Economic Outlook, January 1995

Many in the pest control industry are optimistic, thanks to the GOP's election windfall and an economy that keeps rolling despite the Federal Reserve's efforts to slow it down via interest rate increases.

The business outlook for 1995 contains a mixed bag for pest control professionals in the U.S. Significantly, the changes in the make-up of Congress should result in legislation that is more responsive to the needs of small business. But at the same time, the Federal Reserve's effort to curb inflation by jacking up interest rates, thereby cooling the economy and stymieing real estate, sours the picture, particularly for the termite market.

Ordinarily, attempting to forecast economic conditions for 1995 while pounding the keys of a word processor in November is like predicting the outcome of a football game with the score tied midway through the fourth quarter. But this time it's somewhat easier thanks to Election Day 1994, the defining event that largely shapes the economic forecast for 1995.

The effects of the Republican tidal wave are beginning to come into focus, and change will be the name of the game. In the House of Representatives the GOP majority is 28 seats, and in the Senate the Republicans hold a 53-to-47 edge. Additionally, the GOP made big gains in governorships and in state legislatures. As small businessmen burdened by arduous and expensive regulations and fearful of restrictive rules to come, PCOs should have reason for optimism with a new Congress whose leaders have pledged to follow a "less is more" governmental philosophy.

Buoyed by the message from the electorate that they were unsatisfied, an incoming national legislature espousing less government, cutting taxes, balancing the federal budget and offering fresh congressional faces free of the contamination of the "Washington experience," the GOP sent a clarion message. To hear the victors, their declared objective is to make life easier for business entrepreneurs, to unshackle them from burdensome taxes, and to ease restrictions and regulations, thereby answering the prayers of everyone involved in the pest control industry.

RIDING HIGH. Of course, the irony in the political windfall that saw the Republican party seizing both houses of Congress for the first time in 40 years, plus sweeping governerships and state legislatures in every direction, is that it came at a time when economic conditions had registered solid improvements in the two years since an unpopular President assumed office. When we crystal-balled the economy a year ago, we prefaced our outlook with the phrase "mostly sunny," and we were modest in our assumption.

As we write, industry is working at85% of capacity, and the Federal Reserve, to dampen a heating economy, has instituted the sixth interest rate increase since the beginning of the year, a whopping ¾ of a percentage point. The idea is to put the brakes on business and prevent threatened inflation. There are two sides to this coin — economists who say rates are still not high enough, and a good segment of the business and labor communities, who feel that the flurry of Fed rate increases will stifle the economy.

According to HenryKaufman, a Wall Street economist whose advice is taken seriously, "At some point in the next three months, (the Fed) will have to act again. The economy is too strong to be greatly affected or slowed by the present level of rates." Kaufman predicted that the short-term lending rate controlled by the Federal Reserve, which now stands at 5.5%, would have to reach 7% before the economy would begin to respond.

On the other hand, Jerry Jasinowski, president of the National Association of Manufacturers, said he believes the Nov. 15 move by the Fed could be the straw that breaks the back of the economy. And the AFL-CIO agrees wholeheartedly.

Pest control operators are losers in the face of interest rate increases for two rea sons. As mentioned earlier, rate increases inevitably impact mortgage rates, thereby curtailing the building of homes, which generates a large chunk of PCOs' termite and general pest control business. Secondly, they cut down on any discretionary funds people might have to lay out for non-emergency services.

Take a typical example of the effect of rising interest rates: For a couple who took out a $200,000 30-year fixed-rate mortgage on Jan. 3, the monthly payment was $1,335.98. The same payment for an identical loan on Nov. 9 was $1,616.45, an increase of $280.47. This is not the stuff that a hot real estate market is made of.

According to Lyle Gramley, a former Federal Reserve governor who is a consulting economist for the Mortgage Bankers of America, further weakening of the housing market is likely throughout 1995, and by the end of the year mortgage interest rates likely will increase to 10%.

REMARKABLE RESILIENCY. In the third quarter of 1994, the economy grew 3.4%, exceeding the predictions of economists. Industrial production has soared, inflation has been held down, and the work force has grown. The new housing market in 1994 yo-yoed, and yet recorded some excellent months. With exceptions that can be attributed mostly to adverse weather factors, PCOs on the whole recorded a "not too bad" business year.

As we write, the stock market took a dive, and the record shows that a market decline has preceded every one of the nine postwar recessions by about five months. But as some economists argue, it is also true that the stock market has often dropped sharply without signaling a broader economic tumble.

Tom Stiller, vice president of investments for Rodman & Renshaw, a California brokerage firm, has confidence in what the Federal Reserve is doing with interest rates, and predicts that by midsummer or early fall of 1995 the raises will end and a favorable business climate will see the Dow Jones average hit 4000.

COMPROMISE OR GRIDLOCK? Whether the new Congress has the strength to ram through the many changes that will clearly benefit small business remains to be seen. The caveat hanging over the whole game is whether both parties will cooperate to pass legislation, or whether the Democrats will mimic the Republicans of the 103rd Congress by stonewalling.

Because subsidies for poor and working-class families are not favored by the majority in Congress, real progress on health care reform will be difficult. The highly touted Clinton health care program is, for all practical purposes, a dead issue. However, the American public does feel strongly about improvements in health care, and it is conceivable that we will see the beginning of incremental health legislation — that is, gentler, less radical federal and state reforms. The good news for small businessmen is that it is extremely unlikely that the idea of companies providing full coverage for employees will see the light of day in the 104th Congress.

Look for Congress to sort out and solidify its business ties and reward the conservative business lobby that helped kill the health care bill. PCOs from Nome to Miami will be happy to learn that the door should open for action on the long-stymied tort reform, product liability and labor issues important to business.

You remember OSHA. Well, a central Clinton administration proposal for 1995 — to overhaul the Occupational Safety and Health Administration through fostering safer workplaces by requiring management-employee safety committees — is a dead duck.

Secretary of Labor Robert Reich conceded that the administration might also give up on two bills President Clinton, during his candidacy in 1992, promised to enact — an increase in the minimum wage and a requirement for companies to spend a portion of their payrolls on employee education.

While the Republicans gloat over burying the proposed OSHA reforms, they intend to further ingratiate themselves with the business community in promising to initiate a reform that would bar fines against businesses that tried in good faith to obey the law. "The Contract with America," that by-law with which the GOP intends to drive its legislative machine, could also handcuff OSHA by requiring the government to weigh the potential costs of safety and health regulations against potential benefits.

To the consternation of organized labor, the administration did little last summer to fight for a bill that would have barred employers from permanently replacing striking workers with new employees. The measure expired after Senate Democrats failed to break a Republican filibuster. And such a bill is very unlikely to receive favorable consideration from the new Congress.

Industry, while operating at almost full capacity, is still laying off workers. However, this is considered more a reflection on improved efficiency and workers putting in more hours on the job than an indictment of the economy. In an interesting study by the Bureau of Labor Statistics completed earlier in the year, 4.5 million people lost the permanent jobs they had in 1993. Of this number, 68% were reemployed by February of 1994, 19% were still looking for work, and 13% left the labor force altogether. Of the group that returned to work, 47% were earning less than before, 26% were earning from 0% to 19% more, and 27% were earning at least 20% more than previously.

BAD NEWS FOR GREENIES. Turning to a matter nearer and dearer to our industry, it is no wonder today that dispirited environmental groups are in a blue funk. Many of their legislative supporters have been pushed aside, and their strident cries should of necessity be toned down or meet with more vigorous challenges. Conservatives will most likely press for wholesale revisions if not outright replacement of the Superfund hazardous waste program that is coming up for renewal. In a post-election interview, Sen. Phil Gramm (R-Texas) said: "Republicans will reaffirm the sanctity of private property with proposed legislation requiring monetary compensation to businesses and individuals adversely affected by environmental legislation." As mentioned, environmental matters will bear the scrutiny of a cost-benefit analysis.

While concern about safe pesticides and safe pest control operations will be a constant, logic would dictate there should be fewer regulatory restraints on the industry in the days ahead. More important, legislators making up the new Congress should be more receptive than ever to the issues brought to them on Legislative Day.

Bob Rosenberg, head of government affairs at NPCA, tried not to appear like the pleased cat that swallowed the canary in assessing the changes wrought by the 1994 election. "People are tired of government on their backs," he said. "There are new possibilities and new opportunities, a chance to examine and revise onerous regulations like the Endangered Species Act, DOT requirements and OSHA."

Rosenberg indicated we could probably forget about a proposed administration food safety bill that would allow citizens to sue pesticide applicators. On the other hand, he lamented the loss of Congressional "friends of the industry" and noted that with new, inexperienced faces on Capitol Hill, the pest control industry has a whole new re-education job to do.

Insurance considerations are on the platter of every PCO in contemplating the economic year ahead. Probably no one is in a better position to speak discerningly about the subject than Mark Weisburger of B. & D.A. Weisburger Inc. Mark, whose company has served the pest control industry since the days when sodium fluoride dust was the insecticide of choice for cockroach control, sounds encouraged. He said the insurance market today has more players than ever, with companies bowing in and out. "Rates should be stable, and companies are offering the broadest coverages ever," Weisburger said. He advised that with the competition out there, and with the coverage that is available, PCO clients should squeeze insurers for good deals.

The coming year should see a rash of confident manufacturers and suppliers offering new, ecologically sound, reasonably-priced pesticides. Bill Kenney, vice president of Pest Control Supplies, Kansas City, Mo., which covers the central midwest from Colorado to Indiana, is typical in forecasting significant growth in 1995 provided the weather cooperates.

Manny Martinez, product manager for Zoecon Professional Products, headquartered in Des Plaines, Ill., is likewise bullish and confident that the solid growth of insect growth regulators will continue as a tool for safety-conscious roach and flea controllers.

A MATTER OF TIME. In a thoughtful response to a request for forecasting business conditions in 1995, Rick Veatch, president of Veatch Chemical Co., St. Louis, Mo., opined that we shouldn't necessarily jump into "Happy Days Are Here Again," at least not yet. For one thing, with the latest housing reports off by 5%, Veatch isn't happy about the Fed's latest jump in interest rates. "This is an unneeded move which I see putting a significant damper on termite control operations throughout 1995," Veatch said. "And regardless of which party is in power, a chemophobic society remains in place."

Although he sees only a slow gain until the new pest control-friendly signs begin to take effect, which he feels will take at least 24 months, Veatch nevertheless did agree that in the long term, conditions augur well for the pest control industry.

Tom Wright, president of B&G Chemicals & Equipment Co. and current president of the United Producers, Formulators and Distributors Association (UPF&DA), is in a good position to crystal-ball 1995 business conditions for the industry. He said: "Compared to 1994, which was not a particularly good season for the industry, 1995 should be much better, provided we get a good start with termite work." Wright suggested that everybody seemed ready for an expansion, and is particularly pleased with the regulatory outlook from the nation's capital.

Valera Jessee, executive director of the Georgia Pest Control Association, offered a rejoinder to a general feeling of euphoria surrounding the results of the election of the business-friendly Congress. Pointing out that the pest control industry is directly regulated by the states, she cautioned there is no guarantee when and if states will completely fall in line with any regulatory alleviations.

Tom Moore, president of Copesan Services Inc., the national organization of independent pest control companies covering the U.S., Canada and Mexico, feels that from an economic standpoint the industry can expectreasonable growth next year. He's happy about an anticipated change in the regulatory climate, but cautions that it will take time for the reforms to take hold.

In the final analysis, it appears that Rick Veatch, Valera Jessee and Tom Moore have something. While the business prospects for the average PCO seem bright, it might take a while before both the regulatory reforms and the business reforms that pest control people are so excited about take hold. There are, after all, a lot of other major issues for national and state governments to tackle before they get around to us. So don't hold your breath. Get out there and hustle.

THE GOP'S BIG 'CONTRACT' The PCO-as-taxpayer should have reason to feel optimistic in 1995 if the promised GOP tax cuts can pass in Congress and avoid a presidential veto. Here are the Republican party's main promises as documented in its "Contract with America": • Balance the federal budget. • Cut the capital-gains tax in half. • Phase out the 1993 tax increase on Social Security benefits. • Give a tax credit to married couples who pay more than they would by filing two single returns. • Create a new type of individual retirement account. • Give families earning up to $200,000 a $500 tax credit for each child under 18. • Allow small businesses to deduct the first $25,000 of annual investment. • Tort reform