Cutting Edge Newsletter™ February 2008
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| Total number of tax returns | $130 million |
| Number of tax returns for the bottom 50 percent of taxpayers | $65 million |
| Adjusted gross income for bottom 50 percent of taxpayers | $922 billion |
| Total income tax paid by bottom 50 percent of taxpayers | $27.4 billion |
In other words Exxon Mobil pays as much in taxes as the entire bottom 50 percent of individual taxpayers – 65 million people.
The tax rate for the bottom 50% is 3 percent. Exxon Mobil’s rate is 41 percent.
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China’s Currency Strengthens
Remember the controversy in 2005 about the undervalued Chinese yuan (aka the renminbi)? On July 21 of that year China dropped its pegging of the yuan to the dollar and began managing a small but continuous strengthening of its currency. The fully pegged rate was 8.28 yuan to the dollar. As of this February the dollar had fallen to 7.19 yuan, a 13.1 percent decline. In a mere five weeks this year alone, the dollar lost 1.6 percent of its value in China.
Why is China now letting the yuan strengthen? No doubt officials there are listening to complaints from Washington. But the real reason is inflation. With the recent drop in the dollar’s purchasing power, Chinese inflation had risen to nearly 7 percent. A faster pace of yuan appreciation helps reduce imported inflation. Their inflation also stems from the costs of holding down the yuan: China had to print yuan to buy dollars.
While managing the yuan, China was a major purchaser of U.S. government debt, a fact that kept U.S. interest rates low. In 2005 China bought nearly $85 billion in Treasuries. Last year China became a net seller of our debt instruments. So while the trade imbalance with China continues, the effects of that situation are changing. Stay tuned…
Your Customer’s Customers
Many of the products your customers’ customers purchase depend on discretionary income, those funds available for spending beyond the necessities of life. Determining who has that extra money is critical to capturing a share of it.
According to the Conference Board, about 73 million Americans have discretionary income, up from 57 million in 2002. The total amount of discretionary income is $1.7 trillion with the household average being $24,335. Households earning more than $100,000 annually hold 78 percent of all discretionary income. The wealthiest concentration of these households is in New England where 63 percent have the ability to spend on discretionary purchases. California has the largest number of households with discretionary income followed by Texas. Importantly, households who earn less than $50,000 have only 3 percent of total discretionary income.
Sector Report
Kitchen Cabinets
According to the KCMA’s Trend of Business Survey, December cabinet sales fell by 14.6 percent versus the same month last year. 2007 full year sales were down 12.3 percent vs. 2006. For the year stock cabinet sales dropped 19.8 percent vs. 2006 while semi-custom and custom have declined only 4.7 percent and 5.2 percent respectively. The KCMA forecasts that the industry will be flat at best in 2008.
Spending on remodeling, where the majority of cabinet demand originates, was down about 2 percent in 2007. This year-on-year decline was the first since 2003. The National Association of Home Builders forecasts that remodeling will not recover until 2009. Beyond that homeowner remodeling activity is predicted to rise by 44 percent from 2008 to 2015 or about 3.8 percent annually.
At the company level…
Furniture
Consumer spending on furniture and bedding rose by only 2.7 percent in 2007 having slowed to 1.6 percent and 1.7 percent in the third and fourth quarters respectively. Deloitte Research’s Leading Index of Consumer Durables Spending, having turned negative last September, is pointing to continued weakness in the near term. The conclusion, as confirmed by company reports below: furniture, no matter where it’s made is not selling at retail.
Furniture importers are facing fuel surcharges on container shipments to offset the rising cost of fuel. As of January, shipping companies are charging up to $950 extra for a 40-foot container, up from $455 a year ago. The cost of fuel for ships has risen from $295 per ton in early 2007 to $500 today.
At the company level…
At retail…
Office Furniture
BIFMA, the sector trade association, reported a 2 percent drop in December orders compared with the 7 percent increase in November. Shipments also decelerated by increasing only 1 percent vs. 5 percent growth the prior month. December’s shipments represented the slowest pace of growth in 2007.
In spite of tougher macroeconomic conditions, analysts continue pointing to strength in the primary economic drivers for office furniture demand – corporate profits, non-residential construction, and white collar employment. In addition global demand for these products is growing. The industry is shipping at an $11.420 billion rate vs. $13.35 billion at the historic top in late 2000.
At the company level…
Wood Flooring
NOFMA, the primary flooring industry association, has ceased reporting monthly strip flooring production data. When an alternative source for this information is identified, Business Briefing will resume reporting this indicator of flooring industry health.
Non-Residential Construction
A study by the National Association of Real Estate Investment Trusts shows that an investment in U.S. commercial property at the start of 2000 would have quadrupled by the end of 2006. In spite of that strength, the non-residential market has not seen the overbuilding that normally precedes a cyclical downturn. For example, the vacancy rate in U.S. office space is 12.5 percent, the lowest in six years.
One indicator that spending on commercial construction is continuing is the strength of architects’ billings. Architects, whose work obviously precedes construction, are not busy when project plans are waning. The American Institute of Architects’ Architecture Billings Index is designed to forecast construction activity nine to 12 months in the future. In December the Index was 55.4 with any score above 50 indicating an increase in billings.
Higher education is one sector that is burgeoning. In 2006 colleges and universities completed $15 billion of buildings and started an equal value of projects in 2007. This spending covers the gamut from new laboratories, student housing, and recreational space.
The reason is demographic. American high schools are pumping out millions of potential college students. University enrollment is projected to rise 13 percent by 2015.
Providing space for research and learning is critical to America’s ability to preserve its lead in technological innovation.
In the recent past, WMMA has been an advocate for the creation of a new simplified Research and Development (R&D) credit. Unfortunately our message has been crowded out by a broad concern resulting from the fact the existing credit expired December 31, 2007, for the 13th time since it was originally enacted into law in 1981.
Further complicating our efforts is the fact that in December 2006, Congress extended and revised the R&D Credit by extending current law and enacting a 12 percent alternative simplified credit (ASC). This change recognized the fact that many companies could not qualify for the traditional 20 percent credit due to its statutory formula and that those companies received a much smaller, 1-2 percent effective R&D credit under the alternative incremental research credit (AIRC) method. The December 2006 legislation extended the traditional credit retroactively from January 2006 to December 2007, and implemented the alternative simplified credit from January 2007 to December 2007.
The R&D Coalition is the leading advocate for the permanent extension of the credit. They provide the following information.
The R&D Credit stimulates R&D spending by all sizes of businesses in the U.S. It is specifically designed to encourage the type of commercial R&D investment that enables companies to bring new and improved products and services to the market. The credit is available only for R&D done in the United States, and applies only to the portion of a business taxpayer’s eligible expenses, called qualified research expenditures (QREs), that exceed a calculated base amount of R&D spending. More than 75 percent of credit dollars are earned on wages paid to people working in high-skilled, high-paying R&D jobs in the U.S.; in some industries, this figure is more than 90 percent.
The credit applies only to a defined portion of a company’s expenses directly related to performing domestic R&D. Only expenses that satisfy the requirements in Section 41 of the Internal Revenue Code (IRC) are eligible. Those expenses are limited to in-house wages and supplies attributable to qualified research; certain time-sharing costs for computer use in qualified research; and 65 percent of contract research expenses, i.e., amounts paid to outside contractors in the U.S. for conducting qualified research on the taxpayer’s behalf. The R&D activities must be technological in nature, involve a process of experimentation, and be directed at developing a new or improved business component.
Companies have the opportunity to elect to use one of three credit formulas: the traditional credit, the alternative incremental research credit (AIRC), and the alternative simplified credit (ASC). Under the traditional formula, corporate taxpayers receive a 20 percent tax credit for qualified R&D expenditures in excess of a calculated base amount. The base amount for any given tax year is determined by a statutory formula. Each taxpayer has a fixed-based percentage (FBP), calculated by dividing total qualified expenses incurred during 1984 through 1988 (the base period) by total gross receipts during the same period. The taxpayer’s current base amount is the FBP multiplied by the taxpayer’s average gross receipts for the four years preceding the current tax year. The base amount used to calculate the current year’s credit, however, cannot be less than 50 percent of the current tax year’s QREs.
In 1996, Congress added the “alternative incremental research credit” or AIRC, for companies that were making significant R&D investment but were unable to use the traditional tax credit due to the mechanics used to calculate the base amount. The AIRC utilizes a reduced three-tiered FBP with a reduced three-tiered credit percentage applied to the increment to calculate the credit.
Since January 2007, companies have been able to elect the ASC, a simplified computation that provides a 12 percent credit on current year QREs in excess of 50 percent of a company's prior three-year average of QREs (6 percent for start-up taxpayers). The ASC calculation differs from the conventional credit and the AIRC because the ASC is calculated without reference to gross receipts; instead, it looks to the taxpayer’s historical R&D spending.
The extension of the credit got caught up in the frenzy regarding the extension of the Alternative Minimum Tax “patch” providing temporary relief from the AMT. Congress is operating under “pay-go” rules which require Congress to offset tax relief with spending cuts or tax increases elsewhere. Congress blinked with respect to the AMT patch and decided to ditch efforts to extend any other expiring deduction or credit. The R&D credit is only one of many in that category.
Even another one or two year extension of the current credit will be difficult. The challenge will be to either come up with revenue offsets or convince Congress to put the extension of the R&D credit into a stimulus package.
Until Congress deals with the expiration of the current R&D credit, we will probably put our improvements on the back burner.
Economic Overview for 2008 and Forward U.S. Leading Indicator – The Signal Grows Weaker
The December U.S. leading indicator is out and the numbers aren’t good. The index is at 136.5, down 0.2% from the prior month.
Purchasing Managers Index – Good News This Month
We are very glad we didn’t have a knee-jerk reaction to the bad news of the last couple of months because the January 2008 Purchasing Managers Index shows a nice gain from the previous month.
Manufacturing and Trade Inventories and Sales
The U.S. Census Bureau announced today that the combined value of distributive trade sales and manufacturers’ shipments for December, adjusted for seasonal and trading-day differences but not for price changes, was estimated at $1,147.3 billion.
Manufacturers’ Shipment, Inventories and Orders
New orders for manufactured goods in December, up six of the last seven months, increased $10.1 billion or 2.3 percent to $441.6 billion, the U.S. Census Bureau reported.
Intermediate Materials PPI
The Federal Reserve is widely expected to lower interest rates again later this month and indeed they probably will.
International Help Line
by WMMA Staff
Harold Zassenhaus, Zassenhaus Export Management Group, has long served as the WMMA’s Export Director contributing his international marketing skills and knowledge to assist in advising and administering the association’s International Business Development Committee (IBDC).
Beginning in 2008 Harold’s role with the WMMA changed. Day to day administration and support to the IBDC will revert to the Fernley & Fernley staff while Harold will continue his role as international marketing consultant to the WMMA on a project by project basis as directed by the IBDC.
Harold has spearheaded a number of WMMA international marketing projects with which many of you are familiar including organizing participation in overseas trade fairs, contributing articles to the WMMA Export Manual, developing the International Dealer Directory, administering the International Buyer Program as well as contributing monthly articles to the Cutting Edge. In this regard, the WMMA membership will see little change. During 2008 he will be upgrading the International Dealer Directory, maintaining the newly developed Country Evaluation Sheet, providing new content for the members’ only area on the WMMA website, administering the association’s Export Trade Certificate and providing monthly columns to the Cutting Edge on international marketing techniques and strategies.
He will also be staffing the International HelpLine. The service is provided to WMMA members free of charge that have international marketing questions for their companies and are in need of expert advice. The Helpline, which has always been a service Zassenhaus provided under his prior terms with the WMMA, allows members to call for assistance in solving specific international marketing issues, or taking advantage specific circumstances. As examples: A member called Harold regarding how to establish payment terms for an export sale to a Chilean customer. Zassenhaus reviewed the common options and asked a few questions about the customer and the members’ past experiences with him. As a result, the member was able to offer the customer a few options that satisfied the needs and abilities of each. The WMMA member further adopted the advice and developed standard payment terms for all international transactions that became a part of his standard export quote.
In another example a member called with questions about the Russian market, trends, trade fair participation options and advice on dealers operating in the country. Harold was able to quickly point the member to the WMMA International Dealer Directory, identify a short list on which to concentrate, refer the member to the International Trade Fair Schedule and offer his take on the major developments of the market.
As a final example, a member called asking about entering the European market. He had concerns over the CE Mark and needed additional information to make a quick decision whether to pursue an opportunity. Zassenhaus advised him the European legislation, forwarded information on the process as well as experts and “Notified Bodies” approved to certify his machinery. Finally, he suggested the member contact a few WMMA members that had gone through the process and could advise first hand.
The realignment has other benefits as well; one of which is to free up Harold to work with individual members directly in developing and implementing international marketing strategies. Companies that have a short term project or a need for longer term assistance in developing and implementing an international strategy can contract with Harold. For more information on Harold Zassenhaus and his firm, Zassenhaus Export Management Group, contact him at 301 652 0693; zemg@erols.com
WMMA Updates International Distributor Directory
by Harold Zassenhaus, hzassenhaus@fernley.com
Over 190 records have been updated since November 2007 as a result of a concerted campaign to update records principally in the following targeted countries: Brazil, Canada, Germany, Poland, Russia and the UK.
In total, over 800 dealers of woodworking equipment, cutting tool and accessories dealers in over 50 countries are contained in the directory, available free to members on the WMMA website. In addition to contact information, the MS Excel worksheet includes lines carried, source of the data, the date the record was updated and comments. Since it is in a MS spreadsheet format you will be able to sort the data in a number of ways (Distribution area, last updated, etc.).
The WMMA International Business Development Committee will continue its campaign to update the directory with the goal of having no record more than 3 years old. Periodically, members will be advised of the committee’s progress. However, I encourage you to visit the website from time to time to download the latest version.
Finally, we need your help in upgrading and maintaining this invaluable tool. As you learn of new distributors from travels, conversations with contacts, reading trade publications, etc., please keep us in mind by forwarding information on overseas dealers. Just email Ken Hutton, WMMA, khutton@fernley.com with the information you have. Or tear out the ad or article from the trade publication and forward it to WMMA Headquarters. Even if the information is incomplete, let us have it and we will try to get what is most relevant to you and your colleagues.
Country Evaluation Sheet Updated
by Harold Zassenhaus, hzassenhaus@fernley.com
The Country Evaluation Sheet allows members to quickly assess the relative importance of over
150 foreign markets based on their profile.
The following modifications/updates have been made:
This modification allows members to better track their niche within the woodworking industry.
In its basic form the Country Evaluation Sheet is a series of spreadsheets that includes the following comparable, consistent, reliable and periodically updatable information on over 150 countries:
Each of the above data sets can be assigned a weight enabling a member to customize the data he uses in ranking overseas markets. And, the covering sheet or Flash Report reflects, by country, the relative scoring based on the weights assigned to all data.
The committee has assigned weights to each data set reflecting what it feels is the best combination to be used by a member that is fairly new to exporting or who devotes relatively little attention to the overseas market, AND that sells equally to each woodworking market segment. Obviously, this weighting will apply to only a few members.
To view the Country Evaluation Sheet and access supporting information and instructions, please click here.
WMMA's Export Trade Certificate: Opportunity to Join
by Harold Zassenhaus, hzassenhaus@fernley.com
Since February 1989, the US Departments of Commerce and Justice have granted anti-trust protection for the export activities of WMMA members electing to be covered under the WMMA Export Trade Certificate (ETC).
Each year, the WMMA goes through an amendment procedure allowing additional members to be covered under the ETC umbrella. (Current members must complete a separate form being mailed to them directly). There is no cost to sign up. Interested members must complete the form found at www.wmma.org/members/etc.cfm required by the US Department of Commerce and return it by February 29, 2008 to Harold Zassenhaus, Zassenhaus Export Management Group, 7758 Wisconsin Ave., Suite 306, Bethesda, MD 20814, hzassenhaus@fernley.com.
Background: The Export Trade Certificate is issued under the Export Trading Company Act of 1981. Under a provision of the ETC Act, which is implemented by the US Department of Commerce, US exporters can obtain anti trust immunity from federal and state criminal and civil prosecution for export activities. The Act also can provide reduced anti trust liability in private actions against exporters.
Practical Application: The WMMA is the sponsor of the WMMA Certificate. Under the protective umbrella of the ETC, firms that are listed under the certificate can join together, without the threat of most anti trust regulations, to reduce export related costs and/or increase effectiveness in export operations. The following are examples of activities that can be initiated with a competitor company listed under the WMMA Certificate:
2008 WIC Early Bird Registration Deadline March 5th!
The deadline to save $100 on your WIC registration is Wednesday, March 5th. Act now! All details for events, schedule, registration discounts for volunteer leaders, spouse activities and hotel can be found on the WMMA website at www.wmma.org/wic.cfm. Don’t delay! The sooner you register for the WIC and the Contact Table Program, the sooner your suppliers, dealers and manufacturing colleagues can schedule appointments with you!
Earlier this month, you received an invoice for membership dues. WMMA trusts that you continue to see value in your membership. Here are just 2 of the membership benefits:
•Your 20% booth discount for IWF 2008. Association bylaws dictate that only WMMA members in "continuous good standing" are eligible for this savings. (Act now - you will only be eligible for the IWF booth discount if your dues are paid by April 1, 2008!)
•Listing in the upcoming 2009 WMMA Product Guide & Directory, electronic and hard copy, distributed at tradeshows and through advertisements to thousands of end users each year.
Remember, payment after March 1st will incur a $200 penalty. We do hope that you maintain your membership with WMMA in 2008.
A New Resource Ready for Launch
The U.S. Forest Service Wood Education and Resource Center is currently overseeing beta testing of its online Training Information Exchange System. This system will help individuals in primary and secondary wood products industries locate continuing education training opportunities such as workshops, short courses, seminars, and conferences. System users can search for available training opportunities in the database or automatically receive e-mail notices about training offerings that match specific search criteria.
Participating training organizations can enter available courses online through the Online Training Services Registry System. The system will send a notice to users once it has made a match between training needs and an available training opportunity. The notice will contain additional information about training content, contact information, and related data.
The Web site will be called HONE, with the idea of ‘sharpen your tools.’ Only in this case, we are not talking about knives and saw blades. The tools we are concerned with are skills, knowledge, and information, and the sharpening of these tools through training. These are the tools needed for today’s global and technologically oriented economy. It is through training and continual updating that these tools are sharpened,” said U.S. Forest Service Forest Products Specialist Al Steele. The system will be available for general use after the independent testing and program updates are completed.
The Training Information Exchange System offers benefits for both training participants and providers, including:
The system provides participants with a single, timely source for training programs, a simplified process for planning and scheduling training, and the ability to contact providers about training offerings and additional information.
This system also benefits trainers by providing:
For more information contact Mr. Fred Lamb, Fred Lamb Consulting, Inc., 540-382-0754, FML195@VT.EDU.
State Specific Educational Pathways in Virginia
Mark your calendar for March 13, 2008 for the Southern Virginia Forest Products Initiative Conference. The conference will be held at the Institute for Advanced Learning and Research in Danville, Virginia.
This one day program is a result of nearly two years of collaboration moving toward advanced educational programs and creating educational pathways in partnership among many institutions.
Please visit the conference website at http://www.woodscience.vt.edu/svfpi. Registration is now open for this important one day event. Registration cost is $25.
The conference will include an optional tour of the new Swedwood Danville manufacturing plant. The new Swedwood manufacturing facility is the first North American manufacturing facility for the parent company of IKEA.
For more information contact, Paul M. Winistorfer, PhD, Virginia Tech, P: 540-231-8853, email pstorfer@vt.edu.
Another WoodLINKS Success Story
by Mark Smith, woodlinksusa@netcare-il.com
One of WoodLINKS USA schools, Quinter High School, Quinter KS is realizing the benefits of becoming a WoodLINKS USA school. They were the recipients of a MultiCam CNC Router, donated by Mr. Troy Deaton, President West Wind Wood Specialties.
