Surprise! 1Q spending up 4.1%, government says

Government statistics for the first quarter came out later than usual this year because of the restatement of some series. Fortunately, we have been given the restated data for prior years.

According to the U.S. Department of Commerce, total consumer consumption of furniture and bedding rose

4.1% in the quarter ended March 31, compared to the first quarter of 2006. Based on our industry conversations and the reports of public furniture companies, we find that hard to believe, but there it is.

Both domestic wood furniture shipments and wood imports declined in the March quarter, our government says. U.S.-made wood shipments dropped 7.4% and imports slipped 0.8%. Declines from China (1.1%), Canada (9.4%), Indonesia (2.7%), Mexico (4.3%) and Thailand (30.5%) were offset by gains from Vietnam (a whopping 48.3%), Malaysia (1.9%) and, believe it or not, Italy (7.9%).

It appears that deflation in imported wood furniture is largely over because of higher labor costs, fewer export incentives and rising environmental requirements in China. The continued expansion of manufacturing capacity in China is becoming increasingly problematical, with fewer manufacturers able to maintain desired profitability.

The weaker U.S. demand has been partially offset by rebounding economies in Europe, Japan and elsewhere, but a capacity adjustment in China is likely, especially as Chinese-based manufacturers continue to open factories in Vietnam and elsewhere.

The real action these days is in upholstery. While a weak retail environment led to a 2.6% decline in domestic upholstery shipments in the March quarter, imports grew 9.4%, with a 16.8% gain from China. The dollar gain in leather from China has been reduced by lower prices, but there continue to be strong gains in fabric upholstery coming from China.

This also explains the 13.9% decline in fabric cut-and-sewn covers from China. Clearly, as more finished sofas and chairs come here from China, the need for cut-and-sewn kits declines.

So far this year, bedding has been our strongest category at retail. In the first quarter, domestic shipments grew a sub-par 1.6%, but a new government statistical series showed a 10.5% decline in mattress shipments from China vs. the first quarter of 2006.

As of now, we expect second-quarter import numbers to be weaker, despite a slight improvement at retail since Memorial Day. The big problem continues to be inventory imbalances. There's a surprise!

W.W. "Jerry" Epperson Jr. is a managing director of Mann, Armistead & Epperson Ltd., 119 Shockoe Slip, Richmond, Va., an investment banking and research company that specializes in the furniture sector.