How globalization has benefited the PVF sector

BY MORRIS R. BESCHLOSS

PVF and economic analyst

It’s a matter of common knowledge that the pipe-valve-fitting sector is the fastest-growing component of the $75-billion plumbing-heating-cooling-piping industry.

Although estimates put it at one-third of the industry’s total, it has a growth rate that is running at twice the pace of other members of the PHCP family.

Although the dynamic expansion of power; oil and natural gas; commercial, institutional and industrial construction; exports; chemical; paper; and shipbuilding have strained the capacity of America’s PVF manufacturing capability, globalization has added to the overall strength of this unprecedented manufacturer/distribution juggernaut.

With globalization bringing massive industrial capacity to the forefront, much of it has been made available to American brands in the form of joint ventures, ownership or as a source of product shipments.

Since America is still the No. 1 target for outward bound shipments by such newly industrialized nations as China, India, Taiwan, Southeast Asia and Brazil, having many of these facilities under U.S. control has kept the global PVF business under the American trade umbrella.

Most recently, these global relationships have also been instrumental in accelerating America’s export activities. Last year, U.S. exports reached a record $1.8 trillion, 12.5% of America’s total gross domestic product. This represents more revenues than the housing construction industry at its height. Since two-thirds of all outward bound shipments are industrial, PVF products have certainly comprised a substantial part of such exports.

In talking to major PVF distributors throughout the nation, practically all are participating in the export subsector to some degree.

There isn’t a U.S. manufacturer that isn’t using overseas products or as componentry to a growing extend. A major target for exports, as well as growing distribution, is Canada, which is becoming ever more active in the process of tar sands conversion into oil.

This import/export globalization has planted the U.S. PVF flag around the world. Since much of these products are under U.S. inspection and certification, quality standards of these imports have to maintain the same rigorous strictures as domestically manufactured products.

With U.S. PVF products firmly embedded in the global matrix, I expect the growth of that sector will pick up speed in the years ahead. I predict that the present $25-billion revenues at the distributor level will double by 2015, without indexing for inflation.

Although I continue to emphasize the boom in which the PVF sector finds itself, a significant part of the overall economy is much stronger than many economists and media pundits would have you believe.

Compared to the first quarter of 2007, the economy’s underlying strength is much greater, when one considers all aspects of the current U.S. gross domestic product of goods and services.

With housing so weak, recent softness in production and durable goods is heavily influenced by appliances, furniture, and all other components associated with residential construction. But housing is only a small share of gross domestic product (4.5%). It has fallen so much already that it’s highly unlikely to drive the economy into recession by itself.

Exports are one-eighth of the U.S. economy and are growing at a 13.6% rate annually. The boom in exports is overwhelming the loss from housing.

Personal income was up 6.1% during last year, while small business income accelerated in October and November, during the peak of the credit crisis. Net incomes actually rose 3.9% faster than inflation last year, while commercial paper issuance is rising again, as are mortgage applications.

Regarding corporate earnings, 20 out of the 24 Standard & Poor 500 technology companies that have reported earnings so far this year have exceeded earnings expectations.

Although many believe that a recession has already started because of tight credit standards, this belief is generated more by fear than actuality. I still believe that employment is the key to U.S. prosperity. Even the government, with such inflationary boondoggles as biofuels and $150-billion handouts, cannot dislocate a super economy whose strength is based on its diversity.

I still stick by my January prediction that we’re nowhere near a recession and will avoid it during the first half of this year. With lower interest rates, sovereign wealth fund investments and global money continuing to flow into government paper, expect the second half of the year to evolve into a more normal 3% per annum growth pattern.

Corporate income tax cuts get little support

As the winds of populism sweep across the nation in this pivotal election year, little support can be expected for a cut in the corporate income tax.

As President George W. Bush and his advisors mull over a tax cut package to stimulate the lagging U.S. economy, it’s doubtful that a reduction in taxes paid by American corporations will engender much sympathy.

The U.S. rate of 35% (it’s 40% if the average impact of state corporate income taxes is included) is the second highest in the world, after Japan’s. With exports at the heart of America’s industrial revival, U.S. corporate competition will play a critical role in keeping this momentum going. The average corporate tax bite in the 17 most developed countries was 31% in 2006, down from 38% in 1954, and 51% in 1982, according to the Organization of Economic Cooperation and Development. The last reduction in the U.S. federal corporate tax rate was the cut from 50% to 34% as part of the 1986 tax reform act.

Even China, which still claims an authoritarian Communist regime, has a corporate tax of 25%. Communist Vietnam and France’s new Conservative government have announced their intent to lower corporate taxes to 25%.

Western Europe, not known for its sympathies to the business community, has seen its major nations lowering their corporate taxes to make them more competitive in world markets.

Germany, which is heavily dependent on exports, has dropped its corporate taxes from 62% to 39% in the past 25 years. Britain has gone from 52% to 30 percent, Sweden 63% to 28%, and Austria 62% to 27%. But Ireland gets the golden crown by having the lowest corporate tax rate anywhere at 12%, which has made that little country the best economic performer in Western Europe.

Although each country defines its rates somewhat differently and provides loopholes for its favorite sectors, all those who have shown themselves to be export friendly have gained substantially in the past few years.

The U.S. is way overdue in creating a more export-friendly climate for the corporations that ship heavily abroad, as well as supplying opportunities to expand their business horizons in the world’s largest, by far, the U.S. home market. The U.S. ranks only fifth among the world’s top 17 nations recognized as particularly friendly, tax-wise and regulation savvy.

In the American Treasury’s quest for more dollars, the U.S. government has been stuck with policies that have caused many foreign companies to withhold setting up facilities in the U.S. to serve its indigenous customers. The U.S. is the only major industrial nation to disallow the return of value-added taxes from finished goods as components fabricated by foreign manufacturers to be shipped abroad, even though such a stratagem is allowed by the World Trade Organization.

This also applies to America’s soaring exports, which are not allowed to secure better tax treatment for our exports by substituting a value-added tax for the corporate income tax. Despite years of Congressional hearings on this matter, little progress has been made to make our corporations more competitive, both here and abroad.

Since most members of Congress are gun-shy because of the continued bad press the corporate world has received from the media, they are loath to support such initiatives. Part of the problem is lack of interest in America’s dynamic export growth in the last few years. Unlike almost all other major world powers, which depend heavily on their industrial sectors for exports and home consumption, the U.S. has never considered outward bound shipments as a major function of the growth economy.

Harboring more than 20% of world consumption, American business has historically concentrated on its huge home markets, with exports a supplement to overall revenues.

Unlike China, Japan, Germany and Southeast Asia, which depend on overseas revenues for maintaining their industrial infrastructure, there is no export lobby to plead America’s case.

With House, Ways and Means Committee chairman Charles Rangel (D-N.Y.) now the kingpin of taxation initiatives, it’s doubtful that the corporations will fare better than they did when the Republicans controlled both houses.

Rangel has offered a bone by calling for a corporate decrease from 35% to 30.5%. But in exchange, he demands a new top bracket of 44%, up from the present top rung of 35%. Since this will affect most corporate executives, as well as owners of small businesses, you know where that will wind up -- Dead on Arrival!                   

Morris R. Beschloss, a 51-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst for The Wholesaler.