Business News & Issues

Auto Sales Stayed Suprisingly Strong

   More than 1.3 million cars and light trucks were sold in February, giving the month a much stronger than expected annual sales rate of 16.7 million. Although the rate is off 3.5% from last February, it’s still far better than analysts’ expectations of and 8 to 10% decline.
   However, the news wasn’t completely “good,” at least as far as American companies are concerned, because the relatively strong showing was primarily a result of the continued erosion of the domestic sales. While GM’s solid performance in Trucks and SUV’s brought its sales up 0.5% over a year earlier, Ford and Chrysler continued to experience big declines (12% and 11% respectively) as the sharp decline in rental company orders continued to receive blame for lower sales for the second straight month.
   On the other side, Toyota’s sales rose 1.7%, BMW’s were up 15%, Hyundai plus 14% and Kia up 38%.
   While GM actually gained market share (from 29.9% to 31.2%), it was at the expense of its domestic partners. Over all, the Big 3’s market share fell from 68.2% to 66.4%.

Honda to be First to Market Fuel Cell Car

With more heat coming from Congress regarding Corporate Average Fuel Economy (CAFE) standards, it was notable to see that Honda will start selling cars powered by hydrogen fuel cells in the U.S. next year. The concept is considered the wave of the future since it generates electricity from combining hydrogen and oxygen ... no need for petroleum ... and no pollution.

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When National Retailers Bring About Blight

   Early last week the Wall Street Journal had a front page feature titled “commercial real estate may damp economy.” It noted that: The vacancy rate for office space grew from 7.9% to 13.6% last year; Value of commercial construction for ‘02 is forecast to fall to $65 billion, 20% below ‘00’s level; The delinquency rate on commercial loans was up 75% from the end of the 3rd quarter of ‘01 until this January and will jump another 50% to 100% by year’s end. And, it told of expectations that Kmart will ask the bankruptcy court to terminate leases on hundreds of stores, “sharply increasing the number of empty suburban storefronts.
   The article reminded me of a recent Flint Journal editorial, voicing concern that, because of soaring commercial development in other suburbs, Flint Township was in danger of losing its status as the County’s primary commercial area. Then, in a subsequent discussion with a reporter, there was a reference to a significant number of buildings in the Miller Road area that are, or were, vacant for a long period of time.
   But those buildings were vacant because of external problems, not poor local business conditions. From Pace, to Service Merchandise, to Montgomery Ward, to Builders’ Square, to Highland Appliance, to the Genesee Valley theaters, national companies acquired real estate that local retailers couldn’t afford, then went out of business when newer, stronger competitors came around. And, they left nearly unmarketable structures as potential blight across America’s suburbs.

Barry

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Taxation and Finance ---- Rules for Deducting the Cost of Computer Software

   Computer systems are virtually indispensable in a wide variety of businesses, and an increasingly expensive component of these systems is the software. Therefore, here is a quick review of how you may be able to write off the software expenses you incur in your business.
   If the software is included in the purchase price of the computer itself, it generally does not have to be broken out separately. The entire cost of the machine and the software it comes with may be depreciated over 5 years, or expensed in full in one year, subject to the annual limit, generally $24,000 (in 2001 and 2002, with a permanent limit of $25,000 starting in 2003) for all expensed property you begin to use in your business that year. However, if the price is stated separately, the software component will probably come within rules that allow a three-year write off.
   If you’ve bought additional software, it is fully deductible in the year of purchase if it has a useful life of one year or less. This may apply, for example, to software that is upgraded annually or for which a new edition must be issued each year for the user to stay current.
   If the additional software you have bought has a useful life longer than one year, it can be depreciated over three years if it is bought "off the shelf,'' i.e. for sale to the general public and is not substantially modified (customized) for you. Even if the software isn't "off the shelf" because it has been designed or specifically modified for you, or you have an exclusive license to use it, it can be written off over three years if it was bought for use in your regular business, and was not obtained as part of acquiring another business. However, if the software is customized and was received in a business acquisition, the cost of the software must be amortized over 15 years.
   Note that "software" under these rules generally does not include databases, unless the database is in the public domain and is incidental to the operation of deductible computer software. If instead of buying "off the shelf" or customized software, a business writes or develops its own software internally, the research and development costs can be written off currently, or can be written off over five years or any shorter useful life that can be clearly established. This is true whether or not the software is patented or copyrighted, and whether or not you also sell it to others. But if you choose to fully deduct these costs, generally you must do so consistently each year.

R, P & T

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Home Builders’ Liability Crisis

   At the beginning of the year, an NAHB publication warned that a “General liability crisis is impacting the Building Industry.” It stressed national insurance industry problems (9/11; loss of investment income; rising claims), noting how they’re responsible for higher insurance premiums and, in some areas, scarcity of liability protection in some parts of the country.
   Well, last Wednesday a Wall Street Journal got a bit more specific, explaining that Western builders are being forced to “curtail construction plans because they can’t find liability” coverage. And it placed blame! ... clearly on a barrage of “shoddy construction lawsuits,” noting that “from California to Colorado, a rise in homeowner lawsuits alleging construction defects prompted nearly every standard insurer to stop writing policies for residential building.”
   Last year we wrote about a number of California lawyers who set up practice in other Western States (particularly in Nevada) with the intent of recruiting homeowners for filing suits against builders, noting that these lawyers had saturated the Golden State’s market. Well, the Journal article showed that those lawyers basically bled California insurance companies dry.
   From 1998 through ‘00, insurance companies collected $52.1 million in liability premiums from construction companies, while paying out $118.6 million in claims .. that’s a 2.28 loss ratio. And, what’s worse, is that premiums plunged by $4 million over that period, but losses rose by $8.8 million. So it’s not that much of a surprise to find the number of standard insurers in the state has fallen from 20 to 30 in the late ‘80s, to no more than 4 today. And, up in Washington, 17 insurers pulled out of the state over the past year, leaving builders no access to standard insurance.
   What about Nevada? Well, in booming Las Vegas, where 170 suits were filed since ‘00, the number of standard companies issuing policies is now

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Beyond Seinfeld: It’s still about "Nothing" in particular

“Disney Monday Night” Back to Company Roots

   If you were one of those who grew up with Mickey Mouse & Donald Duck, you may have felt that Dennis Miller (Disney/ABC Network Monday Night football) just didn’t fit the Disney image. Well, apparently the big brass at corporate headquarters must agree, as they’re getting back to company basics by putting a cartoon character in the booth for Monday broadcasts.
   Yes, the likeness of Goofy will join Al Michaels this coming fall to talk about “obtruse triangles” and “four legged turkeys” (while most turkeys have “four” legs, his have 6) as John Madden executes his new $5 million annual contract .
   So, the network that boasts it’s the source of news for more Americans than any other, can give us such stimulating tidbits as: “Coaches have to watch for what they don’t want to see and listen to what they don’t want to hear;” and “the fewer rules a coach has, the fewer rules there are for players to break.”
Aftermath: The next day, Disney leaked word of its intent to replace “Nightline” with David Letterman.

Who needs terrorists? Nightimares Return

   It was quite a week on CNN at February’s end. All the pre-9/11 nightmares returned to the public eye, and even “Anony-mous” wrote another book on Clinton, though this time under his given name. First, there was Gary Condit (who will have lost his March 5 primary by the time you read this) telling Larry King it was the media that’s causing his problems, noting “you’re (the press) not the court and not the church,” which is why he refused to give details of his relationship with missing intern Chandra Levy.
   Of course, Ms. Levy wasn’t the only California Doctor’s daughter/intern in the news. Monica Lewinsky hit King’s set, prior to the premiere of her HBO special, “Monica in Black & White.”
   Monica, looking much better than in her White House days, told Larry her relationship with the former President was “mutual and emotional.”
   Lewinsky’s HBO special debuted Sunday, showing her answering questions from an audience of college students.
   But that wasn’t all. We heard again from the women whose suit against Clinton brought us Monica, as Paula Jones signed on to replace Amy Fisher ( Long Island Lolita) as Tonya Harding’s opponent on Fox Celebrity Boxing set for March 13.
   Finally, Joe Klein (the reporter who wrote Primary Colors) released another book on Clinton to sum up a confounding leader whose “solid policy and brilliant politics” were obscured by his “tawdry personal behavior.”

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Association News and Events

   This month’s Land Development Council meeting was moved to Tuesday, March 19, since County Drain Commissioner Jeff Wright was in the nation’s capitol on the original date. The primary agenda for that afternoon includes a possible financing option for the capitol improvement fees that went into effect last May, an update on changes in the soil erosion regulation process, to understand details in the water and sewer agreement between the county and municipalities, signed last summer.
   We’ll also be discussing future council activities, including analysis of a questionnaire that was sent to potential LDC members.
   The meeting begins at 2:30 p.m. at the BAMF office, and should be over by 4:00.

We’re nearing the final date for Parade of Homes participation, and we currently have 39 entries as of this morning. As we noted in this column in the February 20th edition, there were 34 homes entered by the fifth of March last year, and we ended up with 42.
With the final deadline set for Friday (March 8th), we’ll likely have a final count by the time the mail arrives Monday (post-marks count), so anyone wanting a complete list should call the office that afternoon. Also, we’ll plan on announcing all the entries in the next Veritas, most likely to be published March 19.

With the Parade likely to hit over 40 entries again, it looks like Housing Quarterly will have at least 96 pages. That means we’ll be able to accommodate articles submitted by members. So, if you’d like to submit one for publication, please get it to the BAMF office no later than March 22nd. We’ll begin setting pages shortly after the final Parade deadline, but will leave some editorial space open until the 22nd.
Also, regarding HQ advertising; all ads must be received by April 1st.

   Plans for the Habitat for Humanity house are moving along quickly. While several members as have pledged labor and materials, a couple of other organizations have inquired about involvement with the project.
   As we wrote in the most recent Veritas, the Grand Blanc Township board voted to partner with BAMF and Habitat by donating a lot on Kettering (by the Grand Blanc Inn) at last month’s meeting. The decision to build in Grand Blanc resulted from the association’s board’s desire to have a site that’s convenient to area’s with significant amounts of building activity as it intends to showcase the home during the Fall Parade.
   Currently our plans are to begin construction activity around the beginning of May. Look for an update on our progress at the March 20th meeting.

Note: BAMF members had the opportunity to meet the future “Habitat” homeowner at February’s “exhibitors’ night,” as she was working at the Habitat exhibit during the event.

Economic Update: Is it “Dewey Defeats Truman;” Circa ‘01?

   Perhaps the most embarrassing moment in journalistic history took place in November of ‘48, when the Chicago Tribune boldly declared, “Dewey Defeats Truman.” Back in those days, the science of exit poll-ing was merely in the embryonic stage which, to some extent, is acceptable as we look at the great technological advances that refined the process over the next 52 years (save Florida where half the electorate could vote in ‘48).
Unfortunately, it appears the “technological advances” that aid modern day exit polling haven’t extended to economic forecasting, or the media coverage such issues.
   Last Wednesday, the Federal Reserve Chair spoke in (E.F.) Huttonian tones, stating the economy had reached the “turning point” but not to worry about inflationary pressures developing. And, the myriad media reports took Mr. Green-span’s words to mean that the “recession’s over, but he won’t be looking to raise interest rates in the near future.”
   Now we can safely assume the “recession” was the one declared last fall by the National Bureau of Economic Research (that had been evident “since March”) and was widely reported as gospel.
   However, the following morning the Department of Commerce released its updated estimate of 4th quarter Gross Domestic Product, upgrading its first report of 0.2% growth to 1.4%, making it (likely) the second strongest quarter in 18 months. But more important is that the likelihood of growth in 2001’s 4th quarter means, at least technically, the economy never was in recession, and the record expansion that began in 1991 is on the verge of beginning its 12th year (if recession’s still defined as two {consecutive} quarters of negative growth). In fact, the new data suggest that the economy actually grew 0.1% since the end of last year’s 1st quarter, when the recession allegedly began.
   GDP and Greenspan were just two of several news items stressing economic growth in the past two weeks. Leading Indicators were up again, as were durable goods orders, income and spending. And, for the first time in 18 months, manufacturing activity was on the rise. Highlights follow:

GDP Grows at 1.4%
   Pushed by the biggest surge in sales of “big ticket” items on record, rather than contracting as expected, the economy actually grew in the 4th quarter of ‘01 according to the Commerce Department. Spending on expensive goods jumped a whopping 39.2% during the quarter, while total consumer spending was up a solid 6%. As we’ve frequently noted, it’s consumer spending that’s responsible for 2/3 of total U.S. economic activity, and its rebound shortly after September 11th kept the nation from fall-ing deeper into recession.
   Growth wasn’t the only positive news in the GDP report. In recent months we’ve noted how reduced inventories will eventually lead to an upswing in manufacturing, and the 4th quarter data showed inventory reduction at an annual rate of $120 billion.
   Furthermore, it showed that inflation remained nonexistent as the department’s implicit price deflator was at an annual rate of -0.3%.

Spending, Income Rise
   Getting the 1st quarter off to a solid start, consumer spending and income experienced solid gains in January, according to Friday’s Commerce Department report. Both were up 0.4% for the month, as personal income celebrated its strongest rise in eight months.
   While spending on the expensive items that buoyed the fourth quarter tapered off (due in part to the end of 0% financing on autos), consumption on food, clothing and other “non-durables” soared 1.2%. And, spending on services rose 0.5% for the second consecutive month.

Durable Goods Orders Jumped 2.6%
   Despite the soaring demand for expensive products in the 4th quarter, analysts only expected durable goods orders to rise 1.3% in January. So, as has become the norm, forecasts fell way short as the Commerce Department reported January’s rise in orders for goods expected to last at least 3 years climbed 2.6%. Therefore, with sharply reduced inventories and strong orders for manufactured goods, how long can it be until manufacturing rebounds?

And the Answer Is ..... “February”
   For the first time in 18 months, the nation’s manufacturing sector grew in February, according to the monthly gauge by the Institute of Supply Management (formerly the National Assoc of Purchasing Management). Their monthly index jumped from 49.9 in January to 54.7 last month (any number above 50 indicates expansion).

And, Leading Indicators Rise
Finally, the Index of Leading Economic indicators, forecasting growth 6 months in advance, rose for the 4th straight month.

Housing Industry Update

Following Record Year With Record Month
   For the 2nd time in six months, sales of existing single family homes set a new record as the National Association of Realtors reported January’s activity at a rate of 6.04 million units, up 16% from December’s rate, and more than 10% above the previous record set in August. David Lereah, NAR’s chief economist, credited a surge in consumer confidence, which reached its highest level in 13 months, plus low interest rates and strong affordability as the primary reasons for the surge.
   Regionally homes sales were up between 23.3% in the West and 8.3% in the Midwest. However, it was the Midwest with the biggest rise (17%) above January of 2001.
   Nationally, the median price was up 10.2% over the past 12 months, to $151,100. Medians ranged from $199,900 in the West, to $128,700 in the Midwest.

But New Home Sales Failed to Follow Suit
   While existing homes were setting a new record in January, new home sales were down dramatically, falling to a rate of just 823,000 units, the slowest sales rate since June 2000, and 12% below the January ‘01 estimate of 938,000, and 15% below the revised 966,000 rate of December ‘01. However, what must be noted regarding the January data (from the Commerce Dept.) is that the decline, in comparison to a year earlier, was almost totally centered in the nation’s Southern section.
   The actual number of estimated sales was 62,000, off from 72,000 a year earlier, and 7,000 of that differential was in the South. In fact, the rate for the other sections of the nation was higher than they’re rates for all of 2001’s record year, with the Northeast being up by a significant margin and the Midwest up slightly. The South, on the other hand, experienced a sales rate of 353,000 units which was 18.5% below its 433,000 sales of ‘01.
   So, there’s plenty of reason to believe the downturn is merely an aberration, and has little significance regarding the health of the industry, particularly in light of the record existing home sales.

Condo Sales Record
The NAR reported sales of Condos and Co-ops were at 738,000 last year, 3.8% beyond ‘00’s record level, and 8.3% above ‘99, adding to 2001’s existing home sales record. Note: As 4th quarter condo median prices lagged 15.5% below single family, Midwest condo prices were 8.3% higher.

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