The office & commercial furniture industry has not been immune to tariffs with China, and the West Michigan analyst who most closely keeps tabs on that industry sector is reporting that those tariffs may well impact the 4th quarter as well as the upcoming 1st quarter of 2020.
Michael Dunlap of Michael A. Dunlap & Associates in Holland, is out with the results of his October 2019 MADA/OFI Trends Survey, the 59th such report since he launched the survey in the summer of 2004. He says, “We still feel good about where the industry is currently. The effects of the tariffs with China have dampened the 3rd Quarter and will likely impact the 4th Quarter and 1st Quarter of 2020. The overall economic growth seems to be slowing down and will probably affect this industry in 2020.”
Dunlap’s survey focuses on ten key business activities with respondents rating each area on a scale of 10 (the highest) to 1 (the lowest). Those areas include key measurements for:
- 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
- Personal Outlook on the industry
The quarterly survey is a unique tool that measures the current business activity of the commercial (office, education, healthcare, & hospitality) furniture industry and its suppliers.
The unique element of the survey is the establishment of an Industry Index Number to quantify where the industry is currently performing. For example, an index of 100 means that things “couldn’t be better”, an index of 1 is “absolutely the worst” it can be, and an index of 50 means it is neutral; no change “up” or “down”.
Dunlap’s October 2019 survey highlights are:
Gross Shipments Index:
- 58.33 = October 2019 Index
- 74.00 = July 2019 Index
- 57.79 = 59 Survey Average Index
The October 2019 Index fell to 58.33, nearly 16 points, after the July 2019 Index jumped more than sixteen points to 74.00. The 3rd Quarter October index remains above the 59 Survey average, which is very important.
Dunlap says “It is critical to recognize this reflects the rate of change over both the 1st and 2nd Quarters. First Quarter was unusually below the 57.79 survey average and the previous six months. We see this as a correction to the previous patterns.”
The previous all-time high and low were in July 2019 (74.00) and April 2009 (22.42).
Order Backlog Index:
- 45.56 = October 2019 Index
- 71.50 = July 2019 Index
- 57.78 = 59 Survey Average Index
The October 2019 Index fell to 45.56, nearly 26 points lower than the July 2019 Order Backlog Index of 71.50 which jumped by more than sixteen points over the 1st Quarter.
It is critical to recognize this reflects the rate of change over both the 1st and 2nd Quarters.
January 2019 was previously the highest we have experienced since the survey began in 2004. It was well above the 59 survey average and was remarkably very strong. Like its sister Gross Shipments Index, the quarter-over-quarter change is significant, but can distort the reality.
The previous all-time high and low were in July 2019 (71.50) and July 2009 (25.00).
Employment Index:
- 52.78 = October 2019 Index
- 57.00 = July 2019 Index
- 52.89 = 58 Survey Average Index
The Employment Index measures the degree of increase or decrease in employment levels. The October 2019 Index of 52.58 declined by 4.22 points but is almost equal to the 59 survey average.
Hours Worked Index:
- 56.67 = October 2019 Index
- 61.67 = July 2019 Index
- 56.06 = 59 Survey Average Index
The Hours Worked Index is closely tied to the Employment Index. When the Hours Worked Index exceeds the mid 50’s (usually due to overtime), the following 1-2 quarters often see increases in the Employment Index.
The October 2019 Hours Worked Index is also nearly equal to the 59 Survey Average. Dunlap says, “We view this is still reflective of the inability to fill both entry level and skilled positions which are still are driving up hiring and hours worked. Overtime remains the norm, not the exception.”
Capital Expenditures Index:
- 54.38 = October 2019 Index
- 54.74 = July 2019 Index
- 55.89 = 59 Survey Average Index
Historically, the Capital Expenditures Index has steadily been in the mid to upper 50’s.
The October 2019 follows this pattern and is only 1.5 points below the 59 Survey Average. The all-time high was 64.74 in April 2017.
Tooling Expenditures Index:
- 52.00 = October 2019 Index
- 52.78 = July 2019 Index
- 56.36 = 59 Survey Average Index
The Tooling Expenditures Index tends to remain very steady from quarter to quarter and typically tracks along with Capital Expenditures, but the continued below average index during both the 2nd and 3rd Quarters is “an unpleasant surprise,” according to Dunlap.
New Product Development Index:
- 63.53 = October 2019 Index
- 61.05 = July 2019 Index
- 63.27 = 59 Survey Average Index
The October 2019 survey numbers rebounded by 1.5 Index points, after the April 2019 Index declined by almost six points. October is very close to the 59 survey average and returns to the low 60’s. The highest we have experienced was the April 2015 Index of 69.70.
Raw Material Costs Index:
- 42.50 = October 2019 Index
- 44.44 = July 2019 Index
- 44.87 = 59 Survey Average Index
Many commodity prices in the 3rd Quarter of 2019 continued to increase. Tariffs were felt during this quarter that were not reflected in the 4th Quarter of 2018 or 1st and 2nd Quarters of 2019.
The current index indicates that material costs have increased and are higher than the 59 Survey average. Dunlap suggests, “We suspect that this will worsen in the 4th Quarter of 2019.”
Employee Costs Index:
- 47.55 = October 2019 Index
- 45.26 = July 2019 Index
- 46.55 = 59 Survey Average Index
Much like its companion Raw Materials Index, the Employee Cost Index is rarely above 50.0. Although higher healthcare costs are the most frequently identified issue that contributes to higher costs. Wage increases seen in the 2nd Quarter appear to have stabilized. Healthcare costs remain an issue.
Dunlap says, “We expect Employee Cost increases will continue as long as we have a shortage of qualified labor and overtime is required to meet customer demand.”
The Personal Outlook Index:
- 57.37 = October 2019 Index
- 64.00 = July 2019 Index
- 59.15 = 58 Survey Average Index
Although it slipped from the previous quarter, it is still quite positive.
Dunlap tells us, “This index had remained over “61” for the past 22 Quarters. This is remarkable and it still gives a boost to the Overall Index.”
Overall Index:
- 53.14 = October 2019 Index
- 58.90 = July 2019 Index
- 55.07 = 59 Survey Average Index
The October 2019 Survey Index of 53.14 is just slightly below the 59 survey average.
Two out of ten index values improved from the previous quarter. With the exception of Order Backlog, the other Index changes are within normal or acceptable values.
The highest recorded Index of 59.72 came in July 2005. The lowest was 41.45 in April 2009 during the bottom of the recession.
Dunlap says, “In spite of the 3rd Quarter declines, we believe that the industry remains very strong. We are surveying many more than five or six companies. The ‘Big Twelve’ are
generally doing very well. However, it is the smaller ‘under $50.0 Million sales and fewer than 150 employees’ companies that are driving this industry.” He goes on to note, “Outlook is a purely emotional question but we put a lot of value on this content.”
Dunlap argues that the most frequently cited perceived threats to the industry’s success continue to be tariffs, travel, transportation and logistics costs, however healthcare costs are still the most commonly cited concern from respondents since the survey process was started in August of 2004.
As always, Dunlap thanked the respondents, saying, “Over 67-percent of the responses come from ‘C’ level executives who are the Chairman, CEO, COO or President of their organizations. I am always extremely grateful for their participation and support. Their suggestions and recommendations continue to be helpful to the performance and content of this unique survey.”
The October 2019 MADA / OFI Trends survey was sent to more than 540 individuals involved with the commercial furniture industry’s manufacturing and suppliers from Africa, Asia, Australia, Europe, North and South America and from companies ranging from more than $1 Billion in sales to less than $500,000 in sales. The MADA / OFI Quarterly Survey will repeat in January 2020, and will be the 60th such survey since inception..
Michael A. Dunlap & Associates, LLC, is a consulting firm that focuses upon issues involving the working, learning, healing, and hospitality environments and furniture industries.
