PVF Roundtable provides great value to channel

BY MORRIS R. BESCHLOSS
PVF and economic analyst

May 15, 2007, will forever stand as a milestone in the renaissance of the pipe-valve-fitting sector. Under the leadership of founder Sid Westbrook, president Ron Merrick, and executive vice president Don Caffee, the PVF Roundtable celebrated its most heavily attended meeting ever at Houston’s HESS Club. This group featured manufacturers, master distributors, turnkey constructors, engineers, fabricators and specifiers. In conjunction with The Wholesaler, the mid-May meeting of the PVF Roundtable has become the presentation forum of The Wholesaler’s PVF Hall of Fame. For the sixth time, new entrants were honored, bringing to a total 35 of the industry’s leading lights who are now permanently ensconced in this place of honor.

This year, for the first time, the PVF Roundtable will sponsor four meetings (February, May, August, October). The membership is growing daily, as the PVF sector is recognizing the Roundtable as the focal point of all factors comprising this fast-growing industrial segment of the $75-billion PHCP industry.

With Houston the global center of PVF, each of the four meetings will allow the intermingling of key personnel, as well as the industry’s most exceptional presenters. At the most recent meeting, Chicago Tube & Iron owner Don McNeeley provided a dramatic PowerPoint presentation that brought home the dynamic aspects of our industry and its future in a riveting one-hour tour-de-force.

In addition, the PVF Roundtable and The Wholesaler will join forces to host its second annual Blue Ribbon Industry Panel this fall. The panel will be comprised of the leaders of manufacturing, wholesaling and end users, with your faithful observer presiding as moderator.

Appearing under the auspices of the American Supply Association at the Hyatt Regency Hotel in Anaheim, Calif., the panel will be open to all industry members on Friday, October 26, from 9:30 a.m.-11:30 a.m. Coffee and refreshments will be served.

This column wants to particularly thank Gary Cartright, owner of p&e, and his staff for providing the quarterly product projections to The Wholesaler. They provide extremely valuable market information; watch each quarter in The Wholesaler for Cartright’s synopsis.

Economic outlook continues bright

With the U.S. economy getting off to a relatively slow start in the first quarter, I’m frequently asked whether my optimistic outlook for 2007 is warranted. Despite new stock market records and continued low unemployment, there is increasing concern about the economy’s ability to sustain its dynamics.

Such concerns are abetted by fear of a falling dollar and the continued burden of the budget and trade deficits; and most of all, pessimism about the overhang of the unresolved situation in Iraq. Many of those to whom I have spoken believe the debt incurred in the Iraq imbroglio is probably much higher than the amount to which the government admits, with no end in sight.

What concerns the questioners most immediately is the accelerating slowdown of residential construction and existing home resales. They feel that the combined retrograde of the housing sector and the fall-off in automotive production could lead to a recession similar to the high-tech bubble implosion of 2002-2003.

Even more worrisome is the creeping inflation in everyday consumer goods, not to mention record prices at the gasoline pump. There is almost no confidence that an alternative energy policy is in the wings. Few, outside those with vested interests, believe that ethanol is the solution; but instead has actually added to the cost of gasoline and other distillates. This is translated into further skepticism regarding reprieve from energy shortages and high prices. A drive toward coal liquefaction is being met head-on by environmentalists.

The good news is that the offsetting pluses to these aforestated concerns will generate a better-than-expected economic outcome for 2007, barring a major world geopolitical crisis. The following strong points will undergird America’s positive economic outcome for 2007:

• Consumer spending continues to maintain a remarkably strong pace. This reflects an exceptionally low unemployment rate (4.6%), while wage increases put more money into the spenders’ pockets. The 3.8% improvement in first quarter spending over 2006 is double the gross domestic product growth generated over the year’s first three months.
• Despite the 17% drop in residential construction, commercial, industrial and infrastructural expenditures are providing a major offset to the housing downdraft. The industrial sector as a whole is staging a comeback powered by all aspects of energy development, such as electric power, oil production, refining expansion and maintenance, and the transmission of oil and gas. Also, the aircraft and railroad transportation sector, shipbuilding and pulp and paper are doing their part. With lead times lengthened, domestic manufactured products are in increasing demand.
• Although capital spending got off to a slow start as major corporations assessed the lay of the land, this trend is starting to reverse as inventories are rapidly declining. Exports are exceeding expectations due to a devaluated dollar and a vigorous demand for America’s airplanes, construction machinery, industrial products, and armaments by the world’s emerging nations, which are pouring record financial liquidity into the globe’s economic arteries.
• U.S. corporate profits continue to set new records as many of America’s leading multinationals generate increasing revenues abroad. Domestic profit growth is rebounding, after a temporary slump at the end of last year. This is abetted by cost-cutting in both direct labor as well as fringe benefits. The Administration’s 2003 tax cuts are also pouring unexpected profitability into corporate coffers. This is further benefitting the Internal Revenue Service, which reported all-time high collections for April.
• High technology is on a tear with greater innovations in pharmaceuticals, information technology, manufacturing productivity, aerospace and military science.

Although an increasing percentage of America’s enormous gross domestic product, 75%, is devoted to services, this sector is generating a growing export surplus in international trade.

In a nutshell, America’s 300-million-strong population and its economy are still the envy of the world.

Are negative savings a predictor of economic disaster?

As on ongoing economic analyst, I have become increasingly worried about the declining U.S. per capita savings rate. With over 70% of America’s world-dominating gross domestic product consumer-driven, is the mighty U.S. economy headed for a crash that could exceed the decade of the 1930s? In an eerie forerunner, America’s worst depression ever had been preceded by a gigantic stock market bubble.

After reaching an inflation-adjusted $6,800-per-capita savings rate in the mid-1980s, a binge of consumer spending activity had precipitated an uninterrupted savings decline, which turned decidedly negative in 2006.

But something doesn’t add up. While household net worth at the savings peak of the mid-1980s stood at about $250 thousand, it now stands at nearly twice that number, and is still climbing.

The answer may lie in the fact that of today’s $55.6 trillion in household net worth, only $6.7 trillion is secured in checking accounts, time deposits and money-market funds. The enormous gap between these numbers is found in the tangible and intangible risk capital that has gathered steam in the last 20 years.

This not only reflects the surging value of the stock markets, real estate, corporate and government bonds, and collectibles such as art work and gold, but represents the underpinning of most of America’s wealth.

On top of that, such automatic check-offs as 401Ks, pension fund contributions, and company stock purchase plans represent enforced savings not considered in government statistics. These are an archaic method that the government has used for many decades to evaluate the differences between consumer income and expenditures.

It’s a far cry from the old-fashioned measure of the hard-working payrollers depositing part of their earnings into a savings account. Such thrift is no longer fashionable in the current U.S. generation of unprecedented expenditures, but it also has become a new way of life among the emerging nations throughout the world. This is one of the reasons that the global economy has generated the increasing liquidity that is lubricating the surge of global investments into all aspects of the American economy.

The virtue of savings, which has for years allowed Japanese workers to sock away double digit percentages of their annual earnings is today considered counterproductive, since it has kept that nation’s consumer sector at a snail’s pace growth rate.

A similar factor can be found in Germany, the world’s third-largest economy, in which an overwhelming percentage of its gross domestic product is composed of exports. This is a hangover from Germany’s traditional financial discipline compounded by the traumatic impact of World War II and the post-war period.

Even China, the world’s most aggressively expanding economy, is attempting to redirect its massive currency accumulation into a still embryonic consumer sector.

America’s residential housing industry is the best example of how the nation’s $13.5-trillion gross domestic product has grown so exponentially. Despite the current home building recession, the value of domestic residences and appurtenances still account for 20% of the nation’s total household net worth.

Another factor not considered in today’s archaic method of measuring savings is the increased value of household net worth in real terms. Since prices rose by 22% in current costs, from 1996 to 2006, total household values acclerated by a similar amount during this decade. But with the number of households growing by 15% during this period, these adjustments alone increased total household net worth by 31.7% by the end of 2006. This was one of the greatest 10-year increases ever in American history.

Although the danger of consumer consumption slowdown continues to hover over America’s disproportionate growth economy, the evolution of the world’s dynamic economic expansion makes such a development unlikely. Only an irrational repeat of the 1930s Smoot-Hawley tariff walls, which throttled world trade and ushered in the decade-long Depression, could reverse America’s growth trend of the last 25 years.

Is U.S./Canadian Dollar parity in the offing?

The concept of parity between the U.S. dollar and the Canadian dollar (“loonie”) would have been considered unthinkable within the recent past. But such eventuality is close to reality due to changing circumstances.

This is primarily due to an inversion of economic circumstances by the two North American neighbors, creating opposing currency trends. As the loonie has become increasingly muscular while the U.S. dollar has weakened, the once unbridgeable chasm between the two seems on its way to closure.

Such currency parity was briefly brought up in the North American Free Trade Authority negotiations before they were successfully concluded in 1993. But this was discarded as unrealistic due to the disparity in currency values. Although U.S./Canadian dollar parity existed briefly in the 1950s, the chasm between the two currencies had grown to a ratio of $1.60 Canadian to the U.S. dollar at the turn of the century.

However, the last five years have brought about a remarkable reversal in the industrial viability of the two Northern neighbors. With the 300 million-plus U.S. population having evolved into the world’s largest consumption economy, Canada, with 32 million residents, has become one of the world leaders in energy production.

This newfound Canadian energy power has been facilitated by the tar sands oil conversion in Canada’s Alberta Province, which is now providing close to 2 million daily barrels of crude oil into the U.S.

Such Canadian economic strength has been furthered by other aspects of the Dominion’s industrial economy. Although much of this is related to energy production, transmission and relevant equipment, Canadian housing has experienced a boom, while the U.S. residential construction market is sagging.

This U.S./Canadian energy disparity is bound to narrow as Canada steps up its production while America’s energy needs expand during this summer’s driving and hurricane-threatened season. This is sure to impact the already shrunken gap that’s currently down to $1.06 Canadian to the U.S. dollar.

Whereas America’s Federal Reserve Board is concerned with continued weakness in housing and automotive sectors, the Bank of Canada reports that first quarter growth was a full point over what had been anticipated. Such growth will almost certainly call for an increase in Canadian interest rates over the present 4.25% at the Canadians’ next meeting in July, with another bump-up in September.

At the same time, neither a rate cut nor an increase over the present 5.25% fed funds level appears in the U.S. cards this year, despite creeping inflation fears.

Higher oil prices will strengthen the loonie and weaken the dollar, further shrinking the currency gap. Higher Canadian interest rates and a stronger economy will make the Canadian loonie increasingly attractive to foreign investors as Canada expans its oil and natural gas development.

With driving activity in the U.S. not expected to slow this summer, a greater percentage of consumer expenditures will trend toward filling the gas tank. Less consumer expenditures to generate growth in a consumer driven economy will almost certainly lead to further devaluation of the dollar. While the loonie is lofted by its energy-dominated economy, the shift away from the greenback by oil producers will further cheapen the dollar, shrinking the historical American/Canadian currency gap.

With the housing and automotive drag subtracting 1% per quarter from U.S. growth, expect just the reverse to happen in Canada, which is continues to enjoy its current housing boom.

The once-contemplated Canadian/ American currency union may not become North America’s official answer to the Euro, but it could easily evolve into a unified base due to the afore stated circumstances.

Whatever happens, expect to see very little daylight between the neighboring nations’ currencies the rest of the year.

India quickens its growth rate

With the world’s two most populous nations (China and India) setting a torrid pace in their battle for global economic supremacy, India is in danger of overheating.

Although both nations belong to the exclusive 1-billion plus population club, each represents a different approach to global economic expansion. While China is a highly disciplined state-directed economic superpower, India has depended on its unprecedented entrepreneurial skills to cut a wide swath in world economic leadership.

Coming to the game in the early 1990s, the Indian sub-continent is in danger of overheating as it’s playing catchup with its older rival. Under the leadership of Prime Minister Manmohan Singh, New Delhi is finally cracking the British-imposed bureaucracy that held back most of the commerce and industry comprised by the British bureaucracy in the long period of colonization.

The first break came with the ascendance of Singh to the position of finance minister in 1990. Singh wisely circumvented the Socialist vise that was strangulating India’s economy by developing India’s version of Silicon Valley in the city of Bangalore, which had become an embryonic technology center even before Singh appeared on the scene.

With 50,000 engineers graduated in foreign universities as far back as the 1970s, India had no dearth of potential talent to flex its technological muscles. The trouble was that homeland opportunities were few and far between with bureaucratic constraints keeping most of these graduates in the U.S., Canada and United Kingdom.

Since information technology was a “green field” discipline in the late 1980s, Singh successfully concentrated on keeping this new development out of the hands of Indian officialdom. This led to a meteoric rise in the decade of the 1990s with generous government enticements bringing a large proportion of foreign graduates back to India.

But with this incidence of unbridled capitalism manifesting itself in Bangalore, even more traditional industries, such as steel, have unshackled themselves from bureaucratic restraints. This has led to domestic expansion, recently reaching 9.2%, not far behind China’s 10.4%.

This has superseded the plodding rate of 3%, symptomatic of the old India, which seemed to be going nowhere fast. At this new rate of growth, India is due to soon surpass Japan, trailing only the U.S. and China, if purchasing power parity is considered.

But unlike China, which maintained moderate inflation and no trade deficit, India is incurring a 6.7% inflation rate, plus a widening current account deficit.

Much of this is due to an overheated expansion, which is forcing practically all Indian plants to operate at maximum capacity; coupled with an unprecedented consumer demand, which is driving prices up to new heights.

Despite India’s phenomenal expansion, it’s suffering from an inadequate infrastructure, which it has only recently begun to address. Unlike China, and more like the U.S., India must pass new legislation through a fractious Congress headed by the ruling Congressional party, which recently gained power from the previously ruling nationalists. This massive sub-continent must also contend with indigenous states, some of which are run by left wing governments who don’t share New Delhi’s priorities.

In order to maintain a viable working coalition, India is constantly forced into making compromises to keep its unity government viable.

Despite these stumbling blocks, India is rapidly becoming the focus of world wide investments and is giving China a run for economic world supremacy. If foreign financial commitments are any indication, India may soon forge ahead of China in the world’s economic sweepstakes.                   

Morris R. Beschloss, a 50-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst for The Wholesaler.