Michael A. Dunlap & Associates’ latest report shows first-quarter declines of all major activities in the furniture industry.
The Holland-based consulting firm released the results of its April 2019 quarterly MADA/OFI (Office Furniture Industry) Trends Survey on May 13. The report measures the current business activity of the office, education, health care and hospitality furniture industry and its suppliers.
The survey — which will repeat in July — was sent to more than 550 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 $500,000 to $1 billion-plus 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 currently 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.
Although all 10 indexes dropped in the first quarter, eight remained well over 50, with employee costs and raw material costs hovering in the mid-40s.
Michael Dunlap, owner and president at MADA, said while he didn’t predict the dip, it’s not unusual for one to occur in the first quarter, and the composite index is very close to what it was at the end of the first quarter of 2018.
“To me, it’s just a correction,” he said. “Now, with that said, and I’m kind of jumping ahead here, if we get through the second quarter, and these numbers are down lower than what they were first quarter, then I’m going to be a little more concerned (about) whether we’ve taken a different path.”
Dunlap noted the first quarter was hit with the impact of tariffs, inclement weather and labor shortages, which affected several of the indexes including raw materials, employee costs and order backlog.
“The effect of the next round of tariffs is still too early to predict, but it is reasonable to believe it will dampen second- and third-quarter numbers,” Dunlap said.
The two indicators Dunlap will keep an eye on in the second and third quarters are order backlog and gross shipments (gross sales). He said in the fourth quarter, orders spiked because President Donald Trump had promised more tariffs in the first quarter — although nothing ended up happening.
“People placed orders at the price level (at that time) to avoid price increases as the result of any tariffs that might have been implemented during the first quarter,” he said.
Dunlap said he believes the sales and backlog numbers for Q1 are more normative.
He added the “brutal weather” in much of North America in the first quarter slowed many indicators including shipments and productivity.
NeoCon, a commercial design trade show that runs June 10-12 at Chicago’s Merchandise Mart, is expected to boost product development in the second quarter as competitors return home and get back to work, Dunlap said.
Although this is not reflected in survey numbers, Dunlap said anecdotal conversations he has had with suppliers and manufacturers indicate the ongoing labor shortage is driving capital expenditures because companies need more automation to compensate for the smaller talent pool.
The most frequently cited perceived threats to the industry’s success continue to be tariffs, as well as travel, transportation, logistics and health care costs, according to the survey.
April 2019 survey highlights
Gross shipments index: April 2019, 57.73; January 2019, 64.40; survey average, 58.23; previous all-time high and low: July 2018, 66.86, and July 2009, 41.40
Order backlog index: April 2019, 55; January 2019, 67.92; survey average, 57.76
Employment index*: April 2019, 55; January 2019, 55.20; survey average, 52.61. *The employment index measures the degree of increase or decrease in employment levels. The April 2019 index of 55 was nearly stable, declining by a mere 0.20 points from January. It is still well above the survey average.
Hours worked index*: April 2019, 56.11; January 2019, 59.58; survey average, 55.96. *The hours worked index is closely tied to the employment index. When the hours worked index exceeds the mid-50s, usually due to overtime, the following one to two quarters often see increases in the employment index. The hours worked index slipped by 3.5 points from January 2019 and remains above the survey average. This is still reflective of the inability to fill both entry-level and skilled positions, which is driving up hiring and hours worked. Overtime remains the norm, although at reduced rates.
Capital expenditures index*: April 2019, 54.29; January 2019, 61.20; survey average, 55.93; all-time high in April 2017, 64.74. *Historically, the capital expenditures index has steadily been in the mid- to upper 50s. The April 2019 index slipped by almost nine points from the January index. It is slightly lower than average.
Tooling expenditures index*: April 2019, 52.50; January 2019, 57.50; survey average, 56.49; all-time high in April 2017, 66.65. *The tooling expenditures index tends to remain very steady from quarter to quarter and typically tracks along with capital expenditures, but the significant decrease during the first quarter is “an unpleasant surprise,” according to Dunlap.
New product development index: April 2019, 59.55; January 2019, 64.40; survey average, 63.30; all-time high in April 2015, 69.70.
Raw material costs index*: April 2019, 45.91; January 2019, 47.40; survey average, 44.88. *Many commodity prices increased in the first quarter. Some tariffs were felt during this quarter that were not reflected in the fourth quarter of 2018. The current index indicates material costs have steadied and are above the survey average. Dunlap expects this to worsen in the second and third quarters of 2019.
Employee costs index*: April 2019, 43.33; January 2019, 48.33; survey average, 46.55. *Much like its companion raw materials index, the employee costs 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 again appear to have exceeded health care costs. Dunlap predicts this will continue as long as a shortage of qualified labor exists.
Personal outlook index*: April 2019, 65.91; January 2019, 66.54; survey average, 59.10. *Although it slipped slightly from the previous quarter, this index has remained over 61 for the past 21 quarters, giving a boost to the overall index.
Overall index*: April 2019, 54.58; January 2019, 59.31; survey average, 55.04; all-time high in July 2005, 59.72; all-time low in April 2009, 41.45. *All 10 index values comprising the overall index declined from the previous quarter, but each remains within normal or acceptable values.
Source: Michael A. Dunlap & Associates