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Furniture industry eyes threats

Executives now more worried about tariffs and trade war side effects than health care costs.

August 10, 2018
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Michael A. Dunlap & Associates’ latest report shows commercial furniture executives are starting to worry.

The Holland-based firm released the results of its July 2018 quarterly MADA/OFI (Office Furniture Industry) Trends Survey on Aug. 7, which measures the current business activity of the office, education, health care and hospitality furniture industry and its suppliers.

The most frequently cited perceived threats to the industry’s success in the report are tariffs, transportation and logistics costs, steel prices and general material costs.

Health care costs historically were the most common concern from respondents since MADA launched the survey in 2004.

Overall, the report shows the industry still is growing, and 2018 is on track to outpace 2017.

Michael Dunlap, owner and principal at MADA, said looking at the data, he feels “good about where the industry is currently.”

“2018 will continue on the same path, but the current political uncertainties, midterm elections, tariff and trade questions, and the resulting economic climates make predictions into 2019 very difficult,” he said.

The survey — which will repeat in October — was sent to more than 540 individuals involved with the commercial furniture industry’s manufacturing and supply chain in Africa, Asia, Australia, Europe, North America and South America from companies ranging from more than $1 billion in sales to less than $500,000 in sales.

About 25 percent of the respondents are associated with the West Michigan furniture industry, Dunlap said.

The survey focuses on 10 key business activities, and respondents rate each area on a scale of 1-10, from lowest to highest.

Activities include gross shipments, order backlog/incoming orders, employment levels, manufacturing hours (overtime vs. reduced hours), capital investment, tooling expenditures, new product development activity, raw material costs, employee costs and the respondents’ personal outlook on the industry.

The survey uses index numbers to quantify how the industry is performing. An index of 100 means things “couldn’t be better,” an index of 1 is “absolutely the worst,” and an index of 50 means it is neutral — no change up or down.

The July survey shows nine of 10 indexes remain at, near or above their historical averages.

The 10th, raw material costs, was at 38.44, well below the historical average of 44.94 — which means prices are rising.

“Many commodity prices in the second quarter of 2018 have increased significantly,” Dunlap said, including lumber, steel and aluminum as a result of tariffs and the trade war.

“Through 2015 and into 2016, the average (raw materials cost index) was 50.95. The current index indicates that material costs are increasing and will likely dampen profitability unless selling price increases can offset these additional costs,” Dunlap said in the report analysis.

Even accounting for the rising cost of raw materials, the overall index for the July survey is 57.13, well above the average overall index of 54.98.

Still, Dunlap said if the trade war continues, he expects to see all 10 business activities “shift in a negative fashion” by the third quarter of 2018.

He does not expect the shifts to be major like they were during the Great Recession when shipments dropped 30 percent in the first four months of 2009.

“I had never seen anything like it,” he said, despite his 40 years in the industry. “Even in 2001-04 when the industry had a recession, it only dropped 30 percent over a 40-month period.”

The industry saw 9-10 percent growth per quarter starting in 2014, but it took years to climb out of the hole. The past couple of years, growth has lagged to 0.5 percent to 2.5 percent per quarter, Dunlap said.

The furniture industry historically has been “a lagging industry” when it comes to recessions, he noted.

“Maybe the rest of the economy might slow down, but it takes three to six months to impact the commercial furniture industry, partly because the work has been contract furniture work that is being booked and planned six to 12 months ahead,” Dunlap said. “Orders booked in August won’t be shipped until the first quarter of 2019. If someone is going to build a new building, and they are placing orders for the furniture to be delivered in six months, the order is not going to be canceled, generally speaking.”

That said, if all 10 indexes drop next quarter, it could take a human toll, Dunlap said.

“If you get into fourth quarter or early 2019 and start to see averages below the levels of the last 19 years, I can see manufacturers reduce hiring, hours and maybe some layoffs,” he said. “But I don’t think we’ll see layoffs until we see reduction in the demand. A reduction in hours worked, maybe. I think it would be fairly normal to expect.”

July 2018 survey highlights

Gross shipments index: July 2018, 66.86 (all-time high); survey average, 58.09. The previous all-time high and low were October 2014 (65.85) and July 2009 (41.40).

Order backlog index: July 2018, 66.57 (all-time high); survey average, 57.57.

Employment index*: July 2018, 55.14; survey average, 52.53. *The employment index measures the degree of increase or decrease in employment levels. In West Michigan and many other industry locations, labor shortages are driving up wages, but increased hiring remains strong.

Hours worked index*: July 2018, 57.50; survey average, 55.81. The hours worked index is closely tied to the employment index. When the HWI increases into the mid-50s (usually due to overtime), the next one to two quarters often see increases or decreases in the EI. It is an anomaly that both are up significantly this quarter.

Capital expenditures index: July 2018, 54.12; survey average 55.93. The all-time high was 64.74 in April 2017.

Tooling expenditures index: July 2018, 61.76; survey average 56.58. The all-time high was 66.65 in April 2017.

New product development index: July 2018, 66.47; survey average, 58.58. The July 2018 index is the highest since the April 2015 index of 69.70.

Raw material costs index: July 2018, 38.44; survey average, 44.94.

Employee costs index: July 2018, 45.88; survey average, 46.59. Much like its companion raw materials index, the employee cost index is rarely above 50. Health care costs are the most frequently identified issue that contributes to higher employee costs. The index also reflects the need to pay higher wages during a labor shortage.

Personal outlook index: July 2018; 64.32; survey average, 58.74. The personal outlook index has remained above 61 for the past 18 quarters.

Overall index: July 2018, 57.13; survey average, 54.98. The highest recorded Index was 59.72 in July 2005, and the lowest was 41.45 in April 2009 during the bottom of the recession.

Source: Michael A. Dunlap & Associates

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