Veritas

Business News & Issues

Armstrong Middle School Parade of Homes
   There's a second "Parade of Homes" in progress in Genesee County this week. It's not put on by a realtor hoping to capitalize on "Parade" promotions. It's not even by that Hill Roadd company that can literally parade its homes down the highway like they're Tournament of Roses' floats. This "Parade" is the creation of Shannon Setera, a teacher at Armstrong Middle School in the Kearsley district, and the Builders' Association is fully supportive.
   As aclass project, Ms Setera wlecomed her students to the "Armstrong Estates' Parade of Homes," in which they're designing, advertising, constructing and decorating their own parade model. Armed with a set of minimum requirements, a copy of Housing Quarterly, and instructions on "what to look for" when they tour the (BAMF) Parade with their parents, Setera's sixth grade class, in teams of four students, must draw their house plan, prepare a budget and apply for a building permit by Friday. If the permit's issued, they can begin construction immediately.
   BAMF is hoping to get a look at the finished product...if so, a follow-up will appear in the Jume 5th Veritas.

Small Business More Optimistic according to NFIB
   Regarding the economy, consumers aren't the only people that have become more optimistic in recent weeks. Small business owners are feeling better about economic conditions in general, says the National Federation of Independent Business (NFIB).
   The federation's "small business optimism index" edged up last month, nealry two points above its January low, with a "net 10% of its respondents feeling the economy will strengthen in the next six months, the highest number since November '97." To put that in perspective, just a few months prior to the recessions of 1980 and '90, the net readings were negative 37% and 27% respectively.
   There was also good news on the employment situation in the survey, as actual hiring rose during the month and a net 12% of the respondents plan to expand payrolls in the coming months. Furthermore, for the second consecutive month, respondents with "hard-to-fill" openings was at 26%. This came on the heels of 17 consecutive months when more than 30% were reporting similar problems with employment.

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Census data made economists look like morons

   Since the mid '90s, I've often been cast in a role that's historically foreign to me; serving as the reference source to put the Flint area's economic condition in a positive light. It may be obvious to anyone living in the area's suburbs that we're hardly in a depressed community. However, Federal Government data suggests otherwise.
   Well, since analysts of all types use government data to justify decisions (a bunch of Joe Friday's wanting "just the facts ma'am), I frequently have to put those "facts" in perspective, since new housing activity, more than any other sector of the economy, shows the vibrancy of what we refer to as Metropolitan Flint and provides a clear contrast to popularly held perceptions.
That's why I was so intrigued by an article in the Wall Street Journal regarding the incompetence of the Census Bureau in its forecasting of household creation during the 1990s. The bureau's estimates were roughly 2 million short for the decade, and cost clients of consultants using its data untold billions.
   Frequently quoted economist Mark Zandi (economy.com) told the WSJ he's been "shocked" at housing's resilience, a lot of "it comes from the (Census') wrong economic data." He even admitted advising a client against overbuilding, despite her insistence that "homes were selling like hotcakes."
   So, Zandi looks incompetent in his clients eyes, while the real culprit goes unscathed for several years.
   What's so fascinating about the bureau's blunder is that housing consultants have been preaching exactly what it ignored: immigrants; minorities; divorcees; elderly! That's who's been creating the demand for housing. But the bureau apparently never looks past its historic growth models.
   Frequently I've had to point out that the census ignores the mobility of the population, particularly its access to jobs in nearby metropolitan areas. Now we find its been ignoring population trends in general, despite the fact that they're as easily accessible as the bureau's own data.

Barry

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Taxation and Finance ---- Recordkeeping requirements for business

   Keeping business records are very important in order for tax returns to be properly prepared and so that claimed items can be backed up in the event of an audit. Following in a discussion on common records that are needed in connection with taxes on business income. We also want to advise you of the opportunities and pitfalls in the IRS' recent guidance on electronic storage of records.
   Keep records of all of your gross receipts. They're needed so you can properly report gross income from business activity and self employment taxes owed on your net earnings. Self employment taxes are equivalent to social security taxes paid by both an employee and the employer.
   You must keep proper track of all expenses that are deductible. To this end, keep track of compensation paid for employee, independent contractors, repairs, rent taxes and licenses, bank charges, insurance, utilities, postage and shipping, travel and entertainment, among other items.
   On the subject of travel and entertainment expenses, there is good news. For expenses paid or incurred after September '95, documentary evidence is not necessary for expenditures under $75. The former threshold was just $25. For purposes of the $75 rule, each separate payment is treated as a separate expenditure and you can treat a tip as such. Even though you no longer need documentary evidence for many travel and entertainment expenses under $75, you must still comply with other recordkeeping requirements to substantiate deductions, such as keeping records of the time, place and date of the business travel, and the reason for the travel, etc. Also, you still need bills and receipts for any lodging expense regardless of its amount.

   Keep permanent records of assets that you depreciate. Keep receipts of how much you paid for property and records showing when you placed assets in service or changed them from personal to business use. Also, keep records of capital improvements.
   If you use your car in business, whether you base your deductions on actual expenditures or use an IRS standard mileage rate, there are a number of records you must keep. They include records of: business miles and total miles; when you first started using your car in business and its basis; actual expenses if you do not use the standard mileage rate; and a number of other items regardless of which alternative used.
   Similarly, specific and detailed recordkeeping is required when you use a portion of your home in your business. Records must show the part of the home used for business. Records must show the part of the home used is exclusive. Records are also needed to show the depreciation and expenses for the business part of the home.

The IRS has issued a revenue procedure applicable to taxpayers who maintain books using electronic storage. The IRS defines an electronic storage system as "a system that prepares, records, transfers, indexes, retrieves, stores and produces records by either imaging hardcopy records to an electronic storage medium." And, it's issued guidelines to insure the integrity of the system and governing controls, inspections and quality assurance. Although the taxpayer may destroy paper records if it has a system within the IRS' guidelines, we caution that potential penalties may not apply if the taxpayer maintains its original books and records, perhaps at a remote, low overhead location.
Please contact your tax professional if you have any questions about these, or other recordkeeping requirements, particularly the electronic requirements, including those for any employment tax obligations that may arise in connection with your business.

R, P & T

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Michigan Legislative Update - One code a reality; Enforcement bill passes

   It’s Official! The new single state construction code passed through the promulgation process, and will officially go into effect on July 31st.
   The content of the Michigan Residential Code (MRC) has not deterred from the expectations MAHB’s been reporting for the past few months: Stair geometry remains at 8 1/4 inch risers; 9 inch treads; If basements have “habitable” space or sleeping areas, emergency egress will be required; Sprinklers will not be permitted in lieu of egress from these areas.
The new MRC books are expected to available on July 1st, and we’ll try to make copies available shortly thereafter.
   MAHB has planned a number of code classes, and BAMF is still expecting to hold a joint session with the Genesee Co. Building Officials Association (GCBOA). We’ll expect to be announcing plans in the May 22 issue of Veritas.

   A month ago we wrote that S.B. 351, the bill that will dramatically alter the enforcement process in dealing with claims of poor “workmanship,” passed the senate and “Flint area Senator John Cherry played a critical role in keeping it on track.” Well, although we printed a retraction two weeks ago, noting it only came out of committee, the previous article was “pro-phetic,” as the Senate passed the bill 37-0 and Cherry’s role in keeping it on track was, in fact, “critical.”
   The bill’s now in the house were committee referral will be known later this week.
   Among other items, 351 will require the state to presume a contractor’s innocence, establish performance guidelines, and assure the builder was given reasonable time to fix any disputed problem.

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

  Beware of the NFL as a Political Training Ground
   Around five years ago, in a response to a (V.P. candidate) Jack Kemp statement about taxes, Veritas couldn't help noting that the former Buffalo Bill Quarterback had more concussions than Steve Young and Troy Aikman combined. Well, over the past couple of years, both Young and Aikman were forced into retirement (and are considered potential political stars), concussion prone Dallas Q.B. Roger Staubach (always thought of as a future Senator from Texas), was strongly considered for Secretary of the Navy, and former Seahawk great, Steve Largent, has assumed even greater influence in the U.S. House.
   Well a recent report by the league's player's association suggests we have a few major concerns for consideration before placing additional "NFL greats" in positions of power and influence. The study found that more than 61% of retired players suffered concussions, while 51% were knocked unconscious at least once. And, 31% had difficulty with memory (already).
   So, it's logical to surmise that Minnesota's the trendsetter when selecting an "athlete/politician." Apparently metal chairs across the head don't do as much damage as blitzing linebackers.

A Critical Free Agency Signing by the Democrats
   The football/politics relationship became ever more evident today, with the free agent signing of soon to be (this is written at 9:00 a.m.) Democrat Jim Jeffords(VT)
   Jeffords, a traditional Republican from the days the party ran a straight forward "East Coast" offense, felt underutilized in the GOP's new offensive scheme. With his new team, he's expected to play a significant role which, among other things, will allow the Democrats to reorganize the senate and control the agenda (like controlling the clock), and ultimately, the tempo of legislative operations.
   Unlike the NFL, signings can take place at any time, and with a 50/50 split in the Senate, the timing was apparently right. Jeffords is the third free agent signing in the past decade. Senators Campbell and Shelby signed with the GOP in the '90s.

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Association News and Events Parade concluding; Golf Outing Near

After a tremendous fifteen day run, the Spring Parade of Homes wraps up this weekend. Reports of traffic, interest, and even sales from participating builders and realtors have been well beyond expectations, and calls from the public have been more than gratifying.
Look for the concluding report on the parade, including winners of the judging, in the June 5th Veritas.

With the Parade nearly concluded, the 2001 edition of the Association’s Golf Outing immediately becomes the focus of the membership, as it return’s to Woodfield’s Captain’s Club for the third consecutive year.
This summer’s event, set for Tuesday, August 14th, will be similar in format to the previous events. The 4 person scramble will begin with a Shot-gun start at 10:00 a.m. (Range balls available at 9:00); Lunch (burgers & hot dogs) and refreshments will be served at the turn; and, of course, the refreshment cart will cruise the links all day.
The event concludes with the banquet and prizes, set to begin around 4:30 p.m. And, keeping with recent tradition, tickets for refreshments will be honored at the bars during the banquet (as keg been will also be complimentary). The cost remains at $100 per player; Hole sponsorships available at ($100/$150); and (IMPORTANT NOTE: Tee reservations will be taken, beginning Friday, June 1st.)

With the new Michigan Residential Code set to take effect on July 31st, the local building officials have set a training session for BAMF members.

Economic Update: Greenspan limbo: How low will he go?

   As 1993 was coming to an end, recovery from the '90/91 recession was in high gear with the Gross Domestic Product exploding to 4.7%. At that time, the interest rate on Federal Funds' was at a seemingly ridiculous 3%, spurring the rate of investment that ultimately led to the longest economic expansion in U.S. history.
   Well, that '93 funds' rate doesn't seem so "ridiculous" after last week's Federal Reserve meeting. Not only did the central bank cut rates to 4%, it indicated that it remained in an expansive mode, noting that "erosion in profitability, uncertainty about the business outlook, the effects of reductions in equity wealth on consumption, and the risk of slower growth abroad, continue to weigh on the economy."
   So, with the next meeting of Fed set for late June, economists are already speculating that the funds' rate will be cut another 50 basis points, to 3.5%.

Mortgage & other market driven rates
   On January 3rd, when the Fed made its first of this year's five cuts, the average 30 year fixed mortgage rate was 7.07%, according to the weekly survey by Freddie Mac. Last week, after accumulated cuts of 250 basis points off the federal funds' rate, mortgage rates were up to 7.14%. Even the local survey by Residential Mortgage Consultants had rates at 6.91% last Friday, their highest level all year.
   To get a feel for "market rates" versus Federal Reserve rates, we can look at 10 year treasury bond activity. It was February 27th, when 10 year treasury bond yields, apparently responding to Federal Reserve policy, fell below 5% for the first time in two years. After an approximate month in the 4.9% range, yields shot up, and have remained between 5.4% and 5.5% since mid April. And mortgage rates, which fell to the 6.95% range in March, followed suit.
   What's becoming apparent is that the bond market perceives the economy as stronger than the Federal Reserve suggests. And, as we've frequently pointed out in this column, market driven rates lead Federal Reserve action by at least six months. So, if the, historically pure, "free market" economist Mr. Greenspan appears perplexed in the column one photos, perhaps he's concerned that the markets, rather than the Fed, are moving in the right direction.

Wholesale/Consumer Price Levels
   Prices remained reasonably well behaved in April, though the core rate of inflation at the wholesale level was a bit higher than analysts had expected. The Producer Price Index was up 0.3% for the month, following a March decline of 0.1%, which was equal to expectations. However, with the volatile food and energy sectors removed, the core rate at the wholesale level was up 0.2%, while the "analysts" had expected it to come in at 0.1%
   At the consumer level, prices rose at a slower rate than expected, at 0.3%, while the core rate matched forecasts, up 0.2%. The biggest problem in the CPI, as expected, was gasoline, up 5%, while the category called "other goods and services" showed a 1.3% rise, led by tobacco products which were up 4%.
   For the past twelve months inflation is up 3.16%, while the core rate's up 2.56.

Indicators Rise
For just the second time in the past 7 months, Index of Leading Economic Indicators rose in April, once again suggesting that the economy is not headed into recession. The index, expected to provide some semblance of a forecast for the coming six months, was up 0.1%.

Housing Industry Update

"Looming Need for Housing A Big Surprise"
   The headline above led to an article in the Wall Street Journal last week which refers to new data from the Census Bureau, suggesting that demand for housing is rising faster than expected, and it may lead to shortages in parts of the country.
   Furthermore, though housing advocates have warned of an affordable housing crisis for low income Americans, there's considerable evidence that the problem has spread to the middle class.
   According to Census data, the vacancy rate for owner occupied homes fell from 2.1% to 1.7% over the past decade. "That 19 percent drop came as a surprise to economists who expected the rate to rise," since builders have added some 16 million units in the decade, "a pace that many thought would lead to overbuilding." (Note: the vacancy rate on rentals also fell from 8.5% to 6.8% during the period).
   The article went on to point out the "total number of vacant housing units came in at 10.4 million, roughly the same as in 1990." However, ten years ago the nation had 33 million fewer people.
   It also noted that just prior to last year's Census, the bureau believed the number of vacant units was actually 13.8 million, 33% higher than in reality.
   The new census data helps explain why housing's growth continued at such a strong rate, despite forecasts suggesting otherwise. But the question remains, how could their numbers have been so far off?
   Well, first of all, its projections of household creation during the '90s were off by roughly 17% annually. The latest data show households increased by a rate of 1.35 million each year, 200,000 above bureau expectations. Unfortunately, their estimates were based on data from previous decades, and had little if any relevance to the markets of the '90s.
   For example, they underestimated the number of immigrants entering the housing market, missed the number of single and divorced parent households, and seemed to forget that the elderly are living in their own homes for a longer period of time. In other words, the Census was out of touch with the population it was charged with following.
Even more unfortunate, their misleading data caused losses of millions of dollars to businesses who hired consultants to advise on business decisions. These consultants rely on census data to advise their clients, and faulty data brings faulty advice.

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