There is no clear answer to this complex issue. We see a mixed bag of headwinds and tailwinds going into 2023. But overall, we are bullish on the furniture industry and the U.S. economy. 2023 should be a good year. Bring it on.

The bottom line is that the industry increase was significantly, but then not significantly, driven by consumer demand. Figure 1 summarizes from a historical perspective. Traffic is declining into the stores and has now become an accepted fact at the retail level by at least 30% or more of retailers as indicated in Table D.

The next performance indicator will likely be a decrease in selling price driven by retailers discounting due to excessive inventory. Therefore, without the other normal factors that impact the industry performance is the market conditions of product cost and gross margin.

Figure 2 presents the external factors that impact the furniture industry and whether the forecast for 2023 is for these factors to improve over 2022 or decline.

Looking at the factors that drive our industry, the forecast is obvious with all INDICATORS pointing downward. That part is over for now, but not forever.

The Furniture Industry Braces for a Downturn as Recession Fears Remain at the Forefront

The furniture industry will look back on much of 2022 as a profitable, if not chaotic, year, especially through the first half. But the U.S. is now inching towards a recession, more likely in 2023, with most forecasting it to be brief.

The coming forecasted downturn is difficult because it is unfolding in ways we haven’t seen before in any recession. Inflation is still high and consumer confidence has slowed. But job growth remains strong, unemployment low, and in most consumer products, consumption has slowed but remains healthy. Vacation and airline travel demand, usually one of the first industries to feel the effects of a downturn, is higher than airlines have been able to handle. Supply chain disruptions, both labor and material, are easing.

These opposing forces and other key trends are the basis for Home Furnishings Business’ furniture industry economic outlook and forecast presented below. The Furniture Industry The furniture industry averaged 3.2% growth over the first half of this year compared to the first half of 2021. Consumer spending in July shows furniture sales slowed 0.3% over the preceding June and were down another 1.1% in August over July. Most economists at press time placed a 50-50 chance of the U.S. entering a significant economic correction and downturn, if not in the fourth quarter of 2022, then the first half of next year. Furniture industry sales are projected to finish this year 3% higher than 2021 and primarily grow 2.5% in 2023 (Table A).

Bedding sales have slightly outperformed all other furniture products the first half of this year, 3.61% versus 3.09%. In the second quarter, however, growth slowed slightly for both segments in Q2 vs. Q2 last year to 3.07% (furniture products) and 3.2% (bedding). Spending is forecast to slow further during the second half of this year to 2.5% increase year-overyear for furniture products and 2.4% for bedding (Figure 2).

Distribution Channels.
The 3.2% industry growth in the first half of this year was stretched out over many types of retail outlets; however, furniture store sales grew at only 0.1% through the second quarter as consumers trended toward other retail channels. Home furnishings stores (outlets selling less than 50% furniture) have struggled to keep pace in recent years with pressures from e-commerce. But, surprisingly, these retailers of furnishings, accessories, floor coverings and tableware, have made a small comeback this year, outperforming furniture stores by growing sales 5.2% in the second half of this year compared to last. Electronic shopping again led the pack of all retail channels growing 9.9% in 2022 Q2 YTD for all products, not just furniture. Electronics and appliance store sales were down the most falling 6.9% (Figure 3). A notable slowdown occurred in the last month of the second quarter where sales in June compared to May declined in all of the retail outlets shown in Figure 3, most notably e-commerce shopping (-4.5%), home furnishings stores (-5.3%), warehouse price clubs (-1.7%) and furniture stores (-1%). Going forward through the rest of this year, with retail inventories already at high levels, heavy discounting may be coming this holiday season.

E-commerce shopping is on pace to capture over 20% of all retail sales this year for durable and nondurable goods (excluding motor vehicles and parts) and surpass $1 trillion in revenue for the first time. And although the pace of e-commerce slowed to under 10% growth the first half of this year and shake-outs are expected in the future, it remains the major force of retailing (Figure 4).

 

Furniture Buying Population Shifts.

The prime furniture buying population has been identified as consumers ages 25 to 74. The 65 to 74 age group has been included as this group remains a powerful purchasing presence in the industry. The youngest prime purchasers, ages 25 to 34, continue to decline in population as the Millennials completely age out of this segment. Worrisome for the furniture industry is that the 55 to 64 group, a smaller cohort but one that has the highest incomes, is flooding into the older ages 65 to 74. Will this high dollar group slow its furniture purchasing patterns in retirement? The good news is that the Millennials are currently between the ages of 26 and 41 and will continue to advance into the 35 to 44 age group, the prime purchasers of furniture. And as baby boomers begin their assent into the 75 and over population, the furniture industry will feel their loss for years to come.

The Economy
GDP. Gross Domestic Product took a roller coaster ride through the heart of the pandemic in 2020 before settling into solid growth the second half of the year as consumer spending went a bit crazy. This year brought fiscal reality with GDP sliding 1.6% in Q1 and down 0.6% in Q2. Many economists are predicting third -quarter GDP will be up over 1.5%. Another downturn has not been forecast until maybe late this year, but most likely in early 2023. Year-overyear forecasts for 2022 are ranging from 0% to 1.7% growth for the year.

Most economic forecast projects the 2023 downturn to be mild, ranging from -0.4% go 1.1% growth (Table C). Unemployment. The unemployment rate continued to fall from 5.4% last year to 3.6% in the second quarter of this year. Rates have fallen to just below December 2019 levels. August saw an uptick to 3.7% unemployment; however, the rates are expected to remain low through the rest of the year around 3.6% to 3.7% and rise a full percentage point in 2023 as the economy weakens.

Consumer Prices (Inflation).
The elephant in the room for the U.S. economy continues to be inflation and the price gains made by furniture products in 2021 and the first half of 2022. Prices stayed relatively stable throughout the last half of 2020 after the worst of the Covid pandemic. But in May of last year, price increases exploded with July of this year 21.7% higher than January 2021, a period of 18 months. Meanwhile consumer spending on furniture grew at less than half that rate (9%) during the same 1-1/2 years. Much of the price impact came during the supply chain disruptions of last year. This year both consumer spending on furniture and price increases tracked on parallel lines over the six months February to July. Consumer spending in July was 5.3% higher than February, and price increases were 4.0% more (Table F1).

These increases have helped make up for the years of stagnant price growth. In the second quarter of this year, furniture prices increased at an annual rate of 13.6% well ahead of all consumer products, which grew 8.6%. Higher transportation costs throughout the second half of last year and the first half of this year is a big contributing factor. As inventories increase and the competition adds pressure, prices are cooling in the second half of this year which should take the overall average price increase for the year to 7.2%. Falling gasoline prices should also impact price declines as transportation costs lessen for most consumer products. Next year as the economy continues to struggle, prices could fall even more (Table F2). Consumer price increases for furniture products grew more slowly in the second quarter of this year at 2.2% versus the preceding Q1. In the first quarter, prices grew 4.2% over Q4 of 2021 (Table G).

Stock Market.

The Dow Jones has been volatile since before the Covid pandemic began as if unsure which domestic or global event to react to next. Inflation and interest rate increases have spurred negative market reactions. Meanwhile, consumer spending growth and low unemployment have evoked positive reactions. In the second quarter, more negative than positive news sent the Dow Jones down 11.3% at the end of the quarter compared to 2022 Q1. And hawkish talk from Federal Reserve Chairman Jerome Powell at the end of August sent the Dow down further hovering around 32,000, which is 14% less than January levels of 36,600. Historical data suggests there is more pain to come. Numerous long-range forecasters suggest 2022 will end at around 31,500 and 2023 could possibly go a bit lower (Table H).

Gasoline Prices. One of the biggest economic indicators driving consumer at $4.07 a gallon for regular gas and 2023 at $3.59 (Table I). Consumer Confidence. In June of this year, the Consumer Confidence Index dropped below 100 for the first time in over a year signaling consumers are less optimistic about the economy and worried about persistent inflation and stayed at 95.3 in July. Many economists were surprised by the August jump to 103.2 when the initial forecast was 98.2. Lynn Franco, senior director of economic indicators at The Conference Board, explained the difference in the initial forecast as consumer “purchasing intentions increased after a July pullback, and vacation intentions reached an 8-month high. Looking ahead, August’s improvement in confidence may help support spending, but inflation and additional rate hikes still pose risks to economic growth in the short term” (Table J).

Looking at the forecast for the rest of the year, the third and fourth quarters of this year should show a slow deterioration in confidence and 2023 could see it drop consistently below 100.

Prime Interest Rate. Mid-March of this year the Federal Reserve began to increase the prime interest rate that had been at 3.25% for over two years. In a stair-step approach, at press time rates had increased four times to 5.5% in August, with continuing hawkish talk by the Fed to continue to increase them more to further gain control of inflation. Additional smaller increases may also occur in November and December (Table L).

panic over rising inflation is gasoline, the life blood of U.S. commerce and consumer transportation. A gallon of regular averaged $3.05 last year and $4.64 in second quarter of this year, an increase of 23.1%. At press time, prices had fallen to around $4.00. The U.S. Energy Information Administration forecasts 2022 average gasoline prices Mortgage Interest Rates.Rates for mortgages have responded in kind to the moves by the Fed to bring inflation under control. At press time, 30-year fixed rates were around 5.7%, up from an average of 3% at the end of last year. Meanwhile 5/1- year hybrid adjustable rates were 4.4%. Rates are projected to continue to increase in the second half of the year to an average rate of 5.2% for the year for a 30-year fixed mortgage and 4.0% for a 5/1-year hybrid adjustable mortgage. In 2023 rates should move even higher at an average rate of 6% for 30-year mortgages and 4.8% for 5/1-year hybrid adjustable (Table M).

The Housing Market
Housing Sales. The housing industry has been the star of the U.S. economy pre-pandemic as well as post-pandemic. Coming out of the worst of the COVID-19 shutdown, in August of 2020, 1.036 million new homes (annualized rate) were sold, the largest number in 18 years. In July of this year, that number was more than cut in half to 511,000 homes (annualized rate). After the third quarter 2020 peak, new homes have continued to trend downward. Forecasters believe the industry will fall further in the second half ending 2022 with existing home sales down 13.2% and new single-family homes down more at 17% decline. The forecast for 2023 should be brighter for new home sales, but existing home sales will show little growth (Table N).

Housing Starts. With new single-family housing starts lagging for 10 years coming out of the Great Recession, starts finally picked up in earnest during the Covid pandemic in 2020 and continued growth into 2021. This year, new single family starts slowed and went negative monthover-month beginning in February, dropping each month through July (-2.13% July over June). Meanwhile, multi-family starts have been on fire, up significantly in Q1 and Q2 of this year, at 20.3% and 17.5%. Housing starts are forecast in 2023 to grow 7.9% for single-family units and 3.5% for multi-family units (Table O).

Housing Prices. The much-publicized increase in housing prices this year has stirred fears of another housing crash. However, according to a report issued by the Conference Board, US Housing: Boom- Bust Redux?, “Supply and demand factors—not speculation, predatory lending and/or bad underwriting practices—are at the root of the latest home price upswing.” This year existing home prices are forecast to be up 14.1% and new home prices 10.2%. Prices should level off to more normal growth in 2022.

 

 

When business is trending downward, it is easiest for economists to say that weakness will continue. And today, more economists are saying the recession will hit its worst in the fourth quarter of this year or in early 2023.

I disagree. I think our recession began early this year and the furniture and mattress industries hit their trough during the summer. Why? First, we already have two quarters of negative GDP, a key indicator of a recession, and the summer did not feel any better. Second, our economy is disjointed. From May of 2020 through 2021, durables prospered thanks to governmental generosity driven by the COVID-19 Pandemic, low interest rates that helped housing sales along with great demographics and a broad shortage of places to live and government restrictions that discouraged Americans from leaving their homes or being around others. Since early 2022, with high inflation, rising interest rates, shortages among many durables and a decline in COVIDrelated restrictions, American consumers have been catching up with services and consumer non-durables. Travel, dining out, event attendance and much more has rebounded, shifting spending away from durables— at least on a temporary basis. Third, the furniture industry has been hurt by one of the most unusual combination of circumstances most of us can remember. As consumer spending slowed this year, logistical difficulties (ports, trucks and rail) have begun to improve, and delayed shipments from Asia began to catch up, while many retailers, importers and manufacturers have been able to deliver long delayed furnishings. A dramatic shift from shortages early in the year, we now have excessive inventories, but these will be normalized as the year progresses.

Fourth, home furnishings have historically sold 55% of annual revenues in the second half of our calendar year caused, I believe, by Americans finding new homes in the first half of the year and moving in the summer and fall.

Finally, we believe there is unmet demand for many home products created by the great housing sales in 2019 through 2021. Also, remember that, for many reasons, we could not meet the strong demand we experienced in 2020 and 2021. Consumers are enjoying their travel, restaurants, sporting events and shopping no doubt, but as colder weather returns and we go indoors, we believe home related spending will recover slowly but this should set great prospects for a much improved 2023.

Let’s hope I am right. I am overdue!
JERRY EPPERSON
Managing Director Mann,
Armistead & Epperson, Ltd.


If I thought I could forecast the residential furniture industry for 2023 with any accuracy, I would not be worried about deciding what investments my retirement plan should be making. I think we are all just trying to forecast —with the hope of being close to right—when this slowdown we are in will phase out, and when business will get back to normal. As one executive and I were discussing recently, we are hoping that something that resembles normal will return by maybe November, just a few months away. Then we reminded ourselves that we believed those words three or four months ago. There is good news for some, however, in that quite a few companies still have good backlogs. Those companies will have some time to see what the next few months bring. Others may not be as lucky.

Of course, the real question is what is normal? We all thought 2019 was the last “normal” year. But that was before the craziness of new orders in late 2020 and 2021. Then, most added some 30% to the selling prices at wholesale, hoping that would cover the increased cost of raw materials, labor and overhead as well as imported finished products and freight— whether ocean or domestic. Now many costs have leveled out, but the price increases continue through a lot of the supply chain and inflation in general.

The Federal Reserve is committed to lowering inflation and their theory is that raising interest rates will lower people’s ability to buy therefore forcing prices down due to lack of demand. To some, this brake pumping seems to feel more like brake slamming. When this will end is not clear to most of us at this time. However, a good deal of the inflation relates to energy, especially gas prices, and with the Federal policies we wonder if that can happen.

What impact the elections will have is another big question. At one point, folks thought the Democrats were going to lose in a big way. But that does not seem as clear as it did a month or so ago as the politicians are doing all they can to make things sound and feel better. So, with all that said, what will 2023 look like for residential furniture? We think, as has been the case in the past, the general economy will need to pick up to be able to drag furniture along. We would expect that to happen in a small way sometime in the first quarter of 2023 with meaningful improvement not happening until maybe the second quarter. This should allow the furniture business to get back to a more normal 3% - 4% growth rate by the second half of the year. That growth will be impacted by what we are comparing to as if the ocean freight costs decline even more, then the surcharges that many have added will decline, causing more difficult comparisons the other way.

Many have started comparing unit sales to take all the clutter out of comparisons. For many, this is difficult due to the variety of products offered, but it is not a bad idea if you can do it, even for given product lines.

 

The residential furniture industry enjoyed an unprecedented lift in demand (and prices) during the bulk of the COVID years of 2020 through early 2022, as homeowners invested in their indoor furnishings and outdoor/patio environments. However, by Q2 of 2022 demand began to soften due to a variety of factors including rising interest rates, lower new-home formations and rising costs and inflationary pressures. Also, the consumer saw a shift in mentality from “I need this” purchases to “I want this” discretionary spending. And with the COVID-19 pandemic mostly over, the world has re-opened as consumers have become more comfortable traveling and getting on airplanes, going out to restaurants and generally resuming a normal life. That said consumer demand in 2022 should still exceed pre-COVID volumes – despite soaring inflation, recession talk, and wobbly public stock markets.

Looking forward to 2023, we are optimistic that the U.S. economy will settle into a “new normal” and that home furnishings will resume a nice steady growth over the pre-COVID years. Container rates are coming down, gas prices are finally decreasing, raw material price increases have slowed, and the stock market is showing some strength. All these elements should boost consumer confidence and drive solid growth in furnishings’ purchases. Some key points to watch:

E-Commerce:

Adoption to buying furniture online continues and we are increasingly seeing companies take an omni-channel approach via marketplaces like Wayfair, One Kings Lane, and Overstock.com, while the big box stores offer their massive web-portals (WalMart, Costco, Target, etc.), and the lifestyle stores like RH, PB/West Elm, Arhaus and Crate & Barrel offer tremendous in-person and on-line shopping experiences. And increasingly we see consumers bypassing these more legacy retail brands and buying direct from brands like Joybird, Albany Park, and Burrow. We expect to see significant M&A activity in this space as legacy furniture companies seek this higher growth e-commerce channel.

Whole Home and broader furnishings: Increasingly we are hearing about the “whole home” as consumers want to make purchases that can create a holistic environment, the focus not just on one sofa or table but the entire room and a house that flows onto the patio as an extension of the interior of the home. Lighting, rugs, accessories and wall art will play a leading role in how CEO’s guide product development road maps and revenue growth. We also believe patio and casual furniture will remain a high-growth sector and prime acquisition target for legacy furniture companies.

Global Sourcing Rebalanced:

After a tumultuous several years of supply chain strife, our industry is scrambling to find the right combination of U.S.-made, vs. China, Vietnam, India, Mexico and the rest of the world. Tariffs, container rates and factory shutdowns have wreaked havoc with the global supply chain over the last 18 months, and our leaders are trying to assess what the new balance for supply will be. Labor pressures and geo-political strife continue to make this a complicated issue around the world. We anticipate continued exploration of increased reliance on India and Mexico and smaller outfits in Eastern Europe and Portugal, as well as the continued desire to re-shore manufacturing to the U.S. to the extent possible. Blurring lines of Resi-mercial Furniture: Home and non-home furniture continues to look more alike, as historically segmented players increasingly compete in each other’s spaces. MillerKnoll (the merger of Herman Miller and Knoll) has a huge home furnishings presence with its various brands including DWR, Muuto and HermanMilleronline.com. Steelcase has an alliance with several home furnishings companies. Haworth has huge residential product offerings. HNI has several online portals for home and home office furniture. Competition is growing around every corner, and we expect this to continue, and we expect these players to be major contenders for residential market share and digitally native direct-to-enterprise plays.

Shows/Showrooms:

There is increasing pressure on the markets to become modern and relevant in this new economy. The casual market is leaving Chicago and moving to Atlanta. The Neocon show for commercial furniture now has two competing properties. The Las Vegas and High Point shows continue their relentless cadence of four “can’t miss” residential shows per year, amidst various challenges such as the 100+ degree weather of the Vegas market in July and staggering vacancies in the main buildings in High Point as more exhibitors are building their own destination venues, no doubt drawn by the allure of year-round showcases to key customers. More and more vendors are no longer showing at all and are using alternative marketing tools to reach their customers. There is no clear answer to this complex issue. We see a mixed bag of headwinds and tailwinds going into 2023. But overall, we are bullish on the furniture industry and the U.S. economy. 2023 should be a good year. Bring it on.

What Sells: UPHOLSTERY: The Choice of Comfort

Based on the FurnitureCore Model developed by Impact Consulting Services, parent company to Home Furnishings Business, research shows that the category has maintained its steady climb, finishing 2021 with $53.98 billion in sales and up from $43.34 billion in 2020 – a 24.6% increase. Although skyrocketing demand across all durable goods is settling down, upholstery sales in the second quarter of 2022 were still 4.6% higher than the previous quarter and 3% higher than the same quarter in 2021. With sales of $28.01 in 2022 Q2 year-to-date, the upholstery category accounts for 34.9% of the total furniture industry.

While comfort is no stranger to the world of motion furniture, manufacturers are placing great importance on bridging comfort and style. “Comfort drives our business,” says Anthony Teague, senior vice president of sales and merchandising at Jackson Catnapper. “Aesthetically, we continue to pour our efforts into creating motion that does not look like typical reclining furniture. Catnapper has been the innovator of “pillowed motion” by utilizing the comfort of a classic motion frame core, adding a more current arm treatment and covering with stereotypical stationary fabrics.”

While sleeker, more contemporary designs have gained momentum over the last decade, the majority of consumers are still choosing comfortable, cozy pieces geared toward creating a space the whole family can enjoy. When consumers were polled during a FurnitureCore survey and asked which look they selected for their most recent upholstery furniture purchase, 56.79% selected plump, overstuffed sofas with deep seating compared to 43.21% who selected a sleek, tight body cover following the line of the furniture.

The desire for comfort has also pushed the rise in popularity for sectionals. In a survey from FurnitureCore, consumers were asked why they purchased a sectional sofa and 53.93% answered to have more seating capacity, 21.35% wanted to be able to rearrange seating set-up and 51.69% responded that the sectional matched their open room layout. The ability to customize sectionals is also a growing selling point for many consumers polled in the same survey. While 60.7% purchased the sectional sofa as it was on the sales floor, 39.33% chose to customize the product.

L & JG Stickley has found success with providing consumers the ability to customize. Regarding the company’s bestselling 7000 Series Sectional, Director of Product Development Paul Peters says, “Rather than searching endlessly for the perfect sofa, chair or sectional, customers can design a piece to their exact needs and specifications. They’re excited to choose their preferred arm style, back, base, and even seat depth, finish it in their favorite fabric or leather, and add decorating details.” Whether it’s customized from top to bottom or that perfect upholstery item found right on the sales floor, manufacturers and retailers are providing consumers with the ultimate choice of comfort.

 

Statistically Speaking: U.S. Manufacturers Cautious as Imports Surge

As the global manufacturing economy expands, sorting out the value of domestic furniture manufacturing in terms of U.S.-supplied or foreign-imported parts is tricky and complex. Five years before the 2020 pandemic, the U.S. Department of Commerce Economics and Statistics Administration issued a research study titled “2015: What is Made in America” to explore the subject in each of the major U.S. manufacturing sectors. The conclusions were the first to bring into focus the impact of the global economy on the U.S. furniture industry. The report showed that 18% of the gross output of domestically produced furniture and related products is foreign content. It went further to look at the distinction between the U.S. content of what we produce versus what we consume. The conclusion states that in 2015, 53% of final U.S. purchases of furniture and related products were imported, either by purchases of imported final goods or imported intermediate inputs in U.S.- produced goods. Against this backdrop, Statistically Speaking in this issue explores the ongoing crises of Made in America furniture products.

Table A illustrates how that trend has exploded since then as e-commerce took off and importing products grew easier and easier. In 2012, the ratio of domestic production to imports was more than double at 2.11 compared to 2021 at 1.17. Imported furniture and related products finally surpassed domestic production briefly for two months in April and May of this year, but then fell below June’s level (Table B). However, it is anticipated this dip is temporary. And even with the Covid-related lockdowns, primarily in China, and subsequent supply chain problems from September to November of last year, the imports recovered quickly. Since December of 2021, manufacturers’ shipments have climbed each month up to $6.22 billion in May from a low of $5.71 billion in the previous March. The climb slowed slightly in June – decreasing 1% to $6.16 billion (Table B).

Figure 1 focuses specifically on the key economic indicators for U.S. domestic manufacturing including shipments, new orders, inventories and unfilled orders. In the second quarter of this year compared to the prior first quarter, average monthly shipments, new orders and inventories all trended upward, while unfilled orders dropped 1.7%. But in the last month, June, monthly data showed shipments trending down compared to May as the other indicators all had increases. These indicators are each explored in more depth throughout this article.

Over the last 10 years, domestic manufacturers’ shipments of furniture and related products peaked in 2018 at $77.8 billion. The value of shipments began to decline in 2019 by 3.7% before diving 7.8% more in 2020 (Table C). U.S. shipments began to rebound in 2021 by 0.6% as shutdowns continued in China, opening a window for domestic manufacturers. Then in the first half of this year domestic production took off growing 6.5% compared to the first half of 2021.

After an uphill battle in 2021 with increasing consumer demand and supply chain disruptions, the value of domestic shipments in the first quarter of this year finally jumped 4.4% from $17.46 billion in 2021 Q4 to $18.23 billion in 2022 Q1. Slow growth returned in the second quarter increasing 1.7% over the prior 2022 Q1 (Table D).

Although not an exact apples-to-apples product comparison, the tables have turned for manufacturers and retailers when it comes to inventory levels. Throughout 2021 and early 2022, manufacturers of furniture and related products carried a much higher ratio of inventory to shipments compared to retailers’ inventory to sales ratios (furniture and home furnishings products) (Table E).

But in March of this year, the tide changed as retailers tended to build more inventory than manufacturers. By June of this year, the ratio of inventories to dollar shipments for manufacturers was 1.57X compared to retailers at 1.69X.

After unfilled orders increased consistently month-to-month throughout most of 2021, manufacturers have been ever-so-slowly whittling down the sizable backlog this year. However, the data for June showed a rise again of 0.5% (Table F).

In the years leading up to the pandemic (2018 – 2019), manufacturers’ monthly unfilled orders/backlog was mostly consistent at 130% of the value of shipments (ratio 1.3X). The ratio peaked in December of last year at 1.87X as unfilled orders approached double the shipment volume. In May of 2022, the backlog ratio dropped to 1.66X before popping up slightly to 1.69X in June (Table G).

New orders, the life blood of manufacturing, stayed close to $6 billion a month for most of 2021 before dipping down to $5.78 billion in November last year. However, monthly orders have consistently been above $6 billion a month since March of this year reaching $6.21 billion in June (Table H).

While manufacturers’ shipments grew consistently 2012 to 2016, the number of manufacturing establishments declined rapidly (Table I). In 2011 the number of companies manufacturing furniture and related products totaled 18,985 before falling 7.2% over the next five years to 17,623 in 2016. Since then, growth in establishments has been relatively flat until an uptick to 17,878 companies in 2021. (Table I).

While the number of manufacturing establishments was falling and shipments were growing 2012 to 2016, employment grew 12.4% by 2017 peaking at 394.9 thousand employees. Not surprisingly, employment took a dive in 2020 down to 359.1 thousand before climbing back up to 385.4 thousand over the first half of this year.

Although manufacturing employment increased rapidly at the beginning of this year, jobs peaked in March at 387.1 thousand and have been falling at roughly 0.2% a month down to 384.6 thousand in July (Table K).

Annual hourly wages have increased every year over the last decade but the biggest gains have been made in the last two years, jumping 5% to $24.17 in 2021 and another 5.3% to $25.46 in the first six months of this year (Table L). High inflation and slowing consumer demand are giving all areas of the economy pause, especially furniture manufacturers, who have seen inventories rise uncomfortably, despite steady orders. Most are taking a cautious approach forward.

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