Economic Outlook: Mostly Sunny

These economists also predict spending by businesses and housing to stand out in a generally slow-moving year. They expect the economy to demonstrate the same stop-and-go pattern it has exhibited since the recession ended in March 1991, with the economy spurting forward for a quarter or two, only to be slowed by various forces.

According to William Dunkelberg, president of NABE and dean of the business school at Temple University, Philadelphia, Pa, the protracted period of sluggishness can be blamed on a variety of factors, from cutbacks in the defense industry and weakness in nonresidential construction to continued layoffs by some of America’s largest corporations. “The slow growth will help keep inflation well under control, and for that reason we expect interest rates to stay low,” Dunkelberg said.

Economists from several areas are predicting the U.S. economy, as measured by the gross domestic product, to expand by 2.7% in 1994, a scant one-half percentage point higher than the 1993 forecast of 2.2%. They also look for modest gains in consumer prices of 3.3% for 1994, as a weak economy helps keep a lid on wage and price increases. The best news is that everyone in the know expects interest rates to remain low.

Despite the rosier outlook of some economists regarding jobs, hardly a week goes by without news of massive layoffs and “downsizing” from major employers such as General Motors, Boeing and IBM. The name of the game seems to be to get more production from fewer workers, and to do so with “streamlines facilities.” Streamlined facilities, unfortunately, can translate to plant closings and general decreases in spending which, in turn, can mean diminished pest control accounts.

THE TAX PICTURE. By the narrowest of margins, the 103rd Congress approved President Clinton’s plan to reduce the budget deficit by $496 billion while raising individual and corporate income taxes, gasoline taxes and Medicare and Social Security taxes by about $220 billion over the next five years. Every pest controller will feel the pinch. Certain consequences stemming from the new tax law are worthy of examination.

If yours is a Supchapter S corporation, which means profits are passed to shareholders in proportion to their ownership of the firm, the profits are going to be taxed at new, higher rates thanks to the Omnibus Budget Reconciliation Act of 1993. (see related story, “The Tax Tree’ Falleth,” on page 36 - Ed.) This will no doubt have a negative impact on the growth plans of many companies.

This taxation provision is one of the characteristics that distinguish a Subchapter S corporation from a regular corporation, which is subject to two levels of taxation - one on corporate earnings and another on dividends distributed to shareholders. The new tax law creates a 36% rate for joint taxable income over $140,000 and single taxable income over $150,000. And just in case you’re a heavy hitter with an income over $250,000 (you should be so lucky), you’re subject to a surtax which raises the top individual tax rate to 39.6%.

Are you a big client entertainer? Do you sing up accounts during “power lunches”? Be advised that the new tax law that became effective Jan. 1 trims the deductibility of business meals and entertainment from 80% to 50%. If this won’t affect your meals and entertainment dollar, there is the distinct possibility that your accounts in the hospitality industry could suffer. Furthermore, you should know that dues paid to clubs and other organizations are no longer deductible.

The new tax law also has something to say about retirement contributions. The amount of compensation that can be taken into account for purposes of calculating contributions or benefits under qualified pension or profit sharing plans is now limited.

Gasoline, the lifeblood of every PCO’s operation., has been subjected to added taxes since Oct. 1. The cost of gas and diesel fuel was raised $.043 per gallon.

One of the few bright spots for small businesses is the new law’s bonus depreciation provision. The Omnibus Budget Reconciliation Act of 1993 increases to $17,500 from $10,000 the amount of business equipment costs that can be deducted in the year the equipment is acquired. There are stipulations. The amount of the deduction cannot exceed trade or business net income, and the benefit is phased out as equipment acquisition exceed $200,000 in any single year.

Caution: Consult your certified public accountant and/or tax advisor regarding the impact of the new tax law on your 1994 business.

NEW LEGISLATION. Congress passed the Family Leave Act of 1993, and its full effect will be felt this year. Some pest control firms are covered by a new law that will make things a little more difficult, and certainly more expensive. Briefly, companies with 50 or more employees operating within a 75-mile radius must offer up to 12 weeks of unpaid leave in any 12-month period. During the leave period, which is granted for “family matters,” the employer must continue to provide health care coverage, and the same job or its equivalent must be waiting for the leave-taker upon his or her return to the company.

Two big question marks remain on the economic horizon for every business entrepreneur. What effect will the recently passed North American Free Trade Agreement have on the economy, and what will Congress do with the Clinton health care proposal? It’s much too early to tell, and speculating now on these tremendously important and complex issues would be premature.

Any predictions for the outlook of the pest control industry must always be tempered by a consideration of the unpredictability of nature. Such quirks as the hurricanes that devastated parts of Florida, the disastrous flooding that inundated towns along the Mississippi River in Missouri, Illinois and Iowa, the drought in the Southeast, and the fires in California all had negative effects on business, pest control included.

SUPPLIERS’ OUTLOOK. Fortunately, in making predictions, we can turn to our suppliers, PCOs and association executives to assist in the crystal ball gazing with wise thoughts and astute projections.

Every businessperson in the industry must confront the strain and the drain of insurance coverage, but Ed Van Istendal, technical service director of the Wyomissing Group, doesn’t see any radical price changes occurring in 1994, and feels the pest control industry will have a generally positive year. He does, however, point to the dark clouds that define worker compensation insurance, in which skyrocketing medical costs and hefty tort verdicts are depleting state worker compensation resources.

Mark Weisburger of D&D.A. Weisburger, who might be regarded as the “dean” of pest control insurance carriers, mentions that many new players have entered the game who are eager to sell insurance to the pest control industry. He does caution, however, that some carriers will be forced out of business because of inadequate funding. Weisburger, incidentally, advises PCOs who hire independent contractors to make sure these individuals are protected with their own coverage. At the same time, he doesn’t look for any significant changes in this year’s overall insurance picture.

Ed FitzHarris, the national sales manager for Zoecon Professional Pest Management, is upbeat about prospects in the year ahead. He says his company is coming off two years of solid growth, which he attributes to “changing with the market.” FitzHarris sees the industry profiting from increased use of nontraditional pesticides in response to more environmentally conscious consumers.

Steve Johnson, sales manager for Dow Elanco, says the company “got off to a good start in 1993, and then we ran into some disappointments.” He attributes some of this to the vagaries of weather - particularly the storms and drought that hit the Southeast in the last year. But in the role of oracle, Johnson is more hopeful about 1994. He attributes his optimism to increased consumer confidence, and a stronger housing market, which will boost the termite business.

Bill Massey, president and chief executive officer of Whitmire Research Laboratories, declared that although 1993 was good for Whitmire, his business was flattening, a situation he partially attributes to more manufacturers dividing the pie. As for the fortunes of the pest control industry, he is neither a bull nor a bear, but looks for a slight improvement.

J.T. Eaton vice president Bart Baker visualizes all sorts of promising factors for the industry as it begins the new year. “Signs are positive,” said Baker, whose rodenticide manufacturing business finished last year in good shape. “There’s real potential out there.”

PCOS’ OUTLOOK. Jerry Williams, general manager of Mandarin Service whose home base of Jacksonville, Fla. is still delirious over being awarded a National Football League franchise, told us he looks for the local industry to be “stable with a modest amount of growth.” He said 1993 was a fairly good year, and “no operators went backwards.” Williams, who also owns a fast food franchise, suggested that Florida operators who experienced a recent downturn in the economy paid more attention to their expenses in 1993, a factor he feels will make them more profitable going into 1994.

Joe Kahn of Pest Check in West Chester, Pa., is “cautiously optimistic” in his outlook for business in the coming year. He asserts that the economy in the Northeast hasn’t yet recovered as much as other sections, and he says he’s encouraged by evidence of new construction in his area.

The federal government’s decision to close a slew of military installations across the country would seem to be a cause for misgivings, no so much because of the possible losses of pest control services at the bases themselves, but because of the “ripple effect” such shutdowns would have on the local economies in the areas involved. Nonetheless, Mark Roach, district manager of Dodson Brothers Exterminators, Charleston, S.C. (the location of a huge naval base slated to close), pointed out that these bases will be phased out gradually until 1996. “The overall impact of the closings will be slight, and besides, we have lots of other work not dependent on the military to keep us busy,” Roach said.

Tony de Jesus, pest control manager and spokesman for the New England Pest Control Co., Providence, R.I., has high hopes for business in 1994. In an area of the country that has been particularly hard hit by the economic downturn, he happily reports signs of a turnaround. The most visible indication is in construction of new homes - “which” de Jesus pointed out, “is bound to boost our residential business.”

ASSOCIATION’S OUTLOOK. Speaking on behalf of the Pest Control Operators of California, Executive Vice President Harvey Logan, although he admits he may be engaged in “wishful thinking, “ is looking for a perceptible business turnaround in the spring. He emphasizes that California PCOs are not expecting the gung-ho days of the 1980s in a state that was the last to feel the effects of the recession, and thus likely will also be the last to emerge from it. Says Loga: “Those PCOs in our area whose entire business was based on real estate transfers were really hurt. But the firms with the balanced pest control services have been OK.” On the issue of the scheduled closings of many California military installations, Logan said he believes the reality and impact of this turn of events has not yet set in.

NPCA Executive Vice President Harvey Gold looks upon 1994 as a year of caution for the industry. “From the standpoint of expansion, choice of products, the potential for a variety of legislation to possibly include FIFRA, and from taxes to health care, I see caution,” Gold said. As an interesting consequence of the violent weather that struck the country last year, he also sees the possibility of a more active 1994 pest season.

Sorting out and examining all the accumulated tea leaves leads a pest control prognosticator to conclude that prudent PCOs should weather 1994 in good economic shape. But this implies careful attention to every aspect of business management: sound accounting and recordkeeping, effective budgeting, vigorous selling efforts, cautious purchasing, sensible advertising and painstaking supervision and training. May good fortune smile on you.