Epperson: What’s up with sharp rise in furniture stocks?
Investors apparently think Fed rate cut will help
Jerry Epperson -- Furniture Today, January 23, 2008
The three-quarter-point reduction by the Federal Reserve on Tuesday was a solid signal that the discomfort of the furniture industry is being more widely felt … and is spreading throughout our economy. Until recently, the public face of Washington was that our economy was sound and growing, but the evidence has been growing to the contrary.
The most recent measure of economic growth was surprisingly strong. GDP growth of 4.9% in the third quarter of 2007 floored most economists, who had expected much less. After all, housing was clearly in a free fall and the August credit crunch was not pretty.
Economic growth in the fourth quarter is expected to be between 1% and 2% — almost imperceptible — and the forecasters are now expecting growth early in 2008 to be just as weak or a bit weaker. Growth of 1% is like walking a tightrope. A slight slip and we fall into a recession, now defined as two or more sequential quarters of negative GDP growth.
The headlines about the economy are frightening, with the mortgage crisis soon to be impacting equity lines and credit cards. Lenders are more conservative and are cutting back credit availability. The weaker U.S. dollar has aided exports somewhat but the “balance” of trade is severely askew and not in our favor.
Was this an overreaction by the Fed? The stock market in recent days had been diving, the candidates, pundits and talking heads have stopped condemning the Iraq war in favor of raising alarms about the economy, and worst of all, America had a weak Christmas selling season. Heaven help us.
Yet, while Tuesday started with a 465-point drop in the Dow Jones Industrials Average — severe by any measure — by midday the vast majority of furniture stocks were up and some gained as much as 10%. Does that make sense to you?
In the complex and sometimes befuddled mind of Wall Street, it does. The Federal Reserve hammering down interest rates should begin to ease the current housing distress by lowering mortgage rates and saving homeowners money, reducing the step-up rates on adjustable mortgages, and hopefully making home purchases more affordable so that the glut of homes for sale will be reduced. That, in turn, will stop the decline in home values and everyone should sleep better (helping the mattress industry).
All that said, we still do not see a material pickup in furniture sales until autumn of 2008. There is a lot of the housing mess that needs to be cleaned up, and consumer confidence remains severely shaken. For example, in New England and the South Atlantic (including Florida) consumer confidence is a whopping 26.4% and 21.3% below year ago levels. The least affected regions include the Mountain states (down just 2.9%) and the West South Central states (down 5.3%).
Please don’t give up hope on the economy. At least now some strong corrective steps are being taken.
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