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North American Office Furniture Market

¡¾Jan.12, 2002¡¿

The United States is in a business-led recession. GDP contracted at an annual rate of more than one percent in the second half of 2001. This was the poorest showing since 1991 when the US economy was last in a recession. Analysts expect continued negative growth in the first quarter of 2002.

While growth of pre-tax profits amounted to 8.9% in 2000, it declined by a whooping 15% last year. Profit among Standard & Poor's 500 index companies declined by more than 20% in the second half of 2001, the worst performance in a decade. The erosion of profits may continue for another 6 months before recovering.

Business investments in machinery and equipment, which includes office furniture, advanced at a healthy rate of 4.4% in 2000 but fell by 4.5% in 2001. Businesses are likely to continue to be very cautious with new capital investments. The growth in capital expenditure this year is likely to remain negative at approximately -2%. On the other hand, government spending will continue at a relatively high level and provide some counterbalance to the lackluster business investments.

Construction of commercial buildings advanced by 6% in 2000 (in value terms) but fell by an estimated 1.7% last year. This year, growth will be very close to zero. The national vacancy rate for downtown office space is creeping up. It is presently standing at 10.2%, up from 6.4% in 2000. However, some areas - notably Washington, DC - have vacancy rates well below the national average and we anticipate a healthy construction activity in those centers. Obviously, the office furniture industry will benefit from any new office space created.

Last year, the American economy lost 2 million jobs, representing a decline of 0.3%. This has more than fully eradicated the 1.3 million jobs created in 2000. This year, the rate of job losses will be less dramatic than in 2001. Nevertheless, the USA is likely to lose employment positions again and the unemployment rate may climb to about 5.1% compared to 4.7% last year.

There is justified hope that the economy will turn around later this year. The Federal Reserve Bank lowered interest rates 11 times in 2001 and the rate is now standing at a 40-year low. It is possible that the Fed will continue with its easy monetary policy. Analysts at AKTRIN are confident that the positive effects of lower interest rates will make themselves felt soon. Furthermore, businesses have drastically written off bloated inventories of unsold goods thereby setting a good foundation for a recovery.

The US office furniture market enjoyed a record year in 2000. It reached a consumption peak in the second quarter valued at US$43.5 billion (at annual rates, evaluated at retail prices including sales taxes and including recycled furniture). Following the peak quarter, business purchases of office furniture started to decline. The decline became increasingly steeper and came to a halt only in the third quarter last year when the market value reached US$36.0 billion (on an annualized basis). This is a drop of over 17% between the top and the low point.

Growth of the office furniture market will be modest for the foreseeable future. In fact, due to the still strong market in the first half of last year, thereby lifting the 2001 average to $ 37.7 billion, it is forecast that the annual average consumption this year will, at US$37.1 billion, remain below the year ago average. For 2003, the average consumption value will probably continue to increase, but only marginally. While it will surpass the 2001 average, it will remain well below the $ 42.1 billion annual peak of 2000.

Canada

The Canadian economy slipped into recession during the second half of 2001, shrinking for the first time since 1992. Sagging export sales, above all to the US, represents the most serious drag on the Canadian economy.

Pre-tax profit growth reached a staggering 21.8% in 2000 but started to tumble badly after mid-2001. The 35 biggest companies traded at the Toronto Stock Exchange saw their bottom line plummet by 53% during the second half of 2001. Average corporate profit growth last year came in at minus 0.8%. The outlook for this year is only marginally better with an anticipated profit growth of 1.0%.

Business investment is a direct reflection of business confidence. As of 2000, business investment in machinery and equipment, including office furniture, advanced at a clip of 9.7%. Business spending held up surprisingly well in the first three quarters of 2001 but started to decline steeply thereafter. Corporate profits fell to C$110 billion from almost C$129 billion in the second quarter. Business investments are now one of the weakest components of the Canadian economy. On an annual average, last year's growth was negative at a rate of -1.8%. This year, the investment performance will be positive again, but the growth rate with 2.9% is rather low on a historic comparison.

In 2000, Canada created 338,000 new jobs but some 30,000 jobs have been lost last year. This year, employment growth will be positive again with an estimated addition of 75,000 jobs. Nevertheless, the unemployment rate will continue to rise from 6.8% in 2000 to 7.2% in 2001 and 7.8% in 2002.

Canada's office vacancy rate is on the increase but still at a fairly low 6.5% at the present time. The variance between Canada's major urban centers is quite wide, ranging from a low of 2.0% in Ottawa to a high of 9.1% in Montreal. A low vacancy rate usually triggers new commercial construction which - with a certain time lag - triggers new office furniture acquisitions. On the other hand, a high vacancy rate allows businesses to quickly expand their office space if there should be a need.

The Bank of Canada has repeatedly lowered its interest rate to the present level of 2.25%. It is to be hoped that this will help to keep the recession mild and short. GDP growth for 2002 is predicted to be in the 2% range.

The first fifteen months of this century were very good for the Canadian office furniture industry. Business purchases of office furniture (new and used) culminated at C$4600 million (on an annualized basis) in the first quarter of 2001. However, the good fortunes did not prevail. Office furniture sales dropped very steeply, down to a low point of only C$3988 million in the third quarter of last year. This represents a decline of 13.3% in only six months. Meanwhile, office furniture sales have rebounded a bit, but growth is painfully slow.

Due to the still excellent performance during the first quarter of 2001, last year's annual average of C$ 4223 million represented a peak year. It is very unlikely tat this culmination will be surpassed this year, with an estimated annual average value of C$4083 million. Next year's growth is anticipated to come in at a rate of 5.2% bringing the value of business' investments in office furniture to about C$ 4296 million, thereby exceeding the previous peak year of 2001.