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North American Consumer and Business Spending on Furniture


American Household Furniture Demand

Personal income growth in the USA is picking up. After advancing at an annual rate of 2.3% during the first half of 2002, growth may approach 4.4% in the second half of this year. Further improvements are expected for 2003, with an anticipated rate of 5.5%. This, however, is still far below the stellar performance of 8% back in 2001.

Unfortunately, growth of the all important real disposable income after adjustments for inflation and personal taxes, falls short of the performance of personal income. During the second half of 2002 and in 2003 it will probably remain unchanged at the 3.7% rate achieved in the first 6 months of this year.
Residential construction will have a more positive influence on furniture consumption than personal income. Housing starts in the USA are moving ahead at a much faster pace than the otherwise sluggish economy would suggest. Obviously, low mortgage rates are the driving forces. Compared to the 1.60 million housing units started in 2001, this year is expected to see 1.68 million new units. However, building activity has slowed down in recent months and next year we may even witness a slight drop in starts, down to 1.65 millions.

With disposable personal income growth stalling and concerns about poor corporate governance in the USA, consumer confidence has been eroded somewhat. Nevertheless, the American consumer is still responding favorably to the financial incentives of low interest rates.

Consumer spending remains surprisingly strong, advancing by an estimated rate of 3.1% this year and a projected rate of 2.7% in 2003. This compares to 2.5% in 2001 (down from 4.3% in 2000). Spending on durable consumer goods is performing even better. The growth rate for 2002 will be about 5.9%, followed by 2.5% next year but this is down significantly from the very strong performance of 8.2% in 2000.

Spending on furniture has almost completely escaped the economic downturn. With the exception of a minor contraction of 0.6% in 2001, consumption has been growing every year since 1995. Even though analysts at AKTRIN expect another minor slowdown during the second half of this year, furniture spending is likely to still exceed last year's level by some 4.5%. In value terms, this means that the market size will advance from $ 64.0 billion in 2001 to $ 66.9 billion this year.

The AKTRIN forecast for next year is also upbeat - although growth may fall slightly short of the 4.5% rate of this year. The predicted rate of 3.1% would bring the market valuation up to a new all-time high of $ 68.9 billion.

Canadian Household Furniture Demand

Personal income growth is sluggish in Canada. After advancing by 7.1% in 2000 and 4.0 % in 2001, it slipped to only 2.9% during the first half of this year. While the low point may have been passed by now, noticeable improvements could be slow in coming. For 2002 as a whole analysts predict a growth rate of 3.3% and 3.8% next year. If inflation and taxes are taken into account, the real disposable income growth was and will be even slower, that is 2.5% last year and approximately 2.7% each in 2002 and 2003. This compares to an advance of 4.7% in 2000.

In spite of the meager income growth, the housing market is responding very positively to low mortgage rates. In fact, the first quarter of 2002 saw the highest level of new residential construction in many years, reaching 204,000 units (on an annualized basis). If the housing activity is expressed in value terms - rather than unit terms - the growth of 35.7% (at an annualized rate) was most spectacular indeed. For this year as a whole some 190,000 new housing units will be started, up from 163,000 units in 2001 and 153,000 units in 2000. No doubt, this will provide a welcome stimulus to the forthcoming demand for residential furniture. We believe that the construction activity will cool down a bit in the months to come. Our prediction of new housing starts for next year will be in the 170,000 range.

Consumers are increasingly reacting to the slow income growth by scaling down their expenditures. After advancing at a rate of 3.7% in 2000, consumer spending decelerated to a 2.6% growth rate last year. We believe that this same rate will again prevail this year and next.

Durable consumer goods are very interest-sensitive and the historically low rates helped to keep sales at a fairly healthy level. Consumption growth of durable household goods came in at a rate of 4.5% in 2001 and is likely to advance to a rate of 6.6% this year. The rate next year may fall below 3% unless the long-awaited economic recovery gathers more steam.

Spending on household furniture follows a very similar path to spending on overall durable consumer goods. The growth rate of 7.0% in 2001 will likely be surpassed this year at an anticipated clip of 9.1%, but it will slow down a bit to a rate of approximately 5.0% next year. If our growth predictions are correct, the value of the Canadian household furniture market will advance from C$ 7.6 billion last year to C$ 8.3 billion this year and to an all-time high of C$ 8.7 billion in 2003.

American Office Furniture Demand

Employment growth is probably the most important determinant for the office furniture demand. While the American economy created 1.36 million jobs in 2000, almost the entire amount, that is 1.34 million, has been lost last year. This year will again witness a drop in employment (-0.4%) but for 2003 we may see a turn-around with some 2.30 million new jobs opening up. Nevertheless, the unemployment rate will remain above 5%, both this year and next.

In addition to employment levels, corporate profits are influencing very directly the office furniture demand. Unfortunately, pre-tax corporate profits are extremely weak at the moment. After growing at a rate of 8.9% in 2000, growth was negative at -17.4% last year. Corporations are still struggling, although to a lesser extent than in 2001. For this year as a whole, analysts anticipate pre-tax corporate profits to shrink by 3.5%. The sky may be brighter next year when corporate profits will advance again at a rate in the 10% to 15% range.
Not surprisingly, business investments have been curtailed in unison with the drop in profits. While still growing at a rate of 7.8% in 2000, business investments shrank by 5.2% last year and a similar decline is expected this year. While the brunt of the decline in business investments refers to non-residential construction, investments in machinery and equipment, which includes office furniture, fared only marginally better. Fortunately, government investments remain positive, offering a counterbalance to the sagging private-sector performance.

Parallel to the recovery in profits, business investment may grow again - at an anticipated rate of 4.3% in 2003.

The economic fundamentals have been very harsh for the office furniture industry. Back in 2000, office furniture consumption advanced by 6.5% reaching an all-time high of US$ 40.6 billion (including recycled furniture). In 2001, consumption dropped by 12.2% and another drop of 7.8% is expected this year, bringing the market valuation down to only US$ 32.9 billion. For 2003, analysts expect the demand to grow again, by approximately 5.0% lifting the market to US$ 34.5. This, however, is still 15% lower than the previous peak achieved in 2000.

Canadian Office Furniture Demand

Pre-tax corporate profits fell by 8.9% in 2001, following a rise of 19.4% in the previous year and 26.3% in 1999. Meanwhile profits recovered in the first half of this year, leaving earnings only 2.3% below year-earlier levels, though still 6.5% off their early 2001 peak. AKTRIN believes that Canadian corporate profitability will further improve in the months ahead but for this year as a whole, profit growth may still remain at a relatively meager rate of 0.5%. Next year's growth is likely to rise above 10%.

Business investment in machinery and equipment - including office furniture - advanced by a healthy 9.3% in 2000 but dropped by 2.2% the year thereafter. Corporate investments are still declining but at a slower rate. Expenditures on machinery and equipment in 2002 will probably end-up 0.7% below 2001 levels. The current improvement in the business sentiment follows the recovery in corporate earnings, albeit with a time lag of several months. We are confident that we will see a noticeable improvement next year, with outlays advancing by an estimated 6.0%.

Non-residential construction is also weak at the present time. However, office vacancy rates are high enough not to cause an impediment for any business expansions.

Government spending had a stabilizing impact on the economy. Annual growth rates have been fairly consistent lying within a range between 2.4% and 4.3% since 2000. No major change is expected for 2003.

The employment market follows closely the path of corporate profits. While 338,000 new employment positions have been created in 2000, this number fell to a dismal 64,000 last year. Nevertheless, contrary to the USA, Canada managed to remain in the positive territory. Meanwhile, the Canadian job market is recovering nicely from its lull in 2001. We anticipate that some 350,000 new jobs will be created this year, representing a growth rate of 1.8%. In relative terms, New Brunswick is posting the strongest performance. Next year, with most of the catch-up requirements satisfied, employment growth will diminish a bit to 1.6% or about one-quarter of one million new positions. Alberta will probably emerge as the growth leader.

Canadian business outlays for new and recycled office furniture rose steeply in 2000 and early 2001, reaching an all-time peak of C$ 3848 million (annualized basis) in the first quarter of 2001. Thereafter it fell dramatically at a rate of 22.8% and the market value for the entire year amounted to only C$ 2972 million. In 2002 a modest, albeit accelerating, recovery has stated. Even though 2002 as a whole will likely lie 8.1% below the 2001 number, we anticipate a positive change of 5.1% for 2003. In value terms, the Canadian office furniture market (at retail prices) may reach C$ 3227 million, up from C$ 3070 in 2002. This, however, is still 6.1% below the previous peak.




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