Any roving wool will do.
To the right are the basic templates. You can make them as fat, short, thin, or tall as you'd like.
The cotton balls are cut in half.
Pick embroidery thread colors that will stand out against the felt.
Cut one piece of embroidery thread, three feet long.
Split the thread in half, three strands each.
Use an embroidery needle. Double or triple the knot near the very end to prevent in popping through the felt.
If you follow the above photos, you'll have a fantastic gnome. Little variations are what make them so marvelous, so don't fret if yours don't turn out just as you see here. My first several tries produced very different results.