March 3, 2011
February's CMI reveals a tale of two economies and two strategies. There is continued good news in the index with sales and credit availability, but there is some very bad news as far as the toll this economy has had on business thus far. An impressive growth in sales pushed the number well into the 60s with a reading of 66.3—the highest since the recession started in 2008. Credit applications experienced the same growth, rising to 60.3 after having slipped to 58.6 in January. This number is also the highest since 2008, suggesting that companies still expect growth and are taking steps to get ready. The good news continued with dollars collected, which improved from 60.9 to 63.4. And, finally, there was good progress in the level of credit extended—an increase from 64.8 to 66.5.
The sum total of all this positive trending is an improvement from 62 to 64.1 in the favorable factor index. "What then is the problem?" asked Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and NACM economic advisor. "Why is overall growth in the CMI non-existent? The 56.4 reading this month is the same as last month despite the good numbers."
This is the vexing part of a transition economy, said Kuehl. This is the time that companies move aggressively to capture market share due to the sense that the consumer is starting to engage—an assumption reinforced by overall economic numbers. These are the signs everyone has been waiting for, but they are not the signs of a fully recovered economy.
This situation creates the same pattern every time. The strongest competitor in a given market, the market leader, starts responding to anticipated demand with more capital investment, some hiring and additional marketing. That provokes the market challengers in that sector to respond in kind to maintain their edge. Right behind them are the market followers that also have to react to the moves of those in the dominant position. It is a chain reaction driven by the need to hang on to market share—a race that some companies are better positioned to enter. They are the ones that can wait for the recovery. Those that are not sitting on enough cash have no choice but to make investments and hope that the timing is right.
One of two things will happen to these companies. If the timing is right, the investment will pay off. The anticipated demand will manifest itself, and the cash flow will be there to handle the investment and credit requests. If the timing is off or if the company is forced to respond to the competition sooner than preferred, the debt soon becomes brutal and business failures ramp up. This is the signal sent by this month's index. The two negative factors showing the biggest increase were bankruptcies (falling from 59.1 to 56) and accounts placed for collection (moving from 52.5 to 49.9). Other indicators deteriorated as well. In the end, the declines in the unfavorable factors dragged down the combined index and left the CMI flat for the month.
The full report, complete with tables and graphs, along with the CMI archives may be viewed here. Watch for monthly email notices to participate in this survey.
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Confidence, while far from high, appeared to strengthen in late 2010 and the first weeks of 2011 with the widely held belief that the U.S. economic recovery would continue, even if its presence was meek at best. Fast-forward to early March, and the business community appears to have returned to an uproar, bracing for the worst (a double-dip recession) because of a surge in gas and oil prices tied to political uprisings and freshly elevated volatility in the Middle East.
While risk has been elevated by the price surge, economists are holding to their predictions that a second wave of recession will not hit the U.S. economy and its hurting small-/mid-sized businesses.
The uprisings in Egypt, Tunisia and oil-rich Libya have sent oil prices skyrocketing to the highest point in a few years. Such cost spikes have obvious ramifications on business' bottom line and at a time when those still recovering (most) can ill afford them. Still, economists including Dan North of Euler Hermes, Xiaobing Shuai of Chmura Economics & Analytics and Ken Goldstein of The Conference Board told NACM the price issues, while troubling, are not yet enough to derail the recovery. That would take more time.
"It's given me pause because spikes in oil prices tend to be very damaging to economies," said North when asked if he has downgraded his recent economic forecast on oil/gas spikes. "If we keep seeing unrest and see prices continue to rise, then the recovery is in jeopardy. But the high prices haven't gone on long enough. If things quiet down a bit, we'll be alright."
Still, because of the volatility of geopolitical factors at present, North admits the chances of a double-dip are higher than they were even one month ago, in his estimation. North noted that, if pressed to give a percentage chance for a double-dip when he keynoted at the FCIB New York International Round Table in early February, he would have estimated it at near 20%. Now, just three weeks later, that likelihood has nearly doubled, he told NACM.
Meanwhile, Goldstein intimates the unrest and price spikes, while certainly worth monitoring, might be a bit of a red herring.
"The price of gas generally goes up from New Year's to Memorial Day every year, though jumping a quarter ($0.25) a gallon is a little steep over a short period, leading to headlines about ‘gouging,'" Goldstein told NACM. "But again, in terms of the rise, the timing and the level; this isn't that far from usual spikes. Longer term, there is more threat to the recovery from food price increases than from energy prices."
Goldstein added that the biggest game-changer to U.S. and global recoveries wouldn't come unless a "small possibility" of one of the following occurring: the Suez Canal shutting down for geopolitical reasons, or if oil-rich U.S. ally Saudi Arabia is the next domino in the seemingly spreading wave of unrest. And that's not even taking into consideration a different, but still critical, type of unrest happening closer to home.
"Perhaps the revolts we should be more concerned with are not in Tunis, Tripoli or Cairo, but in Madison, WI," said Goldstein of the state's ongoing public workers' demonstrations as well as the ramifications of the union-versus-state government showdowns brewing in other states.
Brian Shappell, NACM staff writer
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A pair of bills in the Senate would repeal a 3% withholding requirement on all federal, state and local government contracts set to take effect next year.
The Withholding Tax Relief Act of 2011 (S. 89), introduced by Sen. David Vitter (R-LA), currently has four Republican cosponsors and seems to be the most likely of the two bills to move. The other version, which has an identical name but different bill number (S. 164), was introduced by Sen. Scott Brown (R-MA) and has only two cosponsors, one of whom is a Democrat. Both pieces of legislation have been referred to the Finance Committee.
The only difference between the two bills, other than competing numbers and partisan pedigrees, is that Brown's version also includes a provision that rescinds $39 billion in funds that have been appropriated for government agencies, but remain unobligated, which is to say unspent and unlikely to be spent. Unobligated funds from the Department of Defense and Department of Veterans Affairs would be exempt under this provision in Brown's bill.
The 3% withholding requirement was originally enacted in Section 511 of the Tax Increase Prevention and Reconciliation Act (TIPRA), which was signed into law in 2006. It was originally scheduled to go into effect on January 1, 2011, but was delayed to January 1, 2012 in 2009 by the American Recovery and Reinvestment Act (ARRA). Should the requirement go into effect, any and all transactions for goods and services with a government entity would be subject to a 3% withholding charge, kept by the governmental entity in question.
NACM has fought the enactment of this provision, which will fall disproportionately on smaller businesses, since its introduction. As a member of the Government Withholding Relief Commission, NACM has lobbied for a full repeal and hopes Congress acts quickly to remove this unfair and potentially harmful provision from the tax code.
Stay tuned to NACM's eNews and Credit Real-Time Blog for updates.
Jacob Barron, NACM staff writer
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As Federal Reserve Chairman Ben Bernanke carried a message of cautious optimism to Congress on Wednesday based on strong manufacturing gains, exporting activity and rising business confidence, the Beige Book economic conditions roundup of the 12 Fed districts told a similar tale.
Bernanke, in presenting the Semi-Annual Monetary Policy Report to the House and Senate on consecutive days, noted that all signs point to continued economic expansion throughout 2011, even with the perception of threats from higher oil prices and inflation. Bernanke did, however, warn that some of the federal budget cuts proposed by the GOP could stymie growth by cutting as many as 200,000 U.S. jobs.
Meanwhile, the new Fed Beige Book, summarizing district-by-district economic conditions eight times annually, noted retail sales and manufacturing increases in all districts, except for St. Louis, even as crippling snowstorms blanketed much of the nation during portions of February. The Cleveland, Atlanta, Minneapolis and Kansas City districts noted especially "solid expansion" for manufacturing. However, Chicago noted that its rise was more moderate than in past periods.
About half the districts reported that the long-wounded commercial real estate sector was "showing signs of gaining traction," a change from most of 2010. Commercial loan demand also was mixed, though financial institutions reported widespread improvements in all other loan segments. Credit standards, however, continued to be tight even as credit quality has improved, the Beige Book indicated.
Agriculture, in the areas of crop yields and production, may have suffered the worst because of the cold and snowy weather conditions. There were, however, some exceptions in areas like the strong-performing St. Louis district. Additionally, high prices of ag commodities such as cotton, corn, soybean and wheat, among others, continued to hold firm or improve.
Brian Shappell, NACM staff writer
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Those who thought the Democrats took a beating in the November General Election might want to glance at the situation in Ireland. The Emerald Isle's latest election saw the powerful Fianna Fail ruling party reduced to rubble after years of mismanagement have left the nation in near catastrophic debt. But it remains questionable what impact the new ruling party will have on the previously arranged European Union (EU) bailout and the ramifications on European and global markets as a result. One international economist believes a misstep by the new leaders could result in a national default.
After years under a left-leaning regime, the Fine Gael party, led by Enda Kenny, made a resounding leap into power following last week's elections in Ireland. The party is almost certain to be more conservative than its predecessors on the economy though it faces some tough challenges as a result of ongoing high unemployment, which is now above 13%, and a wave of emigration by a disillusioned young workforce. Add to that the Fine Gael party's lack of a full majority in the Irish parliament, and the path for an Irish recovery is not clear.
What was made clear, through pre-election rhetoric, is that the Fine Gale is not happy with the European Union/International Monetary Fund bailout and plans to renegotiate, or at least attempt to do so. Among other complaints about the estimated 85 billion euro loan is that the borrowing interest rate arranged was too high and some of the forced austerity measures go too far. Moody's Analytics Economist Melanie Bowler told NACM renegotiating with European nations already unhappy with having to foot the bill for a bailout will be a difficult task and could carry dangerous consequences.
"A key risk to Ireland's global economic standing would be if the country's low corporate tax rate became used as a bargaining tool for renegotiation of the bailout," said Bowler. "Ireland's high-tech manufacturing, dominated by multinational firms, has been the only contributor to growth in recent quarters, powering exports and keeping unemployment from rising even more than it has. Any sign that corporate taxes could rise would reduce foreign investment and dampen growth prospects over the longer term."
Bowler also noted that a retreat from the new government from some of the EU/IMF-mandated belt-tightening also could significantly disrupt market confidence and increase the risk of an Irish default. The new Irish government certainly has come into power during precarious times for the nation.
Brian Shappell, NACM staff writer
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Powerful officials on both sides of the aisle recently laid into President Barack Obama for what was seen as a lackluster trade agenda for 2011. Among the most egregious exclusions from the president's agenda were a timeline to complete the Colombia and Panama free trade agreements (FTAs) and a procedure to deal with South Korea's continued restrictions on U.S. beef.
"If we want to meet the president's stated goal of doubling U.S. exports by 2015, the administration needs to act now to resolve the outstanding issues with the Colombia, Panama and Korea Free Trade Agreements and send these agreements to Congress," said Sen. Max Baucus (D-MT), chairman of the Finance Committee. "It is time to develop a roadmap for increased market access for U.S. beef in Korea. And American ranchers, farmers and businesses can't afford to lose any further ground in the booming Colombian and Panama markets...The administration needs to quickly resolve all outstanding issues so Congress can approve all three free trade agreements as soon as possible this year and help create more jobs here at home."
Baucus tempered his criticism with support of other items on the president's trade agenda, specifically a plan to secure a long-term reauthorization of Trade Adjustment Assistance (TAA) and the extension of expired trade preference programs. However, Sen. Orrin Hatch (R-UT), Baucus' Republican counterpart on the Finance Committee, made no such efforts to soften the blow of his assessments.
"If American employers and workers are to compete in our global economy, then the White House must lead on trade. Regrettably, instead of concrete action, there's only been rhetoric," said Hatch. "While President Obama studies, reviews and ponders ‘outstanding issues,' other countries are aggressively negotiating and implementing deals to the detriment of American workers and job creators. We cannot afford to sit on the sidelines any longer. The more we wait, the more our economy suffers."
The Finance Committee, which has jurisdiction over international trade policy, will hear testimony from U.S. Trade Representative Ron Kirk and further examine the Obama Administration's trade agenda in a hearing next week.
Jacob Barron, NACM staff writer
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