Architecture & Design and Manufacturing

Furniture industry dips in third quarter

Executives report spike in raw material costs, decreases in tooling expenditures and new product development.

November 16, 2018
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MADA Office Steelcase
Despite pre-recession parallels showing up in the third quarter, Michael Dunlap & Associates foresees a “pretty steady” fourth quarter. Courtesy Steelcase

The latest report from Michael A. Dunlap & Associates shows furniture industry executives remain confident despite declines from the second quarter.

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

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

Michael Dunlap, owner and president at MADA, said the report paints a “steady” picture of the industry despite surprise dips in several categories.

“Any declines we saw in the third quarter from the second quarter were because the first two quarters were so strong,” Dunlap said. “We’ve had some dips, but I think that’s normal.”

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

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

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

The survey uses index numbers to quantify how the industry is currently 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.

Of the 10 indexes, four remain above 14-year historical averages: gross shipments, order backlog, hours worked and personal optimism.

The remaining six slipped below average in the third quarter.

In the second quarter, nine of 10 indexes were at, near or above historical averages.

Dunlap said he doesn’t believe the price of raw materials is behind the decrease in tooling activity and new product development, and it’s “a mystery” to him what might be the cause.

“From the July/August/September time period, it might just be a change in reporting or the mix of people who responded,” he said. “I’ve looked through the responses, and nothing stands out at me as to why this is off.”

He said new product development is “critical” to the commercial furniture manufacturing industry, and he is certain the numbers will rebound.

“The first quarter is always strong in product development,” he said. “Perhaps in the July/August/September period, maybe it was just relaxing after NeoCon.”

Besides the executives’ personal outlook index, Dunlap said he puts the most stock in the gross shipments and order backlog indexes, which both were up from survey averages but down six points from July 2018.

Preceding the Great Recession, gross shipment and order backlog indexes were as high or higher than 2018 levels.

In January 2007, the gross shipment index was at 65.13, the second highest ever, compared to the all-time high of 66.86 in July 2018 and the October 2018 index of 60.37.

In January 2007, the order backlog was at 61.47, compared to 66.57 in July 2018 and 60.74 in October 2018.

During the lowest point of the recession in April 2009, the gross shipments and order backlog indexes fell to 22.42 and 25, respectively.

By October 2010, both indexes had climbed back up to the high 60s.

Despite pre-recession parallels, Dunlap foresees a “pretty steady” fourth quarter.

“The main thing should be the real impact of tariffs,” he said. “And the one thing nobody can control will be the weather, which will change shipments, affect hours worked and productivity.

“Aside from operations issues and the tariffs, I don’t really see anything looming on the horizon that’s a hazard or a haunting ghost. I feel the fourth quarter should be very good. Where we saw corrections from the first and second quarters, we should be back up to average or above-average levels.”

Dunlap said he expects the trend of acquisitions and marketing alliances at major furniture manufacturers to continue into 2019.

He said factors driving the trend include an influx of corporate cash from tax reform, baby boomers retiring and selling their businesses after putting it off during the recession and the abundance of available new venture capital.

October 2018 survey highlights

Gross shipments index: October 2018, 60.37; survey average, 58.13; all-time high: July 2018, 66.86.

Order backlog index: October 2018, 60.74; survey average, 57.63; all-time high: July 2018, 66.57.

Employment index*: October 2018, 52.22; 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 steady.

Hours worked index*: October 2018, 60.42; survey average, 55.89. *The HWI is closely tied to the employment index. When the HWI exceeds the mid-50s (usually due to overtime), the following one to two quarters often see increases in the employment index. This is an anomaly, as hours worked are higher while unemployment is lower.

Capital expenditures index: October 2018, 52.31; survey average, 55.87; all-time high: April 2017, 64.74.

Tooling expenditures index*: October 2018, 54.81; survey average, 56.55; all-time high: April 2017, 66.65. *The tooling expenditures index tends to remain very steady from quarter to quarter and typically tracks along with capital expenditures. The significant decrease during the third quarter is a surprise, Dunlap said.

New product development index: October 2018, 60.38; survey average, 63.35; all-time high: April 2015, 69.70.

Raw material costs index*: October 2018, 37.69; survey average, 44.81. *A lower index number means commodities prices are rising. The current index indicates material costs will likely dampen profitability unless selling price increases can offset these additional costs, Dunlap said.

Employee costs index*: October 2018, 45.77; survey average, 46.58. *Much like its companion raw materials index, the employee cost index is rarely above 50. Although higher health care costs are the most frequently identified issue that contributes to higher costs, wage increases this quarter have exceeded health care as the primary reason cited, Dunlap said.

Personal outlook index: October 2018, 64.81; survey average, 58.84. The personal outlook index has remained above 61 for the past 19 quarters.

Overall index: October 2018, 54.98; survey average, also 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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