[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
WHY ADD AN INTEREST RATE HIKE ON OUR
STRUGGLING SMALL MANUFACTURERS
=======================================================================
HEARING
Before the
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
WASHINGTON, DC
__________
APRIL 24, 2002
__________
Serial No. 107-54
__________
Printed for the use of the Committee on Small Business
U.S. GOVERNMENT PRINTING OFFICE
80-728 WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
COMMITTEE ON SMALL BUSINESS
DONALD MANZULLO, Illinois, Chairman
LARRY COMBEST, Texas NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado JUANITA MILLENDER-McDONALD,
ROSCOE G. BARTLETT, Maryland California
FRANK A. LoBIONDO, New Jersey DANNY K. DAVIS, Illinois
SUE W. KELLY, New York BILL PASCRELL, Jr., New Jersey
STEVE CHABOT, Ohio DONNA M. CHRISTENSEN, Virgin
PATRICK J. TOOMEY, Pennsylvania Islands
JIM DeMINT, South Carolina ROBERT A. BRADY, Pennsylvania
JOHN R. THUNE, South Dakota TOM UDALL, New Mexico
MICHAEL PENCE, Indiana STEPHANIE TUBBS JONES, Ohio
MIKE FERGUSON, New Jersey CHARLES A. GONZALEZ, Texas
DARRELL E. ISSA, California DAVID D. PHELPS, Illinois
SAM GRAVES, Missouri GRACE F. NAPOLITANO, California
EDWARD L. SCHROCK, Virginia BRIAN BAIRD, Washington
FELIX J. GRUCCI, Jr., New York MARK UDALL, Colorado
TODD W. AKIN, Missouri JAMES R. LANGEVIN, Rhode Island
SHELLEY MOORE CAPITO, West Virginia MIKE ROSS, Arkansas
BILL SHUSTER, Pennsylvania BRAD CARSON, Oklahoma
ANIBAL ACEVEDO-VILA, Puerto Rico
Doug Thomas, Staff Director
Phil Eskeland, Deputy Staff Director
Michael Day, Minority Staff Director
C O N T E N T S
Page
Hearing held on April 24, 2002................................... 1
Witnesses
Ferguson, Hon. Roger, Vice Chairman, Board of Governors of The
Federal Reserve Board, Washington, DC.......................... 3
Czinkota, Dr. Michael, Professor of International Business,
Georgetown University McDonough School of Business............. 21
Metz, Don, Owner/President, Metz Tool & Die, Representing the
National Tooling & Machining Association....................... 22
Fedor, Edward, President, MASCO Machine, Inc., Representing the
Association for Manufacturing Technology....................... 25
Habenicht, Howard, President/CFO, Vibro/Dynamics Corporation,
Representing the National Association of Manufacturers......... 27
Garretson, Sara, President, Industrial and Technology Assistance
Corporation.................................................... 28
Appendix
Opening statements:
Manzullo, Hon. Donald........................................ 39
Velazquez, Hon. Nydia........................................ 42
Millender-McDonald, Hon. Juanita............................. 44
Grucci, Hon. Felix........................................... 48
Prepared statements:
Ferguson, Hon. Roger......................................... 50
Czinkota, Dr. Michael........................................ 62
Metz, Don.................................................... 77
Fedor, Edward................................................ 82
Habenicht, Howard............................................ 91
Garretson, Sara.............................................. 100
Additional Information:
Submission by Donna Harman, Vice-President Congressional
Affairs, American Forest & Paper Association............... 104
Letter to Hon. Alan Greenspan from Chairman Manzullo......... 109
WHY ADD AN INTEREST RATE HIKE ON OUR STRUGGLING SMALL MANUFACTURERS?
----------
WEDNESDAY, APRIL 24, 2002
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:05 a.m. in Room
2360, Rayburn House Office Building, Hon. Donald Manzullo
presiding.
Chairman Manzullo. The Committee will come to order. We
will get started, Dr. Ferguson. If you could please have a
seat.
Good morning and welcome to this hearing of the Committee
on Small Business. I especially want to welcome those who have
come some distance to participate.
A little over a month ago I sent a letter to Federal
Reserve Board Chairman Alan Greenspan encouraging him to resist
interest rate hikes in the near future. I explained that an
important sector of our economy, namely small manufacturers,
were still in recession. I further encouraged him to look at
the state of the machine tool industry as a key indicator of
America's economic health.
It now appears, and I am pleased to observe that the
Federal Reserve will not raise interest rates at its next
meeting on May 7th. I do not know if it is in direct relation
to the letter we sent, but we certainly were beating the drums
that we have got a long way to go to recover.
Let me just raise a couple of things, raise eight factors
that I believe are extremely important. Before the Washington
Post had called Rockford, Illinois, which is my home city in
the center of our congressional district, a ``Barometer In The
Heartland.'' That was the headline of a 3-page story in the
Post's March 25, 2001 edition. The sub headline says ``Rockford
Holds Clues to Shifts in the U.S. Economic Climate.'' The
article notes the influence that Rockford's situation should
have with the Federal Reserve policy makers. Rockford was a
national predictor in the early 1980s when its unemployment led
the nation at 25.9 percent. More people were unemployed
proportionally in Rockford in 1980 than they were in the Great
Depression.
There are eight factors that are contributing to tough
times for small manufacturers, and those will be touched on
across the board today: stiff foreign competition that is
allowing for very thin margins, number one; number two, new
steel tariffs that are increasing the costs of American
production; three, an overvalued U.S. dollar making American
manufacturers less competitive; four, tighter credit standards
preventing small manufacturers from securing needed loans;
five, U.S. export controls and unilateral sanctions that limit
the ability of American companies to compete internationally;
six, increased productivity leaving many businesses overstaffed
and facing job cuts; seven, the heavy U.S. tax burden and how
it places American companies at competitive disadvantages; and
finally, eight, government regulations continuing to overburden
struggling American businesses.
We called this hearing several weeks ago because we don't
want to add a ninth factor to that. And that would be increased
costs of doing business through an increase in the interest
rate. So we are going to have a great hearing today. I look
forward to the testimony of all the witnesses. And I now yield
for an opening statement from our good friend and colleague,
the Ranking Member Ms. Velazquez of New York.
Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
When Americans think of small businesses the first image
that leaps to mind is the small manufacturer. The entrepreneur
takes raw materials and produces real, innovative products.
Small manufacturers still form the bedrock of our economy, and
they deserve our support.
Today we are examining the effects that a potential
interest rate hike by the Federal Reserve would have on more
than 35,000 small manufacturers in this country. I think
everyone here agrees that now is not the time for a Fed rate
hike. The economy is not growing fast enough to worry about
inflation. I am pleased to learn that Chairman Greenspan shares
this assessment.
Given that reality I believe that in addition to examining
the impact of a federal hike, it is important to assess the
long term and substantial barriers that small manufacturers
face. By focusing on these challenges today and implementing a
strategy toward overcoming these challenges, I am sure we can
do far more to help small manufacturers than the Fed can do to
harm them. Small manufacturers, even in an economic downturn,
are having a difficult time hiring skilled workers to get the
job done.
A long time has passed since Henry Ford reduced
manufacturing to an assembly line process that could employ
practically anyone regardless of skill or education. Today
manufacturers require a highly trained technical workforce.
Because the skill barrier is so high, often these manufacturers
are reduced to paying for worker training themselves only to
have them leave for bigger companies and better benefits. We
want to make it easier for small companies to pay for worker
training and to hold on to those employees they train.
In addition, we know that technical assistance can double
the success rate of small manufacturers. Programs such as the
Manufacturing Extension Partnership can bring small
manufacturers together with mentors and experts to increase
productivity and profitability. Unfortunately, the
Manufacturing Extension Partnership is another in a long list
of vital small business technical assistance initiatives facing
cuts under the President's budget proposal.
Another major concern to small manufacturers is access to
capital. Small manufacturers are not just worried about the
costs of capital, they are also worried about the supply. When
small manufacturers cannot get capital, they cannot buy new
equipment. Without new equipment their productivity falls and
so does their competitiveness. One obstacle blocking the path
to increased capital supply is the 7(a) Loan Program. The
recent budget proposal would cut this program in half, keeping
an additional $5 billion in capital out of the economy, capital
that could be financing new equipment and productivity. Instead
it sits in a ledger somewhere at the Treasury, in effect a
subsidy of the federal government by this country's small
businesses.
I look forward to the opportunity today to examine the
Fed's impact in addition to highlighting other issues and
challenges facing them. We are beginning the process of
examining the challenges facing small manufacturers, which are
the lifeblood of many communities across the country. I hope we
can learn more about what we can do to help them thrive.
Thank you, Mr. Chairman.
Chairman Manzullo. Thank you.
Our first witness, it is a real honor to have Dr. Ferguson
with us again today. Dr. Ferguson, I want to commend you for
the outstanding leadership that you lent to this country after
the horrible events on September 11th, in helping to spear up
the literally small group of people involved in the government
to pump liquidity in the markets to stop a panic. And I just do
not think that Americans realize the tremendous job and the
wisdom and the insight of what that literally handful of people
did in that time of crisis.
Dr. Ferguson holds two doctorates, and he is the Vice
Chairman of the Board of Governors of the Federal Reserve
System. And it is a real honor and pleasure to have you here
today.
Matthew, turn off the clock, we do not need that for Dr.
Ferguson.
I look forward to your testimony, and your entire statement
will be made part of the record. Thank you, sir.
STATEMENT OF HONORABLE ROGER W. FERGUSON, VICE CHAIRMAN, BOARD
OF GOVERNORS OF THE FEDERAL RESERVE BOARD, WASHINGTON, D.C.
Mr. Ferguson. Thank you very much, Mr. Chairman.
And let me also say it is a pleasure to appear before your
Committee this morning to update you on recent economic
developments and on the availability of credit to small
business. In doing so, I want to emphasize that I speak for
myself and not necessarily for the Federal Reserve.
When I met with your Committee almost one year ago, overall
economic activity had slowed noticeably after several years of
rapid expansion. What looked at the outset to be a gradual
cooling of an overheated economy became much more serious,
particularly in the manufacturing sector, for several reasons.
First, the shakeout in the high-tech sector proved to be not
simply an adjustment to slower domestic demand but a more
fundamental reassessment by businesses, globally, of the
profitability of additional fixed capital added to the already
high stock of such capital. Besides the plunge in demand for
high-tech products, our exports were hit hard by the slowdown
in economic growth abroad. Lastly, the shock to confidence and
spending in the wake of the tragic events of September 11
extended the weakness in the economy that had emerged over the
first half of the year.
As the economic slowdown unfolded during 2001, the Federal
Open Market Committee moved aggressively to counter the
weakening in economic activity and to limit the extent of the
downturn. In the event, I believe that monetary policy
substantially cushioned the negative forces weighing on the
economy. Homebuilding was visibly buoyed by lower mortgage
rates. At the same time, auto makers drew a record number of
new car buyers into showrooms by offering generous financing
deals. Indeed, in contrast to earlier economic contractions,
consumer spending held up remarkably well last year. The
favorable effects of lower interest rates on borrowing costs
and the boost to disposable income from the federal tax cuts
and falling energy prices largely offset the deterioration in
consumer confidence, the decline in wealth from lower equity
values, and the rise in unemployment.
Compared with the previous four downturns that we had
experienced since 1969, last year's downturn appears to have
been mild overall. However, it differed importantly in its
composition. Between the first and fourth quarters of last
year, real disposable income, real personal consumption
expenditures, and real outlays for residential construction
increased more rapidly than in the preceding four economic
downturns. In contrast, because of the particularly sharp
retrenchment in capital spending for high-tech equipment, firms
cut back their capital spending more extensively than was
typical of earlier business cycles. The inventory correction
was much more prompt, and as the cycle played out, it became a
more substantial drag on domestic production than had been the
case in earlier downturns.
Because the cutbacks in demand centered on goods, the
manufacturing sector was hit particularly hard. Indeed, the
contraction in manufacturing production began in the second
half of 2000, well before the cyclical peak in March of 2001,
when the inventory correction and retrenchment in capital
spending developed. And, though the recession in real GDP was
mild by historical standards, the cumulative drop of more than
7.5 percent in manufacturing industrial production from June
2000 through December 2001 was larger than the decline in any
of the previous four recessions. As a result, capacity
utilization in manufacturing dropped over that period to 73.1
percent in the fourth quarter of last year, 7\3/4\ percentage
points below its longer-run average.
On a more positive note, two other distinctive aspects of
last year's recession are important for the longer-run outlook.
The economy entered the recent slowdown, first, with a much
lower rate of inflation and, second, with a noticeably higher
rate of increase in productivity than during the other
recession episodes since the mid-1970s. In both cases, the
favorable performance has been well maintained into the first
part of this year and provides a solid basis for a return to
sustained no inflationary economic expansion.
As Chairman Greenspan reported in his testimony before the
Joint Economic Committee last week, prospects for a renewed
expansion have now brightened significantly. The economy
appears to have been expanding at a significant pace in recent
months. Household spending is holding up well, business
spending on new equipment appears to have firmed, and
preliminary data suggest that inventories are being drawn down
less rapidly than at the end of last year. Of course, I should
caution that at this early stage the degree of strengthening of
final demand, which is a key factor in shaping the contour of
the upturn, is still uncertain.
That said, our estimates of industrial production, which
were released last week, indicate that manufacturers have begun
to benefit form the pickup in the economy to date. Overall
industrial production began to increase again in January, and
the indexes for almost 60 percent of the individual series for
which we calculate production were by February above their
levels three months earlier. We estimated another broad-based
gain of \3/4\ percent in IP in March.
Of course, the cyclical recovery in the manufacturing
sector will be superimposed on the longer-run structural trends
in domestic goods production. Our manufacturers have over time
been a strong and steady source of advances in productivity,
and thus, the sector continues to be a significant contributor
to the nation's overall economic growth. At the same time,
because advances in manufacturing have required increasingly
less of our economic resources, they have implied a noticeable
secular decline in the share of jobs in the manufacturing
sector.
Furthermore, the increased globalization of goods
production and the competitive pressures that have ensued have
had additional consequences for the extent to which worldwide
demand for goods has been met by U.S. firms and their workers,
and those consequences have varied by industry.
Turning to issues more directly related to small
businesses, I want to begin by noting that the results of the
Federal Reserve Board's Survey of Small Business Finance had
just become available when I testified before your committee
last May. At that time, I discussed with you in broad terms our
findings regarding the use of credit and other financial
characteristics of small businesses.
As we have discussed before, the Survey of Small Business
Finances can be used to examine a range of issues, including
the study of specific groups of firms. This morning I would
like to draw on the results of the survey to focus on what they
tell us about small manufacturing firms.
According to our 1998 survey, about 8 percent of the more
than 5 million nonfarm, nonfinancial small businesses, that is
those with fewer than 500 employees, were manufacturing firms.
Those manufacturing firms were larger than other small
businesses: Both average employment and average receipts at
small manufacturing enterprises were about twice those at other
small businesses. As a result, small manufacturing firms
accounted for about 14 percent of small business employment and
around 17 percent of small business receipts.
Despite considerable structural change and consolidation in
the financial service sector and the increased accessibility to
capital markets by small businesses, commercial banks continued
to be the dominant provider of financial services to most non-
tech small businesses in 1998. These patterns were similar for
manufacturing and nonmanufacturing firms.
No doubt, the economic and financial environment has become
less conductive to risk-taking and leverage since the survey
was conducted in 1998. The economic slowdown of the past year
led to a deterioration of corporate profits and an acceleration
of bond defaults and loan delinquencies. As profits fell and
businesses revised down their expectations for sales and their
expansion plans, investors became less certain about the
returns they should expect on investments. The dramatic rise in
problem credits and the rapid pace at which we saw firms fall
from stellar ratings to bankruptcy also led investors to
reevaluate their views about the financial well-being of
businesses and their creditors.
Thus far, we have seen few signs of the types of financial
headwinds that in the early 1990s had played havoc with the
ability of many creditworthy small firms to roll over loans and
renew credit lines. Credit flows to businesses have fallen much
more modestly in the recent cycle, even as firms slashed their
investment in fixed capital and inventories. Moreover,
financial institutions have maintained their capital and
liquidity as delinquency rates of business and real estate
loans did not reach the highs witnessed in the earlier period.
As the Federal Reserve aggressively cut the federal funds
rate in 2001, borrowing rates for most businesses dropped
sharply despite persistently high risk spreads for lower-rated
firms. Low interest rates prompted investment-grade
nonfinancial corporations to issue a record volume of bonds,
and issuance continues to be strong this year. These firms used
the proceeds to strengthen their balance sheets by repaying
short-term debt, refinancing other long-term debt, and building
up liquid assets.
Though investors appeared cautious, non-investment-grade
companies were also able to raise funds: junk bond offerings
have accounted for about one-quarter of total public debt
issuance. At commercial banks, rates on business loans
declined, but loans at large banks fell sharply. In contrast,
loans at small banks, which make many loans to small
businesses, expanded moderately last year and have continued to
do so this year.
As you are aware, the Federal Reserve regularly surveys
senior lending officers around the country, principally at
large banks, but also at a selection of small banks. The
survey, which is administered quarterly, asks banks about their
credit terms and standards, loan demand, and other issues that
may be topical. During the market turmoil in late 1998 banks
began looking harder at the loans they made to large and
middle-market businesses. In each quarter over the past three
years, more banks reported having firmed their lending
standards than reported having eased their lending standards
for large and medium-sized borrowers. Not surprisingly, banks
have been particularly vigilant during the recent economic
downturn with 40 to 60 percent, on net, having tightened their
lending standards. Of particular relevance to this committee is
the fact that the net portion of banks that reported having
tightened their lending standards for small borrowers was about
10 percentage points below the net portion that reported having
tightened standards for larger borrowers.
The senior loan officer survey also questions banks about
why they tightened their lending standards. In 2001 banks
commonly cited uncertainty about the economic environment,
worsening industry-specific problems, and a reduced tolerance
for risk. The survey further questions banks about their
perception of borrower demand. In the most recent survey, about
one-half of the banks surveyed reported that the demand for
business credit continued to decline, a high fraction by
historical standards, but lower than the roughly three-fourths
that reported declining demand in the fourth quarter of last
year.
Banks attributed declines in loan demand to reductions in
planned investments and diminished financing for mergers. This
view held by bankers is confirmed by surveys of small
businesses. According to surveys conducted by the National
Federation of Independent Business in 2001, only about 12
percent of respondents on average thought that it was a good
time to expand, roughly half the percentage of a year earlier.
Few firms reported financing costs as a reason for believing
that expansions were not a good idea.
Indeed, since the beginning of 2001, NFIB respondents have
not viewed financial conditions as onerous. The percentage
reporting that they found credit more difficult to obtain has
remained moderate and well below the highs witnessed in
previous economic downturns. In addition, for creditworthy
small businesses, interest rates on bank loans have declined
with the easing in monetary policy. The average short-term
interest rate paid by NFIB respondents decreased about 3
percentage points to its lowest level in more than two decades.
Though we may take comfort from the lack of angst expressed
by small borrowers in the NFIB surveys as well as from the
lower loan interest rates, we must recognize that given the
tighter lending standards some small businesses have almost
certainly found credit difficult and more expensive to obtain.
Small manufacturing firms, in particular, may have faced tight
credit constraints, as their profitability fell sharply last
year and their business prospects became more clouded.
Indeed, such constraints are suggested by a recent survey
conducted by the National Association of Manufacturers, an
association whose membership is heavily weighted toward small
and middle-market manufacturing firms. The survey found that 2
percent of respondents though it was ``impossible'' to get
credit, a further 16 percent reported that it was ``much more
difficult'' to do so, and another 16 percent reported that it
was ``slightly more difficult'' to do so. Of those experiencing
difficulty in obtaining credit, 19 percent cited tougher credit
standards as the explanation. But nearly 40 percent of the
respondents cited a decline in profits and a slowing economy as
the explanation for experiencing difficulty in obtaining
credit.
However, I note that recent data from the Quarterly
Financial Reports of Manufacturing, Mining, and Trade Firms
show that outstanding bank loans to manufacturers with less
than $25 million in total assets actually increased moderately
in 2001. In contrast, bank loans to larger manufacturing firms
were falling.
Let me conclude and summarize by saying that obviously 2001
was a rough year for the economy. And given the nature of the
downturn it was particularly rough for the manufacturing
sector. Credit flows did slow, driven largely by the falloff in
the demand for funds as the economy softened and the reduced
pace of merger and acquisition activity. Overall, the
tightening in credit standards that occurred was principally a
response to the weak economy and declining profits, and thus it
reflected a prudent pulling back of lending.
The outlook, however, has brightened: Industrial output has
begun to turn up, and various surveys of business conditions
suggest that orders are increasing. These developments are
encouraging signs, but they are no guarantee that a sustained
solid expansion of final demand has gained traction, and we
will be monitoring economic developments closely in coming
months.
Accordingly, the assessment of the Federal Open Market
Committee at its most recent meeting was that the risks to the
outlook in the near term were balanced between economic
weakness and pressures on inflation. The committee kept the
federal funds rate at its current level of 1\3/4\ percent which
implies that monetary policy remains accommodative. The FOMC's
focus will remain on fostering a balanced, noninflationary
economic recovery. As you know, monetary policy works with one
instrument in a national money market. As a result, we cannot
and should not set policy with an eye to the outcome in a
particular sector of the economy. However, we believe that
promoting our longer-run objectives of maximum sustainable
economic growth and financial stability will produce an
environment in which the broadest range of businesses and
households will prosper.
Mr. Chairman, that concludes my opening remarks. And I am
pleased that you already noted that the entire statement will
be read into the record. So at this stage I am ready to answer
any questions.
[Mr. Ferguson's statement may be found in the appendix.]
Chairman Manzullo. Thank you very much, Doctor. And thank
you for that excellent testimony that was stated in terms that
non-economists such as myself could understand. I always
appreciate people that can take complicated issues and make it
easier to understand.
One of the issues here that I like to raise, and we talked
about it just before the Committee hearing today, and we sent
you testimony of the other witnesses, goes to the indicators
that the Federal Reserve is using. I do not know if you saw a
letter that we sent to Chairman Greenspan on March 20. You may
have but there----
Mr. Ferguson. Yes.
Chairman Manzullo. Are you familiar with the letter,
Doctor?
Mr. Ferguson. I am generally familiar with it. I am not
sure that I have all of it.
Chairman Manzullo. We have an extra here.
Matthew, why don't you take that to him.
Mr. Ferguson. Okay, I have it here. Thank you.
Chairman Manzullo. You have it there?
Mr. Ferguson. Yes.
Chairman Manzullo. Okay. Okay, thank you.
Doctor, on the last paragraph on the second page, we talked
about various dynamics going on. And then it concludes based
upon the fact that Rockford, Illinois, is the machine tool
center of the world. Rockford was settled by the Swedes about
130 years ago. They brought with them to Rockford the old world
craftsmanship of carving tools for making furniture, furniture
legs, and the lathing machines and things of that nature.
And then when steel took over from wood they took the
talents involved in making the tools to cut wood to tools to
cut steel, metal, different parts like that. And that is why
Rockford became known as the tool center, tool and die center
of the world. At one point it was known as the leading city in
the country for furniture manufacturing.
So we have that old world tradition of craftsmanship that
finds its way into cutting tools. And Rockford has a base of
about 32, 33 percent manufacturing which is double that of
every other city. And in that last paragraph, we encouraged
Chairman Greenspan and the Fed to use the monthly U.S. Machine
Tool Consumption Report that is released by the Association for
Manufacturing Technology and the American Machine Tool
Distributors Association as a key indicator of the overall
health of the economy.
Could you comment on that, Doctor?
Mr. Ferguson. Let me again say I will speak for myself. My
perspective on the way one should think about getting
indicators of the U.S. economy is to be very expansive and to
seek data, both quantitative data, data that come from
professional economists and models, etc., but also to think
about and seek data from a wide variety of businesses to
understand how the economy is functioning.
We have an economy that is $10 to $11 trillion. By
definition it is unlikely that any single indicator will give
you a complete picture of how such a large and complex economy
is functioning. And so I do think it is important for us to
reach out and choose a wide variety of data.
Indeed, we do that already to some extent. We have, as you
know, 12 Reserve Banks who have boards of directors and who
have active outreach efforts. And they, through the information
they provide to the Beige Book and through the information that
their presence provides when they come to FOMC meetings, give a
great deal of input for how it feels around different parts of
the country in this area.
Certainly we are also always interested in getting
anecdotal information of one form or another. And, indeed, I
personally have often encouraged the staff to look to various
sectors that might have some sort of capability to be a leading
indicator.
Chairman Manzullo. Predictor.
Mr. Ferguson. Predictor, as you have described it. And
there are a number that we should be examining closely. And
this one, since you have sent the letter to us, will obviously
be one of the things that we will look into and make an effort
to examine. And I think that, sir, is forthcoming and an
appropriate kind of response.
If this indicator turns out to have what accountants
describe as information value, then we need to understand that
more fully. Our staff has been aware of this indicator over
many years, and I suspect that we will now take a renewed
interest in understanding the value that it could provide in
understanding how the economy is likely to evolve over time.
Chairman Manzullo. We appreciate that. In defense of the
indicator, what is unique about the machine tool industry, Dr.
Ferguson, is the fact that if there is a decrease in orders for
the tools that go onto the machines that make the new or
improved products, it is my belief that that is the first,
actually that is the second sign. The first one I look to, is I
call our steel producers back home and the steel sellers and
say what is going on in machine tool sales. It is a high
specialty steel. We worked and were successful in getting that
exempt from the new tariffs. And the first indicator of a box
that there is slowdown in the sale of steel that is used for
making the machine tools, then that is how this Congressman
judges the economy.
And that is exactly what happened in the spring of 2000
when the Fed raised the interest rate for the last time. I
believe was it May or June?
Mr. Ferguson. Yes.
Chairman Manzullo. Was it June, Doctor?
Mr. Ferguson. It was June. It was mid-year.
Chairman Manzullo. It was in June. And we had sent a letter
to Dr. Greenspan a couple months before then, saying please be
very careful what you are doing because this indicator is
showing up on our radar screen based on just a couple of phone
calls that I made from my office.
So I am just thrilled that the Fed is going to take a look
at that index. I look forward to working with you on a formal
or informal basis. I would invite you to come to our
Congressional District, meet with the small manufacturers, get
a feel for what they are doing, some hands-on. Get some machine
oil on your hands if that has not happened in your career. And
then the heartbeat of America happens with this very select
group of people that I believe is the best indicator of what is
happening in manufacturing.
Mr. Ferguson. Well, personally I do enjoy spending a great
deal of time--I go out and give speeches and have done other
things. And I was not in fact in Rockford, but I know where it
is. I have been to other parts of Illinois, spent a fair amount
of time, two days actually with a farmer in Logan County,
Illinois, which as you know is incredibly rich in deep topsoil.
And I found that very impressive. And I am sure an opportunity
to visit in Rockford and understand more about machine tools
and, what that life is like would also be beneficial and
educational.
Chairman Manzullo. Well, take this as a formal invitation.
We will reduce that to writing.
Mr. Ferguson. Fine.
Chairman Manzullo. Thank you, Doctor.
Ms. Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman. And thank you, Dr.
Ferguson, for your insightful presentation.
When we talk to small businesses in our nation and we ask
them what is the top priority for them, they talk about access
to capital. And in the current economic climate, Mr. Ferguson,
small businesses are having difficulty in obtaining financing.
And you touch on that in your presentation.
I would like to ask you, which do you think will have a
greater impact on small manufacturers' access to capital, a 25
basis point increase in the federal funds rate, or cutting by
50 percent the capacity of the SBA 7(a) Program, loan program,
as is proposed by the Administration's fiscal year 2003 budget?
Mr. Ferguson. Well, you have managed to put into a question
areas that I cannot predict and areas in which I am not an
expert. And so, with all due respect, I know these are
important issues, but I am not an expert on the SBA program. I
know the importance of it. In fact, in the reports that we
present every five years on small business we do occasionally
have a paragraph about SBA. But I am really not in a position
to give you the tradeoff of the two things that you just talked
about.
Ms. Velazquez. But, Mr. Ferguson, you do not need to be an
expert on the loan programs of SBA. What I am asking you is,
what do you think would be more harmful to small businesses, an
interest rate increase or taking away $5 billion that would
allow small businesses to access capital?
Mr. Ferguson. Well, you are trying to draw me into a
discussion about fiscal policy because the decisions of where
taxpayers' money are being spent are ultimately fiscal policy.
And as you well know, the Federal Reserve does not and I
personally never comment on fiscal policy.
I will say by definition----
Ms. Velazquez. I understand. It's okay.
Mr. Ferguson [continuing]. That fiscal policy requires----
Ms. Velazquez. I am not trying to put you in a difficult
position here.
Mr. Ferguson. Okay.
Ms. Velazquez. I am just, asking you for a common sense
answer to my question.
Small manufacturers are much more dependent on long-term
interest rates because of their need for longer term loans to
purchase equipment and other fixed assets. Yet Chairman
Greenspan and former Treasury Secretary Robert Rubin have
emphasized that long-term interest rates have failed to follow
short-term rates because of market nervousness over the
government's long-term fiscal position.
So I ask you now that the administration has spent all of
the surplus and will soon be back in deficit spending; How will
long-term interest rates be affected?
Mr. Ferguson. One of the issues and challenges in economics
is indeed to understand the forces that drive long-term
interest rates. And the econometric evidence--the research--
suggests that long-term interest rates reflect a wide variety
of factors. In some cases it is supply and demand for the bonds
that are sold that have a long maturity, and so you get special
supply and demand influences. In some cases it is expectations
about future policies of one sort or another. In some cases one
sees what economists call an inflation concern, inflation
threat. There are a number of things that go into determining
long-term interest rates. And it is very hard, I have
discovered, professionally to sort of parse out how those
things all come together at any one point to determine what
long-term interest rates will be.
Ms. Velazquez. But among those factors we can consider too
deficit spending?
Mr. Ferguson. Well, I think perspectives about the future
of policy broadly, both monetary and fiscal policy, play into
issues of long-term interest rates, certainly.
Ms. Velazquez. Dr. Ferguson, as the economy slowly recovers
from the recession, how long do you anticipate it will take for
banks to ease their lending standard towards small businesses?
Are there policies that the Fed can pursue to improve the
situation?
Mr. Ferguson. Well, I think the role that we can play as
supervisor of banks is to encourage banks to continue to focus
on the creditworthy and creditworthiness of their
counterparties. And I think as I have said in my statement, one
of the reasons that I believe banks have tightened to some
degree their terms and conditions has to do with perceptions
about creditworthiness and also has to do with perceptions
about the strength of the economy.
And I would presume that as the economy turns, banks will
exercise reasonable and prudent judgment, which I think they
have been doing, and reflect appropriately those changes. And
beyond that, I think there is nothing more that we can
encourage them to do other than to exercise reasonable and
prudent judgment and to reflect, analyze, and understand
creditworthiness and the economic outlook as best they can and
take all of that into consideration in determining terms and
conditions for loans.
Ms. Velazquez. Thank you.
Chairman Manzullo. Congressman Davis.
Mr. Davis. Thank you very much, Mr. Chairman.
Dr. Ferguson, let me just indicate that I appreciate your
testimony and the insightful information that you have provided
us with in terms of direction.
I want to ask, given increases in technology; Do you see a
relationship between those increases and the ability of small
manufacturers to survive and thrive and do well in this
economy?
Mr. Ferguson. Let me first talk about the role of small
business in the U.S. economy by way of giving your answer.
As you know, small businesses account for about half the
private nonfarm gross product in the U.S. Small businesses
employ about half the private sector workers. Small businesses
provide about three-quarters of net new jobs each year, or did
between 1990 and 1995 based on some Commerce Department
information. The reason I say that is that even as our economy
has changed and evolved, small businesses have been and
continue to be an important part of the economy.
To answer your question more directly, I believe even in a
world in which technology and increased productivity are an
important part of the positive benefits that we have
experienced, small businesses can and indeed will compete
successfully. For two reasons I believe that to be the case:
first, we have seen that the costs of technologies, basic
computers for example, hook-ups to the Internet, building a
website with the appropriate kind of security, etc., all of
that has actually quite rapidly been coming down, making those
kind of investments available to small and medium size
enterprises as well as to large enterprises. And I see no
reason why a well-managed small business cannot participate in
some of these productivity enhancements as much as a large
institution can.
The challenge, obviously, is that one of the impacts of
this investment in technology is it requires restructuring, for
example, in order to get the full benefits. And by definition
for many small businesses, opportunities to restructure may not
be as big as for some large businesses. And so they can make
the investments in technology. Their ability to get the full
benefit may vary depending on the management skill of the
individuals involved.
So I think I would continue to be optimistic that small
businesses, which have been an important part of the U.S.
economy, can continue to be an important part of the U.S.
economy even as the economy itself changes, evolves, and
becomes more heavily dependent on these new areas of technology
because the costs of buying that technology, putting it into
place in the small and medium size enterprise is becoming more
and more manageable over time. It is not something that only
the big can afford to do.
Mr. Davis. During the past, oh, three, four, five decades
we have seen a tremendous decline in manufacturing in large
urban areas. Do you see that have an impact on the overall
economy? And do you see any way for us to reclaim some of that
activity in big urban centers?
Mr. Ferguson. One of the big things that I think has been
driving decisions about the location of business has to do with
the education of the workforce, and the second is I think the
infrastructure, particularly the kinds of infrastructure that
are required to make an area compatible with the high-tech
kinds of investments that we were just discussing.
And certainly from a longer-term perspective, cities offer
the potential to be very attractive. Cities have emerged out of
economic history because of a natural desire for people to come
together in certain locations and trade and do commerce with
each other, and it is quite efficient to do that in a smaller
area as opposed to a larger area. So the entire field of urban
economics has theories of cities arising because they become
natural gathering points or recognize natural gathering points
of individuals who want to engage in commerce.
I think the challenge now has very much to do with creating
an environment of a solid, well-educated workforce that is in
cities, and adding to that the kinds of infrastructure
investments that will make cities again attractive places to
site particularly the more high-tech kinds of businesses that
are an important part of what has made the U.S. economy so
strong.
And so I would argue that one can be, while recognizing the
difficulties that a number of cities have faced over the last
generation or two, and I grew up here in Washington, DC, and I
have seen things change here, there is some reason to be
cautiously hopeful that a well-managed city that focuses on
education and that focuses on infrastructure can succeed in
bringing businesses back to the city.
And, indeed, one can look at Washington, DC. I do not have
off the top of my head the statistics about businesses in
Washington, but I do know, having lived here, having grown up
here, and now again living here, that the city appears to be
enjoying a certain amount of resurgence indicating that,
indeed, a well-managed city can bring businesses back into the
city and can indeed bring households back into the city and
have the population start to rise again and bring in
individuals who have the kind of entrepreneurial spirit that
can take advantage of a well-educated workforce and also the
kinds of technology investments.
So there is some possibility that the declines that we have
seen in cities could possibly be reversed with the kinds of
investments in what is called human capital and also actual
physical capital.
Mr. Davis. Thank you very much.
Mr. Ferguson. Thank you.
Mr. Davis. Mr. Chairman, education is as much of a factor
as much of the other factors.
Mr. Ferguson. That is certainly my personal belief.
Chairman Manzullo. Thank you.
Congressman Bartlett.
Mr. Bartlett. Thank you very much. I am sorry I could not
be here for your testimony. We had a mark-up in the Morale,
Welfare and Recreation Panel, important to our military people.
When interest rates go up, and I was in another life a
small business person, when interest rates go up obviously that
increases the cost of doing business. If interest rates were to
go down, all of the things remaining equal, your profits would
go up. So if interest rates go up, profits then go down.
Now, if you are a startup company and have no profits and
there is an increase in interest rates that may simply mean
that you no longer qualify for the capital that you must have
to continue your business.
I have a generic concern about what interest rates do to
our small business community. But I have a very specific
concern about women-owned small businesses. As you know, women-
owned small businesses are growing at twice the rate of male-
owned small businesses. And they have, and this surprises many
people, they have a lower bankruptcy failure rate than male-
owned small businesses. In spite of that very good track
record, availability of capital is a very serious problem for
women-owned small businesses.
My concern is that as our small businesses get squeezed
with increasing interest rates, how are we going to make sure
that our women-owned small businesses are not squeezed more
than male- owned small businesses. Because of the present, and
I am afraid for the moment at least, continuing attitude of the
lending community that women are not as good a risk as men in
terms of managing businesses, when in fact the record shows
that they have a lower bankruptcy failure rate than their male
counterparts. Can you comment, please?
Mr. Ferguson. There are a couple of comments that one would
make. First, as you well know, there are a number of laws on
the books that outlaw discrimination of any sort in extending
credit. And I think it is quite important for those who are
responsible to make sure that those laws are fully enforced.
I would raise a second issue because I think you have
touched on a very important topic, which has to do with what I
would describe as financial literacy. And the point that you
have made that I find so telling is that financial literacy we
often think of as having to do with individuals and households
and high school students, etc., but it is equally important for
bankers to understand the credit risk of their counterparties
and to judge credit extensions based on a fact-based analysis,
not based on any unusual agenda or color or things that are
inappropriate.
And so I think raising the degree of awareness, as you have
just done with the facts that you have brought forth, is very,
very useful. So I sense that indeed just having honest
discussions of this sort about the characteristics of small
businesses, what one can say about profit, profitability,
creditworthiness, etc., all of those factors should come into
play.
But when all is said and done a good banker, exercising
what I describe as basic banking skills, will understand well
the creditworthiness of counterparties, price the risk
appropriately, deliver the appropriate amount of capital, and
should be able to overcome some of the concerns that you have
just talked about. And our job in part, back to an earlier
question, is to encourage bankers to be responsible, to be
prudent, to exercise basic banking judgments. And if they do
that they ought to be able to sort out the creditworthiness of
their various sorts of applicants and make the right kind of
decision.
Mr. Bartlett. Mr. Chairman, I would like to suggest that
perhaps the best thing that Congress can do to help small
business is to reduce the size of government and spend less
money, which means we need to borrow less money, so therefore
we compete less in the marketplace for borrowing money, and
that will drop interest rates. I think there is probably
nothing else that we could do that would be so helpful to our
small businesses as reducing the amount of money which we
spend.
Chairman Manzullo. You don't expect a comment on fiscal
policy from Dr. Ferguson on that, do you?
Mr. Ferguson. I think that comment was addressed to his
Committee, his fellow Committee members.
Chairman Manzullo. That is correct. That is correct.
Congresswoman Millender-McDonald.
Ms. Millender-McDonald. Thank you, Mr. Chairman, and
Ranking Member. Thank you so much for this very insightful
presentation by Mr. Ferguson.
And, Mr. Ferguson, your testimony was quite impressive. I
want to go back to what you mentioned to my friend on the other
side there in stating that bankers should be cognizant of their
lending partner, for lack of how you described that. Have you
talked with bankers so that they will be sensitive to, i.e.
women-owned businesses that are really the growing businesses
in this country, and whether or not they subscribe to what you
have just said in terms of making sure that they recognize
their partner? Have you talked with bankers about this?
Mr. Ferguson. I talk to bankers quite frequently in large
groups and small groups. And, indeed, in almost all the
speeches that I give I do talk about the importance of what I
have described as basic banking skills, which includes making
creditworthy judgments.
We should be clear. I want to take a step back because I
want to bring some science, if you will, some economic science
to this discussion I have just had with the two of you. There
have been a number of economists who have looked at lending,
lending behavior, particularly with respect to small
businesses. And overall the evidence on the question of
discrimination with respect to lending to small businesses is
what economists describe as ambiguous, which is to say it is
really hard in the data to find concrete, consistent support
for the comments that have just been made about discrimination
in lending.
So you should be aware that economic scientists have been
sensitive to the issue, have been looking at this over many,
many years going back to when I was in school and certainly
probably even before, and the results are, as I say, quite
ambiguous. And that suggests obviously some ongoing vigilance
and enforcement of laws. That's important.
Ms. Millender-McDonald. Why has it been ambiguous?
Mr. Ferguson. Well, I think the reason that it has been
ambiguous is, first, depending on how you cut the data there
may or may not be evidence of differences in prices. While I
recognize that there are people that feel quite strongly that
that is the case, if one looks at large panels of data, it
doesn't always show up as quickly, as clearly as one might
like.
The second is that one has to really control for all the
factors that a bank can appropriately take into consideration
in making a loan. And, indeed, particularly in the world of
small businesses, as you well know, they come on the scene
quickly, and have a relatively large demise as well. So it is
often hard looking at a small business to have a strong sense
of how viable it is going to be. And that is a legitimate
question for a banker to take into consideration. But it is
very hard for an economist after the fact to determine what the
banker might have seen at the time that the credit decision was
being made.
And then we also discover, for example, that a number of
small businesses avoid applying for credit just as a general
matter. And it turns out that minority- and female-owned
businesses are more likely to avoid applying for credit. And
you cannot tell quite what----
Ms. Millender-McDonald. And why is that? And why is that,
sir?
Mr. Ferguson. Well, that is the point, we cannot tell quite
why that is the case. We do not know----
Ms. Millender-McDonald. And that is why----
Mr. Ferguson [continuing]. We do not know if it is out of
anxiety about the concerns that you have just raised or if
there are some other perfectly legitimate reasons why they
might be avoiding it.
Now, let me get back to this. Recognizing this deep
ambiguity that exists in the science, I think it is our job to
continue to raise the importance of enforcing laws that are
currently on the books. It is our job, I think, to remind banks
of the appropriate basic business skills, to look at
creditworthiness. I think it is frankly the job, as you have
done, to ask people about this, to keep this as an important
topic so that we can continue to try to make inroads and make
sure that the credit is extended based on the right kinds of
criteria.
So the fact that the science has not yet proven it does not
mean that we shouldn't continue to encourage the right kinds of
behavior, and that certainly means that we should continue to
vigorously enforce the laws that are currently on the books.
Ms. Millender-McDonald. It seems to me like the ambiguity
that you have just mentioned certainly should be of some
concern to the Federal Reserve or at least speak to the banking
industry as to why is it that women and minorities are not
rushing to trying to find or trying to seek those loans. And as
you said about the control of the data that makes it ambiguous,
that is another concern that I have. But that is another time I
suppose because I wanted to ask you some more questions here.
Mr. Ferguson. Let me respond to another point you have
made. One of the other things that the Federal Reserve does is
that we have very active community development activities
around the country run by our various Reserve Banks. One of the
goals there, one of the things that does emerge in those
activities, and again we are not trying to allocate capital but
raise the degree of conversation if you will, is to help
bankers understand how to think about lending in a variety of
different sorts of communities. And so, you know, we clearly at
our Reserve Bank level have active programs again enforcing
laws that are currently on the books but thinking through
questions of community development. And one of those questions
obviously has to do with do bankers fully understand how to
look at and work with a variety of different types of
borrowers?
So I would say that the fact that the data have not been
clear on this has not in any sense stopped us, either through
comments that we make, through the enforcement of the law, or
through the active behaviors of our 12 Reserve Banks, from
focusing in on the kinds of issues that you are currently
raising.
Ms. Millender-McDonald. Mr. Chairman, I have just got to
ask Mr. Ferguson. You laid out some data here when my colleague
spoke with you, and you spoke about that data in rounds of
small businesses. Now, do we differentiate between small
businesses and small manufacturers? Aren't we talking about
manufacturers today as opposed to small businesses or are they
all encompassing? Because your data, as I heard, was strictly
on small businesses and the notion why this interest rate is
proposed, increased interest rate.
Mr. Ferguson. I am not discussing specifically interest
rates. But the testimony itself attempted to parse out data
where we know about small manufacturers versus small
businesses. So we have worked hard to try to do that.
Now, one of the points I did make in the testimony is that
the nature of this downturn that we experienced last year was
unusual for a number of reasons but it hit the manufacturing
sector particularly hard. And I think, as I have said in the
testimony----
Ms. Millender-McDonald. Of course it did.
Mr. Ferguson [continuing]. That is an important background
fact to have as one thinks about credit, credit extension,
creditworthiness, is that indeed manufacturing then, small
manufacturing----
Ms. Millender-McDonald. Of course, yes.
Mr. Ferguson [continuing]. Was uniquely influenced by the
slowdown last year.
Ms. Millender-McDonald. And this is the climate by which
you increase interest rates as opposed to not, given that type
of scenario you have just outlined?
Mr. Ferguson. I think the Chairman wants to say something.
Yes, sir?
Chairman Manzullo. Well, I would like to get Congressman
Phelps, make sure his questions are in, and then perhaps we
might have one or two other questions and wrap up. Okay, but
thank you, sir. Before you leave, it is obvious that Dr.
Ferguson is open to all types of data, studies, measurements,
etc. And if you come across in your journeys a specific type of
indicator, bring it to my attention and Ms. Velazquez. We would
love to work with you and send a letter to Dr. Ferguson because
he looks at it. Anything that we send him they take a look at.
Thank you.
Ms. Millender-McDonald. I would do just that, Mr. Chairman.
I do have a statement for the record. Thank you.
[Ms. Millender-McDonald's statement may be found in the
appendix.]
Chairman Manzullo. That will be made part of the record.
Congressman Phelps.
Mr. Phelps. Thank you, Mr. Chairman.
Dr. Ferguson, thank you for your valuable input. Just to
follow up on one of the themes. And maybe you stated this. I
came in a little bit after the middle of your statement, and I
have not read it all. Why do you think the recent recession had
a disproportionate impact on the manufactured goods rather than
other sectors of our economy?
Mr. Ferguson. I think that in the nature of the downturn
last year, the slowdown last year, two things occurred. First,
early on in this process of adjustment, I think businesses
decided that the outlook in terms of sales was not as
optimistic as they had originally thought. And, therefore, they
decided they wanted to reduce their inventory. Well, by
definition, inventory is goods, it is not services. We don't
have inventories of services, it is goods. And because it is
goods it tends to be by definition manufacturing that
ultimately feels the brunt of a decision by any business to
reduce inventory.
The second thing that made last year's downturn unusual was
that it followed a period of very rapid investment,
particularly in high-tech capabilities, in communication
equipment, computation equipment, etc. And, again, what we saw
was quite a change in investment appetite for businesses so
that high-tech manufacturers, not just manufacturers in general
but high-tech manufacturers, were heavily influenced by last
year's slowdown.
And so I think the reason that manufacturers were
disproportionately influenced by the slowdown has everything to
do with the nature of the slowdown being focused on inventory
and inventory adjustments and also relatively dramatic changes
in investment and investment intent by businesses.
Mr. Phelps. Thank you. Just as something I have run across,
and it is not a question, just a comment. Many of the smallest
of the small businesses I have found, especially in small rural
areas where I represent largely, do not really even attempt to
access capital through the banking systems because they are so
small that many times of course the SBA with their minimal
$50,000 program, so many of these businesses return their own
profit back into the business and circulate that sort of
activity to operate.
So I am not sure we have a system or could how we monitor
those types of the smallest of the small businesses that are
not even participating in the banking activity but yet create
two or three or four jobs there or are self-employed for the
most part, pay their own health insurance. Those are steaming,
they contribute to the economy also. But yet, I do not even
know how we try to deal with them. And I have sat down with
many of them in their own little mom and pop shops that really
contribute to the economy in many invisible ways. And I am not
sure how we could ever get a handle, but they tell me the
reason; my point is they tell me they don't try to access
capital because many of them are right on the margin of growing
to another level but what they would anticipate in that profit
and what they would have to pay in interest rates even at the
very lowest just does not make it worthwhile.
That's a unique phenomena.
Mr. Ferguson. It is unique. There is nothing much I can add
but you are absolutely right. The range of things that we
describe as small businesses include some that are really, for
lack of a better word, microenterprises and extremely small.
Mr. Phelps. Right.
Mr. Ferguson. Many of them as I have thought about this and
looked into it are self-financed from their own cash flow or
from relatives and friends, etc., and are not big enough or do
not feel the need to try to find capital by going into the
banking system.
Mr. Phelps. Which says something for the management skills
at the same time. If all of us were that good, we probably
would not need the banks then we would have another problem,
wouldn't we.
Thank you very much.
Mr. Ferguson. Thank you.
Chairman Manzullo. I am going to exercise my prerogative as
Chairman and ask a concluding question.
Doctor, we, several months ago we had a roundtable
discussion with small business people that are concerned about
the lack of credit. And we discovered an interesting phenomenon
going on, and that is that the small business people, who are
really the entrepreneurs of the world, are financing their
business operations on credit cards, on introductory rates of
.9 percent for three months or six months, then they roll it
over to the next one, pay it off. And it was some phenomenal
testimony as to this unique system of financing which works all
the time because of the abundance of credit cards.
Is there any indicator that exists as to the amount of
credit card debt that would be attributed to entrepreneurs
getting capital at very low prices?
Mr. Ferguson. Well, as I said, we do these surveys of small
business finance, and that survey does have some information on
it with respect to types of external financing services used,
as that is called.
Chairman Manzullo. External financing?
Mr. Ferguson. Right. And that includes checking accounts.
It includes credit cards, as you just talked about. It includes
loans of one sort or another. So, indeed, as we go out and do
the surveys, we do try to track the kind of information that
you have just talked about.
If one looks at the sort of periodic information on credit
cards, there is obviously more frequent information on cards,
but the ability to tell from the sort of the week to week
information about credit outstanding, how much of revolving
credit, which is credit card credit, is being used for small
business purposes versus individuals, that is hard to say.
So our survey data is the place where we find most of the
information on credit cards. And we take those surveys
periodically and then that is the best information we have.
Chairman Manzullo. Thank you very much. Again, I want to
thank you on behalf of the Full Committee for your taking the
time to be with us this morning and look forward to working
with you and look forward to hosting you in Rockford, Illinois,
where we can show you the sweet smell of machine oil.
Thank you, Dr. Ferguson.
Mr. Ferguson. I am looking forward to it. Thank you.
Chairman Manzullo. Appreciate it. Thank you.
The second panel is here. And I would like Congressman
Davis to introduce a constituent of his, who is with us today.
Mr. Davis. Thank you very much, Mr. Chairman, and Ranking
Member Velazquez. It is my pleasure to present to the Committee
Mr. Howard Habenicht, who is President and CEO of Vibro/
Dynamics in Broadview, Illinois. Of course Vibro/Dynamics,
which was established in 1964, manufactures vibration isolation
devices and other machinery, installation systems for metal
forming, metal cutting, forging, can making, die casting,
plastics, woodworking, and textile industries.
It is a delightfully small community where his plant and
facility are located. They are a thriving industrial-based
community. And we are just delighted that he is able to be here
today representing the National Manufacturing Association.
Welcome and thank you so much.
Chairman Manzullo. Okay. The first witness will be Dr.
Michael Czinkota. Your name is Polish, mine is Italian, all
right? I will do the best I can on these names. I appreciate
that, Matt, but my gosh. We could call you Dr. Smith. I mean
that would make it a lot easier.
Dr. Czinkota is professor of international business at
Georgetown University, McDonough School of Business in
Washington, D.C. And he has been a special advisor to a project
that we have been working on ever since we got it back from
China called America's Jobs First, sitting in on meeting after
meeting making sure that we stay on course in order to increase
America's exports.
Dr. Czinkota, look forward to your testimony. We have the
red light here. When it gets to yellow, that is one minute to
go. When it gets to red, that means time to conclude. So we
would appreciate if you could follow that. Look forward to your
testimony.
The complete statements of all the witnesses will be made
part of the record.
If you could pull the mike a little bit closer to you,
Doctor, I think it would be a lot easier to hear. Thank you.
STATEMENT OF MICHAEL CZINKOTA, PH.D., PROFESSOR OF
INTERNATIONAL BUSINESS, GEORGETOWN UNIVERSITY McDONOUGH SCHOOL
OF BUSINESS, WASHINGTON, D.C.
Mr. Czinkota. Thank you very much, Chairman Manzullo,
distinguished members of this Committee. I appreciate your
inviting me to testify here today on U.S. exporters in the
global market place. I base my comments on the more than two
decades that our international marketing team at Georgetown
University has systematically tracked the activities of
international firms.
The news for the U.S. trade position and for small to
medium size U.S. exporters is not good. Large trade deficits,
which in 2001 reached $426 billion for trade and goods, are
unsustainable in the long run. That makes it increasingly
critical to achieve an export performance that matches and
exceeds our imports.
Exports are also an important contributor to national
employment. Over eight million jobs are sustained by the
exports of manufactured goods. In Illinois alone, for example,
more than 360,000 jobs are linked to exports.
U.S. exporters are vulnerable in their export performance
and expansion. Small and midsize U.S. manufacturers encounter
four major problem areas: financial issues, supply chain
management, regulatory issues, and market contact difficulties.
On the financial side, international transactions are more
costly than domestic ones. This is due to the time lag between
shipping and payment receipts as well as to the need to offer
credit to buyers. At the same time as they need more funding,
our exporters are encountering a tighter credit market and the
threat of higher interest rates.
Unlike larger firms, our smaller companies cannot boast of
access to global capital markets. Their transactions are too
small and their collateral processes are too limited. As Mr.
Ferguson already has stated, typically they are reliant on
local financing alternatives, and therefore they suffer from
local interest rate inefficiencies.
Exchange rate changes also make smaller manufacturers
vulnerable since they are not prepared to adjust to such shifts
by serving new markets. The low value of the European currency,
the euro, makes it easy for importers but tough for exporters
to compete. Please consider that there is an increasing
commoditization of goods where price is the decisive criterion
in getting the order. Any upward swing in price, be it due to
exchange rate changes or interest rate shifts, even if
seemingly minor, can have a major effect on a firm's
performance abroad.
Government regulations, such as export controls and customs
rules, often extract a high price of compliance from smaller
size firms.
Firms are also exposed to a double-whammy from trade
policy. For example, in the steel case, many of our smaller
firms must now pay higher prices for their steel-based input
while at the same time their export efforts are exposed to
retaliatory action by trading partners.
Due to the threat of terrorism, our firms also need to be
much more vigilant in their supply chain management. Security
measures require them to redesign their just-in-time systems.
Higher transportation and insurance costs force them to revamp
their way of transporting supplies and bringing them to market.
All these shifts make it difficult for firms to compete
abroad. It bears remembering that any firm that newly enters an
international market must not only match but must by far exceed
the capability of the local competition in order to be
successful. We need to provide our firms with a stable
financial environment both domestically and internationally.
Low interest rates empower our firms. A responsible relaxation
of some of the stringent credit criteria would also be of help,
as would encouragement and support of marketing and
distribution based investments. Unless our firms can make such
investments into the international presence and processes, they
will not compete successfully.
We need to have more work done on generating data-driven
insights so that we know which policies help and which ones
hinder the performance of firms. The development of a
globalization index which measures the extent to which
countries are linked to the world could be of major use to
firms. Increased collaboration of federal agencies with trade
and professional organizations is also important in supporting
the tough tasks that our exporters face.
Overall our smaller size manufacturers still have many
hurdles to overcome on the way to increased exports. They need
to be able to fight and win the battles of competition in the
international marketplace.
On the policy side we need to ensure that our firms have a
strong, healthy, and competitive platform from which to launch
their international ventures. After all, economic performance
and success are the key foundation to our global position and
our national security.
Thank you for your attention.
[Mr. Czinkota's statement may be found in the appendix.]
Chairman Manzullo. Thank you.
Our next witness, it is my pleasure to introduce is my
constituent. Don Metz is Vice President of Metz Tool and Die
Works in Rockford, Illinois. And Don and I have known each
other for a long period of time. He represents the old world
manufacturing base that I referred to, but I left out the fact
that it is not only the Swedes that settled the area, but it is
the Germans.
Mr. Metz. That is right.
Chairman Manzullo. With their high-technology and the
families going back for different generations.
Don has worked with us. And I don't know how many
government people that he has met in efforts to expand his
horizons and to keep the shop profitable, keep the people
employed. And, Don, we are honored you came all the way from
Rockford, Illinois, to testify to us today. We look forward to
your testimony.
STATEMENT OF DON METZ, OWNER/PRESIDENT, METZ TOOL & DIE,
ROCKFORD, ILLINOIS
Mr. Metz. Thank you.
Good morning. Good morning to all of you, Mr. Chairman,
members of the Committee. I am here today to represent and
testify to you on behalf of the National Tool and Machining
Association and our 2,500 members spread across this nation. I
want to talk to you for just a few moments about the negative
impact that raising interest rates would have on our industry.
It was June of 1976, and I was introducing President Ford
to a meeting of the National Tool and Machining Association in
Illinois. And that night, the country was gripped in a
recession, and these people were despondent, discouraged, and a
little bit fearful. And President Ford stepped to the
microphone in front of that group and he said, ``I am
absolutely convinced that this country, because of its people,
because of its structure of government, because of the policies
we pursue, will meet and conquer this challenge.''
Well, the challenges for Metz Tool & Die began 55 years ago
when my parents, Jim and Betty Metz, left their family-owned
farms on the Missouri-Arkansas line to come to northern
Illinois to seek their version of the American dream. They were
armed simply with a faith in God, a willingness to sacrifice,
and a belief that hard work would pay dividends. My dad started
as an apprenticeship mold maker, and the Swedish and Italian
mold makers were his role models. And after years of hard work
and working two jobs and saving his money, he opened the first
Metz Tool & Die in the garage behind our house.
I joined the workforce at the age of six and worked for 40
cents an hour. And believe me, I was overpaid. But as time
went, with loyal customers, fair competition, and dedicated
workers, the next 40 years brought prosperity and expansion to
that industry and to that business.
But mold making is a business of precision machining. And
if you ask; what is a mold maker? A mold maker is a sculptor.
He is the artist in steel. He is the visionary that takes your
dreams of a new product and turns it into reality. Mold making
is everything that is mass-produced, from the first rattle you
shake as a baby to the decorative hardware on your casket when
you are laid to rest, begins in our industry.
And our industry meant more to me than just a business. My
son, Matthew Metz, only lived 16 years. And those 16 years were
spent in a wheelchair because he had Duchenne's muscular
dystrophy which is, of course, the disease Jerry Lewis does a
telethon for. Now, in that time you need lifts, wheelchairs,
special beds, all sorts of special equipment. And I always
turned to my dad, the mold maker, to tell us how to adapt that
equipment to Matt's handicap.
One day I was agonizing over how to fix a particular bed
for Matt's use. And Matt said to me, ``Don't worry about it,
Dad, Grandpa will figure it out, he's a mold maker. They can
make anything.'' But mold making, die making, our industry has
faced a new enemy in the millennium. It's offshore.
Companies have been lured offshore by the promise of cheap
labor, low taxes, few environmental regulations, and they have
left our markets. Motorola is the classic example in our
district. Motorola came in with the promise of many jobs and
millions of dollars in subcontract work. Well, now Motorola has
chosen to go offshore, the jobs are gone, and the millions of
dollars of subcontract work are now gone.
Our community suffered through the 1980s with a 25 percent
plus unemployment. And we feel like we are moving back into
that same range again.
I have had in the last two years the opportunity to travel
and talk with some of my constituents and contemporaries. I
walked down the halls of one shop, and the man showed me that
there was a $100,000 CNC machine sitting empty for lack of
work. Farther down the hall was a $300,000 machining center
sitting empty for the lack of work. The walls were lined with
the benches that used to house the tools of mold makers and die
makers and machinists, but because business is off 30 to 40
percent, they were no longer working.
One man related the story to me of how he raised his
business up from the very beginning. And he built it into a
prosperous business. And he told his sons, you go off to
college and get an education and when you come back take my
business to the next level.
The sons went off to college, they got an education. And
they came back. But when they got back, there was very little
business there because the business had gone offshore. But yet
understand, even when business drops off mortgage payments,
interest payments, principal payments, workers' comp medical
insurance, fire insurance, all these things keep coming.
Suppliers don't sell there. Rubbish people don't pick up there.
People don't bring uniforms there because business is off 30
and 40, 50 percent.
How can you help us? One, pass the Association Health Plan
bill. That would give us insurance for our people at a
competitive rate.
Give a Skilled Workforce Enhancement Act to bring the
apprenticeship training back to our industry, a $15,000 tax
credit.
Low cost equipment loans.
But most important, keep interest rates at their current
levels because when interest rates are low, then we have the
opportunity for new products. And new products create jobs. And
when interest rates go up, new products are shelved, are
forgotten, and then we lose jobs.
You have heard it said that the economy is rebounding. I
hope you understand that I am saying our industry has not made
it back yet. And our industry needs more time.
Last but not least, think America first for all your
subcontract work.
Thank you very much.
[Mr. Metz's statement may be found in the appendix.]
Chairman Manzullo. This has been one of the finest hearings
that we have had in many--we have had, what, 45, 50 hearings
together. And I tell you, you guys are making an impact, you
ladies and gentlemen are making an impact. You know, from the
Midwest we all say guys. I don't know why we do it.
Thank you for your testimony, Don.
Our next witness is, is it Fedor?
Mr. Fedor. Fedor.
Chairman Manzullo. Fedor. He is the President of MASCO
Machine, Incorporated, testifying individually and on behalf of
his association, the Association for Manufacturing Technology.
I look forward to your testimony.
STATEMENT OF EDWARD FEDOR, PRESIDENT, MASCO MACHINE, INC.,
CLEVELAND, OHIO
Mr. Fedor. Thank you. Good morning.
Let me begin by thanking you, Mr. Chairman, for your strong
leadership along with Congressman Neal of Massachusetts of the
House Machine Tool Caucus, which has provided invaluable
support and encouragement for our industry.
I would also like to thank you and the members of your
Committee who supported the economic stimulus package recently
signed into law by President Bush. The 30 percent expensing
provision included in the package gives my industry a real shot
in the arm that we so desperately need right now.
Masco Machine, my company, is a small, family-owned
designer and builder of custom metal cutting machinery. We have
60 employees. And we provide production equipment to the
automotive industry, their suppliers, heavy equipment,
agriculture, aerospace and other industries.
It is a cause for concern that the U.S. machine tool
industry, an industry critical to national security and
economic stability, is experiencing the worst market conditions
in its domestic market since the Great Depression. Orders are
off more than 50 percent since their peak in 1997. Import
penetration has shot up nearly 20 percentage points in the past
three years due to the Asian financial crisis and the weakening
of the euro and the yen. Moreover, we have seen increased
overseas and domestic outsourcing by some of our largest U.S.
customers.
Since the slowdown in manufacturing started in late 2000,
my company's sales dropped off by as much as 50 percent
compared to our sales in the late 1990s. We have had to lay off
16 percent of our workforce, reduce hours, reduce employee
benefits and cut costs in other areas. And it looks like, Lord
willing, hopefully we won't have to lay off more people but we
will see.
Unfortunately, almost all of our peers have had to do the
same or more simply to stay in business. And we have lost a
number of our very important peers in the last couple of years.
Over the past year-and-a-half, the Federal Reserve has
responded to the economic downturn by cutting interest rates 11
times. And this policy is starting to show results. However,
tight bank regulatory standards have resulted in credit being
diverted from privately held companies, and many banks have
raised their fees or their collateral standards or both, which
has the effect of negating the effect of lower interest rates
from the central bank.
To compound this credit crunch the dollar has been at
record highs. This has had a devastating effect on my industry,
effectively adding a 25 to 30 percent tax on U.S. machine tool
products. This is an added cost that no degree of cost-cutting
or productivity can overcome.
Recently my company participated in an online reverse
auction for an automotive customer where we were competing with
two German companies and two U.S. companies. Our equipment was
priced absolutely as low as we could go. The overvalued dollar,
undervalued euro permitted our European competitors to undercut
our pricing by 30 percent. There is no way for us to compete
with such price advantages.
Once market share is lost, it is very difficult to regain
it. In almost every case our foreign competitors are strongly
supported by their government. At times it seems our government
is working against us. U.S. export control policy, particularly
with regards to China, is a good example. Repeatedly over the
last decade the United States Government has taken a negative
approach toward machine tool sales to China while our allies
have not. The result has been that the Chinese have been denied
nothing in terms of high-technology while U.S. firms have lost
out in a crucial market.
My company bid on a piece of equipment for legitimate end
user, and the export licensing process took 11 months to
complete. The whole process appeared to me to be biased toward
refusing a license without ground. This effectively shuts us
out of many potential orders in China and deters potential
customers from even contacting us in the first place.
Mr. Chairman, our industry was hit extremely hard by this
economic downturn. It battered manufacturers first. And the
downturn has been sustained for nearly two years. We only see
modest relief coming and not until well into the second half of
this year.
I would note, Mr. Chairman, that if the United States were
to use our domestic core of the machine tool industry we would
become wholly dependent on our allies and trade competitors for
the industrial production machinery that fuels our productivity
and keeps our industries on the cutting edge of the latest
technology. Without sensible government policies, the U.S.
machine tool industry, which is critical to America's continued
leadership, may be lost. Our industry supports your work and
hopes to continue to work with you in your efforts to build a
stronger America.
So we thank you, Mr. Chairman. And I would be happy to
respond to questions.
[Mr. Fedor's statement may be found in the appendix.]
Chairman Manzullo. Thank you.
Our next witness has already been introduced. You would
think I would be able to pronounce his last name after hearing
it several times. Is it Habenicht?
Mr. Habenicht. That is correct.
Chairman Manzullo. That is Italian for ``good food''?
Mr. Habenicht. That is German for ``have nothing.''
Chairman Manzullo. We need a more positive spin on it, you
know?
Mr. Habenicht. Right. I have had to live with that name all
my life.
Chairman Manzullo. What would be German for ``abundance''?
Mr. Habenicht. I am not German. I do not know.
Chairman Manzullo. Oh, okay.
Mr. Habenicht. I am an American.
Chairman Manzullo. We look forward to your testimony. Thank
you.
STATEMENT OF HOWARD HABENICHT, PRESIDENT/CFO, VIBRO/DYNAMICS
CORPORATION, BROADVIEW, ILLINOIS
Mr. Habenicht. Thank you, Mr. Chairman. I appreciate the
opportunity to testify before your Committee today.
As you said, my name is Howard Habenicht. I am President
and Chief Financial Officer of Vibro/Dynamics Corporation. We
are a member of the National Association of Manufacturers, an
association with 14,000 member companies. And included in that
are 10,000 small manufacturers.
Vibro/Dynamics is located in Broadview, Illinois, which is
just outside of Chicago. And we manufacture mounts and mounting
systems for the installation of industrial machinery. We have
about 30 employees but we are recognized as the leader,
technological leader in the installation of metal forming
presses in the United States. About 80 percent of our business
is in the United States and Canada with about 20 percent
exports.
As has been repeated today, the manufacturing sector was
hit much harder than the rest of the economy during last year's
recession. In fact, the manufacturing downturn actually began
fully six months prior to the official start of the recession
in March of 2001. It is the first time such a thing has
happened since the end of World War II. And in setting the
stage for a recovery in 2002, one of the most important
elements is to be able to maintain low interest rates. This is
especially important for small manufacturers like Vibro/
Dynamics. While large firms have wide access to capital through
bond and equity markets, small firms rely almost exclusively on
the banking system for capital.
The 2001 manufacturing recession was caused in large part
by a combination of high capital costs and zero pricing power.
Belatedly, the Federal Reserve cut interest rates aggressively
in the beginning of 2001. And as I speak now the federal funds
rate now stands at a 40 year low. But any move by the Federal
Reserve to increase interest rates at this point could derail
the recovery that hopefully is just beginning to emerge.
Adjusting for inflation the real cost of borrowing for
firms, measured as the nominal prime rate less inflation, is
actually still 20 percent above its 40-year average. And we do
not need it to go any higher. Moreover, no meaningful signs of
inflation exist.
With inflationary pressures absent this is the wrong time
to argue for higher interest rates when manufacturers are just
emerging from the worst recession since 1982.
Now let me talk about the effects of the overvalued dollar
which is decimating much of U.S. industry and certainly has
hurt our company. In my company we have had to reduce our
workforce by 30 percent and impose 10 percent pay cuts to
everyone else. Last year was the first time in our 36-year
history that we lost money.
In the last 10 years we have seen a significant decline in
our customer base which is the U.S. machine tool manufacturers.
In December of 2000 the only surviving U.S. builder of large
presses, and at that time our largest customer, went bankrupt.
The large press builders, and I am talking about builders of
machines that weigh in excess of 4 million pounds up to as much
as 10 million pounds, these builders are now found in Germany,
Japan, and Italy. There are none in the United States. This has
shifted our focus to overseas markets and manufacturers as
these machines now are imported in the United States.
Because of the overvalued dollar, we find that we simply
cannot match the prices offered by our overseas competitors and
are now actually looking at purchasing some of our component
parts overseas at costs much less than what it costs us to
purchase in the United States. And this kind of action will
lead to even more lost manufacturing jobs in the United States.
I believe in fair trade and fair competition. We have the
best workers in the world right here in the United States, and
our productivity continues to outpace that of other countries.
Unfortunately, we cannot make up for a dollar-induced surcharge
of 30 percent. And we are not alone. The National Association
of Manufacturers using U.S. Government data has found that U.S.
manufactured goods exports have fallen $140 billion in the last
year-and-a-half. This is astonishing. In effect, our
association estimates that this decline, principally due to the
overvalued dollar, is so large that it has accounted for two-
fifths of the entire decline in U.S. manufacturing employment,
four out of every ten unemployed factory workers.
I am not a monetary economist. I am trying to run a
company. But I know it is time for the U.S. Government to stop
extolling the virtues of a strong dollar at any cost and start
advocating and working for a realistically valued dollar.
Thank you for your attention.
[Mr. Habenicht's statement may be found in the appendix.]
Chairman Manzullo. Thank you very for your testimony.
The next witness is Sara Garretson from the Industrial &
Technology Assistance Corporation. And we look forward to your
testimony.
You might want to pull your mike a little closer to you.
STATEMENT OF SARA P. GARRETSON, PRESIDENT, INDUSTRIAL AND
TECHNOLOGY ASSISTANCE CORPORATION, NEW YORK, NEW YORK
Ms. Garretson. Thank you, Mr. Chairman and Vice Chairman
Bartlett. And I hope we will see the Ranking Member Velazquez
coming back.
I am Sara Garretson, the President of ITAC, the Industrial
and Technology Assistance Corporation. We are a not-for-profit
economic development organization located in New York City.
Like all of the 60 Manufacturing Extension Partnership or MEP
centers across the country, we help small manufacturing firms
in our locale to be more productive, competitive, and
profitable.
The manufacturing sector is important to our nation's
economy. It contributes 16 percent of the gross domestic
product. Employees earn $44,778 average annually, which is 27
percent higher than the U.S. average for all industries. 80
percent of U.S. export revenue is manufactured goods.
The small manufacturer is a key component of our nation's
industrial base. There are over 355,000 of them in the U.S.,
making machine tools and molds, but also making parts for
Boeing and G.M., producing food for our markets and products
for our retail stores as well as for export. 95 percent of all
U.S. manufacturers are small firms. They provide employment for
11.3 million Americans, two-thirds of total manufacturing
employment.
Almost ten years ago, I participated in a National Research
Council Study entitled ``Learning to Change: Opportunities to
Improve the Performance of Small Manufacturers.'' The study
identified five barriers to manufacturing performance
improvement in small firms. One of these was the scarcity of
capital. The study found that small manufacturers lacked access
to operating capital and investment funds for modernization.
Has this situation changed? Well, recently the National
Association of Manufacturers completed a survey on credit
rationing. One of the survey's conclusions was that, and I
quote, ``More than a third of small and medium size
manufacturers are finding it more difficult to obtain credit
from their longstanding bank lenders--a trend that threatens to
undermine our economic recovery.''
Why does this matter? If we are to recover from the current
recession, then we need small manufacturing firms to improve
their productivity and to develop new products and markets.
These firms can drive the recovery, but only if we give them
the means to do so.
Investments in productivity improvement and in product
development pay back year after year. Would firms actually
invest in productivity improvement if they could access the
financing at a reasonable cost? Another recent NAM survey
showed that over 75 percent of small manufacturing firms want
to invest in their future, including marketing and sales,
manufacturing process improvement, product development, and
workforce training.
At ITAC, as with other MEP Centers, we frequently witness
the payback of these investments. In my written testimony, I
gave two examples from Congresswoman Velazquez' District. I
think I have time for one today.
Grand Processing Inc., formerly known as Tony's Brushing
and Processing, services the local textile knitting industry by
dyeing and drying textiles. They employ 75 people. In today's
market they are expected to provide high quality and 24-hour
turnaround. They came to us for help in reducing their very
high energy costs and to reduce turnaround time.
We worked with the company to apply microwave technology in
a whole new way to drying for textiles. When the installation
becomes operational, the company will have energy costs at one-
fifth the current level; the machine will dry the textiles in
one-fifth the time, using one-fifth the labor.
The project cost $350,000 but, fortunately, we were able to
help the company to access financing through a New York State
government agency.
Before I close I want to say a few words about the
Manufacturing Extension Partnership. As I am sure you are
aware, the program is in danger of elimination because the
proposed Administration Budget for fiscal year 2003 reduces
funding from $106.5 million to $12.9 million. MEP is a cost-
beneficial investment for the Federal Government. We return $4
in federal tax revenue for every $1 invested in the program.
For fiscal year 2000 only, our client firms reported $2.3
billion in increased and retained sales, cost savings of $483
million, and more than 25,000 jobs created or retained.
In sum, our small manufacturers are an important part of
our economy, past, present, and future. Our country and our
economy need to make sure they have the means and the knowledge
to invest in their future success. The MEP provides the
technical support the firms may need to invest wisely and
successfully, but the manufacturers also need to be able to
access reasonably priced financing. Keeping interest rates low
during this critical phase of the economic recovery will help
to make the means available for these investment in the future.
Mr. Chairman and Ranking Member Velazquez, I thank you and
the Committee for the opportunity to appear before you today.
And I will be happy to answer any questions.
[Ms. Garretson's statement may be found in the appendix.]
Chairman Manzullo. Thank you very much. Excellent testimony
of everybody.
I have a question I would like to ask of Mr. Habenicht.
And, Professor, perhaps you could help us answer this question.
Appearing on page 5 of your testimony, right at the bottom,
it says ``one of the European press builders.'' Are you talking
about newspaper press or what type of presses.
Mr. Habenicht. No, no, metal forming equipment.
Chairman Manzullo. Oh, okay.
Mr. Habenicht. Punch presses.
Chairman Manzullo. Punch presses. Okay.
``Had been telling their customers that if they used Vibro/
Dynamics mounting systems for installing their presses, they
would not honor their warranty.'' And even though this is not
government action, Professor Czinkota, do you detect any type
of violation of any trade laws by that type of activity taking
place?
Mr. Czinkota. Well, it is always difficult to tell outside
of having been there at the specific situation. But clearly in
terms of procurement code which would encourage transparency
and equal access to contracting, one could and possibly should
look at that more closely.
Chairman Manzullo. But this was a private company here.
Mr. Czinkota. Nonetheless, we like to think that the
procurement code, even though it focuses on government
procurement, also tacitly expanded to reasonable actions on
part of the private sector.
It is the type of thing where you cannot bring down the
brunt of trade law but you certainly can bring down the force
of persuasion in trade discussions.
Chairman Manzullo. Did you want to comment on that?
Mr. Habenicht. Well, we thought it was very mean-spirited,
if nothing else.
Chairman Manzullo. At the bottom, right. But that happens,
but it sometimes means there are things illegal.
Mr. Habenicht. But that is, yes, that is something that
happened several years ago. And since that time we worked very
hard with this company. And as I indicated in the written
testimony they do now allow us to quote on their machines. So
that particular negative thing that was happening is not
happening anymore.
Our big problem today, as I said, is the surcharge that we
are faced with because of the inflated dollar.
Chairman Manzullo. Okay. Then let me go right back to Dr.
Czinkota. This is a tough one. You know, five years ago we were
commending the Chinese for not devaluing their RMB during the
Asian crisis. Now for five years it has been stuck at I think
8.7 to the fixed U.S. dollar.
Dr. Czinkota, how do you go about, I don't want to use the
word devaluing the U.S. dollar, because that is what it is, but
making the U.S. dollar more competitive overseas? Is the
solution harder, or is the remedy harder than what the problem
is? Appreciate your comments, it is a tough question.
Mr. Czinkota. Well, it sure is. And let me tread very
lightly here.
First of all, obviously we need to keep in mind that if we
are talking about currency change, there are different players.
How you like it depends on where you sit. Importers, for
example, are absolutely delighted about the low prices they are
able to obtain abroad because of a strong dollar.
Now, our focus today is on the other side, namely
exporters, and how can they penetrate international markets?
And they are clearly inhibited by a strong dollar.
Now, the last policy occasion that we have had where there
was a meeting and a subsequent decline of the dollar was really
the Plaza Agreement in the late Eighties at which time the
major trading players met, the secretaries of finance, in our
case Treasury, met and looked at the world and tried to
formulate a longer-term vision as to where do we go from here.
And to some degree their pronouncements, even though backed up
by some funds flow, also had a lot of psychological effect on
the markets.
One problem we are facing today, if you want to call it a
problem, is the U.S. has a very powerful attraction as a market
and as a safe haven for money. So as a result, a lot of people
abroad believe in our country, which is actually nice to know.
But they accompany that belief by sending money here. And as
they send money here and purchase dollars that means the value
of the dollar remains very strong.
Chairman Manzullo. You did not answer the question. Do you
want to take a stab at it?
Mr. Habenicht. I could take a stab at it.
Chairman Manzullo. Is the remedy worse than the cure?
Anybody. Okay.
Mr. Habenicht. I think, I don't know a lot about how this
stuff works, but I think one of the things that happens is when
the dollar starts to fall in relation to foreign currencies,
the Treasury Department goes in and starts buying U.S. dollars
on the market to prop it back up. That is a simple answer and
it may be oversimplified, but that is about the extent of my
knowledge of how that works.
Chairman Manzullo. Well, that says when the dollar starts
to fall. But that has not happened.
Mr. Habenicht. Well, you don't know it has not happened
because when it does start to happen they take this action that
raises it, they start to buy the funds.
Chairman Manzullo. Well, there is another dynamic. It is
not just that strong dollar is not just making it more
difficult for American manufacturers to export, but it is
direct competition for American manufacturers like Don Metz and
Ed Fedor and Howard Habenicht to compete domestically because
the people to whom they would ordinarily sell are buying the
stuff on the open market internationally, displacing the
domestic market on it.
Ms. Velazquez. Mr. Chairman, would you yield?
Chairman Manzullo. Please.
Ms. Velazquez. Following the same line of question,
Professor, could you answer, would most of the options for
devaluing the dollar produce negative impacts on the domestic
economy?
Mr. Czinkota. When the Fed has difficulties answering
precise cause/effect relations then I am not sure I am the
right one to present you with direct causality. Clearly you
have different sectors being affected in almost diametrically
opposed ways by a changing currency value.
Right now, of course, we import more than we export. That
is why we have a trade deficit. So that would indicate that a
larger sector, segment is affected. But at the same time, as
the Chairman pointed out, there will be an effect on domestic
producers as well due to the relief of pressure on them from
imports.
But far be it from me to precisely delineate the outcome of
that.
Ms. Velazquez. Thank you.
Ms. Garretson, you spoke about the budgets proposed part of
89 percent to the MEP. And can you clarify or expand a little
bit more in terms of that budget cut and would your center or
most of the other 60 or 61 centers nationwide would have to be
shut down?
Ms. Garretson. I think it is a combination of shut down and
severely diminished capacity. The federal funding is structured
in such a way that it requires a two to one match, which most
of us receive through our states and also through local company
cost share.
Some of that state funding is contingent on the federal
money. So the federal money leverages a system that then puts
2,000 people out working with companies. You take that away,
you are going to have some of that state money taken back as
well.
For our organization, we have 12 ``feet on the street'' at
this time, and I would suggest that means engineers and
manufacturing professionals working with companies. We will
cutback to two or three at most. Now, we have 10,000
manufacturers in New York City, so you can imagine that that
then severely diminishes our ability to work with them.
Ms. Velazquez. Could you talk to the Committee about the
experiences that the manufacturers in Brooklyn and Manhattan
have been facing after September 11? And, also, what have been
the largest challenges that they have faced after September 11?
And what do you think in terms of economic relief would be more
beneficial for them, grants or disaster loans?
Ms. Garretson. Okay. I think there are two things that
happened. One is that the economy had already slowed down. For
the New York City firms, the economy just sort of plummeted on
September 11. So one issue is the amount and the sudden
occurrence of economic contraction. So many of the businesses
that we are dealing with, are seeing a temporary reduction in
sales, others experienced a permanent reduction in sales
because they had customers who were in the World Trade Center.
Some firms were actually located in Ground Zero. And we are
just starting to actually help a printer who has lost his
facility and is having to relocate and start up again.
I think the other thing is a less tangible issue which is
fear. It is a psychological issue: ``Do I have enough
confidence in the future of this city and of this location that
I will invest in my firm's future?'' And our sense is that we
have seen great reluctance to do that. I am hoping that we are
now beginning to see some changes in that. But companies who we
have been working with for a long time have said, ``No, right
now I am not doing anything, I am waiting to see what is
happening here.''
So I see A) declining business, B) declining willingness to
invest, C) uncertainty and the psychological impact.
Accessing the loan programs have been very difficult. Most
of our businesses do not like giving a personal guarantee,
particularly in an era when they are not confident in the
future. They do not want to pledge their homes in this kind of
uncertain environment. So that has been a tremendous barrier to
people stepping up to the various 9/11 loan programs.
So the answer is, ``it depends''. There are cycles of
impact, there are companies who lost their location and who
really need grants, and there are others where if you loosened
up the guarantee requirements, the financing might be adequate.
These are the ``secondary impacts'' companies.
The ``primary impact'' companies are at all levels. Whether
they are a retail store or a Law firm, the impact has been
tremendous. We lost our space for a month and were forced to
work ``virtually''. But it was more than a month's worth of
impact. We are still trying to recover from that.
Ms. Velazquez. But I think that you will agree with me that
the same way that we bailed out the airline industry we could
provide, the Federal Government, some grants assistance----
Ms. Garretson Yes.
Ms. Velazquez [continuing]. To small businesses?
Ms. Garretson. Yes.
Ms. Velazquez. Mr. Metz, can you talk to us about how has
the lack of skilled workers impacted your business? And how do
you think it has impacted the entire tool and machining
industry?
Mr. Metz. The skilled worker problem is a problem of
confidence. In order to train a new skilled worker the National
Tool and Die Association tells us it takes four years and about
$200,000. So as margins are being cut and profits are not
there, immediately one of the first things people begin to give
up on, of course, is the apprenticeship training.
Unfortunately, our industry is getting older. And the average
mold maker in this country right now or die maker is 50 years
old.
And these are high paid individuals who have made an awful
lot of money in their lives, so at this point in their life,
they are not as interested in still working at the same pace or
the number of hours they used to. So you have a twofold
problem: On one end you have your most skilled workers reaching
a point in their life where they have the money and the kids
are through college and they want to reduce their workload, but
yet at the other end, you are not training new people because
you do not have a lot of confidence in the future to go into
that sort of an investment program.
So we need to jumpstart the apprenticeship program. And
literally thousands of young men and women who qualify to be
apprentices and to get that kind of training are being rejected
not on their merit but on the lack of confidence that the
industry has in its future.
Ms. Velazquez. Can you tell us how the Skilled Worker
Enhancement Act will benefit workers?
Mr. Metz. Well, I by no means believe that this act is
going to answer all of the problems that the company has. But
by giving a $15,000 tax credit per employee that you train, you
give an incentive to the company owner to begin that process.
These people are astute enough to realize they are going to
have to train somebody sometime. This is not going to be able
to go on like this forever. And I think it sends a really
positive signal to these company owners that the government
understands their pain and is doing their best to address it.
And you get more of a cooperative feeling that the government
is in this with me, the government has confidence in me and in
the future of my industry and, therefore, let us get back to
the training program.
Ms. Velazquez. Thank you.
Mr. Metz. Thank you.
Ms. Velazquez. Thank you, Mr. Chairman.
Chairman Manzullo. Thank you.
Mr. Bartlett?
Mr. Bartlett. Thank you very much.
In a former life I was a small business person so I
listened with great interest to your testimony.
Dr. Czinkota, you mentioned that our trade deficit last
year was $426 billion. Now, more than 100 billion of that I
think was with China. And most of the stuff that I see we are
buying from China is going to be on the county landfill by the
end of the year. It is not durable goods.
Help me understand how at least a large part of this $426
billion is not simply a transfer of wealth from our country to
our trading partners?
Mr. Czinkota. There are several things to keep in mind with
the $426 billion, which is the merchandise trade deficit. You
are absolutely correct, a large portion of that is with China
and with Japan as the second largest trade deficit country.
First of all, one hopeful benefit we are going to see with
China is that now that the country has joined the World Trade
Organization, its own market will open up much more and,
hopefully, that means we can penetrate it. I am saying
hopefully because I know that it will be more penetrated if
they comply with the rules, but I hope it is not just European
firms then who benefit from that. I am hoping that U.S. firms
will be very strong in that penetration.
So that should account for more evenness in the exchange
rather than what you call transfer of wealth.
The second issue to keep in mind is also that we are
looking at an increasing proportion of intra-firm trade. What
that means is U.S. firms are going to countries, setting up
operations, producing there, and then importing from abroad
into the United States. So the instigator if you will or the
primary profit taker is actually a U.S. firm or a multinational
firm from some other country, not necessarily just a Chinese
firm even though foreign investment, of course, triggers
domestic benefits.
And, finally, firms are responding to customer demands and
to demands by their supply chains. If you look at, for example,
our leading retailers who very specifically tell their
suppliers that consumer goods have to be very low priced
otherwise we won't carry your products, we carry someone
else's. And that, of course, in itself triggers a lot of the
imports from Asia.
Mr. Bartlett. Our industry, of course, is moving from a
manufacturing industry, which was our great strength for many
years, it is now moving to a service-based industry. Now, if
you push that to an absurdity you can see that we cannot
survive. If all we did, for instance, was cut each other's
hair, obviously that is not a basis for a viable economy, is
it? At what point do we finally recognize that our economy
cannot survive without returning to a vigorous dependence on a
manufacturing base?
You know, there are only a few industries that produce
wealth. Farmers produce wealth. Service-based industries are
consumers of wealth. I used to be a producer of wealth, now I
am a consumer of wealth. And manufacturing is one of the big
producers of wealth and now that is progressively moving
offshore. When are we going to understand that moving electrons
around the country and cutting each other's hair and cleaning
our clothes cannot be the basis of a viable economy?
Mr. Czinkota. Well, sir, first of all I am in full
agreement with you that manufacturing is a terribly important
sector of the economy. And I, for one, do not wish to see any
kind of hollowing out of that sector.
Having said that, one blessed condition we have in the U.S.
is that we do rely on market forces. And I would be happy to
supply you with the data from, stemming from the turn of last
century where we had about something like 60 percent of our
domestic employment in farming which has now declined to about
2.5 percent. And the outcome, of course, is not that now we
have all these unemployed farmers, but we have a tremendous
shift in employment figures and lots of people are now employed
in occupations different than farming. And this is not because
anyone told them to or government told them to but because
market forces have created new opportunities in other sectors.
Now, you are very correct in your statement on services. We
have become a service-driven economy both in terms of
percentage of GDP as well as in terms of employment. It is, of
course, not just not all cutting hair. You also look at service
jobs in the banking industry, in the construction industry.
My wife, for example, is an architect, and her work
increasingly is global where she takes on architectural
products, redesigning, restoring hotels in Singapore which
would not have happened ten years ago. So in that sense there
also is wealth generated by knowledge, by intellectual
property. And I wouldn't give up on the services sector just
yet. But the manufacturing sector clearly is and should remain
a very important component of our economy.
Mr. Bartlett. Thank you.
Mr. Chairman, traditionally our service-based industries
have been supporting those industries that produce wealth.
Today if they are supporting industries that produce wealth,
they are supporting industries overseas that produce wealth,
not in this country. Thank you.
Chairman Manzullo. Let me if I could do a follow-up on
that. We have about an $80 billion surplus in services. Under
the WTO, under the U.S.-China WTO accords, the opportunity for
exports and services to China is just, I mean it is wide open
for everything, life insurance to banking to having American
money managers manage portfolios in China. And for the first
time that agreement is one-sided. That type of agreement is
one-sided in favor of the United States.
When I was in China in January, there was an interesting
article in the paper about the beginning of China importing
foreign automobiles because the tariffs on those were going
down by almost 75 percent. And the tariffs on manufacturing
goods were down by the same amount. And that the Chinese rules
on domestic content are going away with that accord. And that
the foreign and national treatment of corporations has to be
the same.
So China is really under the gun in complying with the WTO.
They are painfully aware of the fact. When we were there, they
talked about patience and everything. And I said, look-it, you
wanted to get into this thing for 15 years. I'm going to be the
first one to tell you there is no squeeze room. If you do not
comply, there will be sanctions filed against you. And China is
in the process now of they have to open up to more markets.
And, lastly, whenever the United States exports services,
the merchandise factor follows. It is always that way. For
example, the exporting of architectural services such as we do,
such as what happens with Trade Development Agency. Whenever we
design overseas systems, they are conveniently designed to
accommodate American manufacturers. So that is why there is a
lot of emphasis now.
We had an interesting discussion with Chen S'ing-he, who is
the 38-year-old Vice President of the Shanghai Stock Exchange.
Now Americans will be allowed to buy what are called Class A
Chinese stocks as the Chinese state-owned enterprises become
privatized. And I said how does somebody age 38 become the vice
president of the Shanghai Stock Exchange?
He said, well, the president is a year younger than me. He
said, Congressman, he said, anybody in China over the age of 40
does not understand how the stock market works. And I thought
that was an astounding statement to see what is going on there
in terms of that type of investment.
One of the reasons for this hearing or the reason is to
make American manufacturers more competitive. I think it is
extremely significant that even though Dr. Ferguson was not
able to stay and listen to your testimony, he has all of your
statements. And if you listened very closely to his testimony,
which was nothing less than compelling, you will note that
things that each of you said worked their way into his
statement, where he addresses these various issues.
And now as a result of the letter that we sent, as a result
of the work of the organizations that are represented here
today, and as a result of your testimony about how sensitive
machine tooling is to interest rates, the Fed, I can guarantee
you, is going to be taking a different look at the manner in
which they raise interest rates.
The opportunity for Dr. Ferguson to come to our district,
and Don, I think you know of a good facility you would like to
have him visit. We will make sure that he doesn't wear white
shirts when he visits. I think the openness of Dr. Ferguson to
travel the country, to listen to the people impacted, to me,
that is the best indication of a public servant. He has a
jurisprudence doctorate from Harvard----
Mr. Bartlett. And a Ph.D. from Harvard.
Chairman Manzullo [continuing]. And a Ph.D. from Harvard.
This man is truly a public servant who has the interests of
this country at heart.
And we will bring him out to our district as soon as
possible because he needs to come up to speed as to what is
going on in the area of machine tools.
Well, this has been nothing less than exemplary hearing.
Lynn Martin, who is my predecessor and the former Secretary of
Labor, furnished us with a 4-page statement that is going to be
made part of the record. She would have been here today
testifying with you were it not for the fact that she had a
prior engagement.
Chairman Manzullo. Did you have any concluding remarks you
wanted to make, Mrs. Velazquez, and we will wind it up?
Ms. Velazquez. No, just to thank all of you for being here
today. This was an important hearing. And we will continue to
work in a bipartisan way to help, you know, strengthen small
business, especially small manufacturers.
Chairman Manzullo. Thank you for your leadership.
Mr. Fedor, you wanted to say something?
Mr. Fedor. Yes, sir. Well, I just had a couple of comments
as you were making your remarks. One of the things that came to
mind when we talk about China's increased willingness now to
open their markets now that they are part of the WTO, as it
regards companies like mine and small manufacturers, I think
that the U.S. Government can be more of a friend to U.S.
manufacturers in that regard if we continue to allow the
machine tool market to open up regarding not putting unilateral
controls on certain kinds of machine tools that we can export
to China.
It seems to me that we are being maybe unintentionally
hostile to small manufacturers like ours in putting unilateral
controls on those kinds of products when really they can get
that same technology from companies in France or somewhere in
Europe quite easily.
I wanted to also make another comment. You had a comment, a
question regarding the strong U.S. dollar and what you can do
about that. I am not sure. I am not an expert in this area. It
does not seem like you can necessarily legislate a change there
but what we see is----
Chairman Manzullo. Thank you, I appreciate that statement.
Mr. Fedor [continuing]. Mr. O'Neil and the Treasury
Department talking up the dollar and extolling the virtues of a
strong dollar in itself almost creates a perception of a
government policy toward a strong dollar. And I think that if
we were to moderate the tone of the comments regarding the
strong dollar perhaps that would have an effect. And also have
the dollar float more with the strength of the U.S. economy. I
am not sure how you do that, but with the strength of the
economy have the dollar follow I think would be more
appropriate.
Chairman Manzullo. Congressman Bartlett, you had a
concluding remark?
Mr. Bartlett. I am on the Armed Services Committee and
there we have a major concern with, obvious concern with
exports to China. I guess that on that committee I am kind of
politically incorrect because my position has been that we need
a military industrial base in this country. We have a shrinking
one. Part of that industrial base can be supported with foreign
sales.
And my view has been that if the foreign country can buy
the product or the service anywhere else in the world, we ought
to be able to compete. It is good for our economy. Ultimately
it will be essentially, I think, to our national security
because we cannot depend on foreign countries to build our
ships and build our airplanes and so forth.
The difficulty is deciding what in fact can be bought from
any other place or from some other place in the world. But my
general view is that if you can buy it anywhere else why can't
our guys compete? And I noticed in your testimony you were
concerned about limitations on exports to China. Nobody wants
to export to a country technologies that will put them at a
military disadvantage relative to us. But also I do not want to
deny any export to them that will assist our manufacturing
base. And, we are not now doing a very good job of reaching
that balance. And, I appreciate your interest and your concern.
Chairman Manzullo. Thank you very much. This Committee is
adjourned.
[Whereupon, at 12:15 p.m., the Committee was adjourned.]
[GRAPHIC] [TIFF OMITTED] 80728.001
[GRAPHIC] [TIFF OMITTED] 80728.002
[GRAPHIC] [TIFF OMITTED] 80728.003
[GRAPHIC] [TIFF OMITTED] 80728.004
[GRAPHIC] [TIFF OMITTED] 80728.005
[GRAPHIC] [TIFF OMITTED] 80728.006
[GRAPHIC] [TIFF OMITTED] 80728.007
[GRAPHIC] [TIFF OMITTED] 80728.008
[GRAPHIC] [TIFF OMITTED] 80728.009
[GRAPHIC] [TIFF OMITTED] 80728.010
[GRAPHIC] [TIFF OMITTED] 80728.011
[GRAPHIC] [TIFF OMITTED] 80728.012
[GRAPHIC] [TIFF OMITTED] 80728.013
[GRAPHIC] [TIFF OMITTED] 80728.014
[GRAPHIC] [TIFF OMITTED] 80728.015
[GRAPHIC] [TIFF OMITTED] 80728.016
[GRAPHIC] [TIFF OMITTED] 80728.017
[GRAPHIC] [TIFF OMITTED] 80728.018
[GRAPHIC] [TIFF OMITTED] 80728.019
[GRAPHIC] [TIFF OMITTED] 80728.020
[GRAPHIC] [TIFF OMITTED] 80728.021
[GRAPHIC] [TIFF OMITTED] 80728.022
[GRAPHIC] [TIFF OMITTED] 80728.023
[GRAPHIC] [TIFF OMITTED] 80728.024
[GRAPHIC] [TIFF OMITTED] 80728.025
[GRAPHIC] [TIFF OMITTED] 80728.026
[GRAPHIC] [TIFF OMITTED] 80728.027
[GRAPHIC] [TIFF OMITTED] 80728.028
[GRAPHIC] [TIFF OMITTED] 80728.029
[GRAPHIC] [TIFF OMITTED] 80728.030
[GRAPHIC] [TIFF OMITTED] 80728.031
[GRAPHIC] [TIFF OMITTED] 80728.032
[GRAPHIC] [TIFF OMITTED] 80728.033
[GRAPHIC] [TIFF OMITTED] 80728.034
[GRAPHIC] [TIFF OMITTED] 80728.035
[GRAPHIC] [TIFF OMITTED] 80728.036
[GRAPHIC] [TIFF OMITTED] 80728.037
[GRAPHIC] [TIFF OMITTED] 80728.038
[GRAPHIC] [TIFF OMITTED] 80728.039
[GRAPHIC] [TIFF OMITTED] 80728.040
[GRAPHIC] [TIFF OMITTED] 80728.041
[GRAPHIC] [TIFF OMITTED] 80728.042
[GRAPHIC] [TIFF OMITTED] 80728.043
[GRAPHIC] [TIFF OMITTED] 80728.044
[GRAPHIC] [TIFF OMITTED] 80728.045
[GRAPHIC] [TIFF OMITTED] 80728.046
[GRAPHIC] [TIFF OMITTED] 80728.047
[GRAPHIC] [TIFF OMITTED] 80728.048
[GRAPHIC] [TIFF OMITTED] 80728.049
[GRAPHIC] [TIFF OMITTED] 80728.050
[GRAPHIC] [TIFF OMITTED] 80728.051
[GRAPHIC] [TIFF OMITTED] 80728.052
[GRAPHIC] [TIFF OMITTED] 80728.053
[GRAPHIC] [TIFF OMITTED] 80728.054
[GRAPHIC] [TIFF OMITTED] 80728.055
[GRAPHIC] [TIFF OMITTED] 80728.056
[GRAPHIC] [TIFF OMITTED] 80728.057
[GRAPHIC] [TIFF OMITTED] 80728.058
[GRAPHIC] [TIFF OMITTED] 80728.059
[GRAPHIC] [TIFF OMITTED] 80728.060
[GRAPHIC] [TIFF OMITTED] 80728.061
[GRAPHIC] [TIFF OMITTED] 80728.062
[GRAPHIC] [TIFF OMITTED] 80728.063
[GRAPHIC] [TIFF OMITTED] 80728.064
[GRAPHIC] [TIFF OMITTED] 80728.065
[GRAPHIC] [TIFF OMITTED] 80728.066
[GRAPHIC] [TIFF OMITTED] 80728.067
[GRAPHIC] [TIFF OMITTED] 80728.068
[GRAPHIC] [TIFF OMITTED] 80728.069
[GRAPHIC] [TIFF OMITTED] 80728.070
[GRAPHIC] [TIFF OMITTED] 80728.071
[GRAPHIC] [TIFF OMITTED] 80728.072