eNews December 2, 2010

December 2, 2010

News Briefs

  1. Faltering Manufacturing Sector Stalls Growth
  2. Senate Rejects Latest 1099 Repeal Efforts
  3. Fed Beige Book: Economy Continues to Buck Fear-Based Forecasts, Albeit Slowly
  4. NACM Offers Two Added-Advantage Teleconferences Next Week
  5. EU Sending Green to Bailout Struggling Irish
  6. New U.S.-Panama Tax Agreement Paves Way for Free Trade Approval
  7. Winter Arrives With Newfound Hope From Small Business, Commercial Real Estate Sectors



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Faltering Manufacturing Sector Stalls Growth

The progress noted over the last three months in the Credit Managers' Index (CMI) came to an end in November, at least as far as the manufacturing sector was concerned. The service sector data was a little more encouraging, but not enough to keep growth from stumbling. The combined index posted less than a 0.1 increase, which was barely enough to push the index from 54.9 to 55.0. "The issue was less about demand and growth than the fact that past issues were starting to catch up again," said Chris Kuehl, PhD, economic advisor for the National Association of Credit Management (NACM). "There was actually a pretty impressive gain in terms of overall sales—from 60.8 to 61.9—even though this factor in the service sector contracted somewhat. There were also gains in new credit applications and amount of credit extended. These indicators suggest real growth in both sectors and match data coming from the Purchasing Managers Index as well as more recent data from the retail community. The declines came from the indicators that point to debt issues and the struggles of companies that have not managed to get through the recession all that easily."

The dollar collection data showed a substantial decline—from 61.9 to 58.6—and for the most part the index of unfavorable factors demonstrated a similar decline. There was an increase in dollars beyond terms and in filings for bankruptcies as well as in other indicators. The pattern is not unfamiliar to the credit community and based on past data, there was reason to expect some of these results to start showing up. This is a critical time for many companies and some are not ready to address the situation effectively. During the worst of the recession, most companies were in the same position: hunkering down to survive. As the recovery started, the majority of those companies that made it through the worst of the decline maintained a pretty cautious position due to lack of real demand. Now there is some sense that an economic rebound may finally be on the horizon and some companies are starting to gear up for that rebound with more marketing, sales efforts and inventory accumulation. If a few companies in a given sector start to make moves, there is additional pressure on others in that sector to match them. If they are not financially strong enough to make that move, they can swiftly fall behind if the expected sales rebound does not occur on schedule.

The full report, complete with tables and graphs, can be viewed here.

Source: NACM

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Senate Rejects Latest 1099 Repeal Efforts

The Senate on Monday rejected an attempt by two prominent members to repeal the health care reform bill's 1099 reporting requirement for businesses. The new provision would require companies large and small to issue 1099 forms to all companies and individuals from whom they purchase more than $600 of goods or services annually. It is scheduled to go into effect in 2012.

Senators Mike Johanns (R-NE) and Max Baucus (D-MT) introduced two amendments to S. 510, the FDA Food Safety Modernization Act, both of which would've repealed the 1099 requirement. Neither made it into the final version of the bill.

"Despite a chorus of discontent about this burdensome provision and overwhelming support from both sides of the aisle to repeal it, the Senate again failed to support our nation's job creators," said Johanns. "More than 40 million businesses across the country are now in jeopardy of being hit by this paperwork monsoon. Businesses are already struggling to survive this fragile economy, and failing to repeal the 1099 mandate adds more roadblocks to hiring. The American people have clearly signaled that support for job creation should be a top priority; it's time for Congress to listen."

Johanns noted that his amendment would've funded the repeal by using $39 billion in unspent discretionary funds to cover the revenue that the 1099 requirement is expected to generate. He alleged that Baucus' amendment was nearly identical, but included no such offsets and would've added $19 billion to the deficit. However, Baucus and his Democratic colleague, Sen. Mary Landrieu (D-LA), countered that the health care reform bill already reduces the deficit and therefore already offsets the revenue lost by repealing the 1099 requirement.

"Since these 1099 regulations were mandated by the new health care reform law, the Baucus Amendment is appropriately paid for with the savings created by the health care bill," said Landrieu. "The Johanns Amendment takes funds specifically designated to build Coast Guard ships and provide relief for Louisiana families still struggling to recover from four devastating storms. The Baucus proposal that I supported repealed these burdensome regulations without shortchanging Louisiana or any other state."

Johanns' proposal garnered 61 votes, short of the 67 votes required for approval, while Baucus' amendment only received 44 votes.

Baucus, who introduced legislation earlier in November to remove the 1099 provision, vowed to keep up the fight for repeal, pushing his as-yet unconsidered bill as a solution. "I am disappointed that we weren't able to repeal these requirements today, but I intend to keep working until we do," said Baucus. "Our bill will allow small business owners to direct their focus onto job creation and growth rather than on paperwork. We will keep up our fight on behalf of small businesses so they can continue their critical work to create jobs and help the economy recover."

Stay tuned to NACM's eNews and NACM's Credit Real-Time Blog for further updates on the 1099 provision.

Jacob Barron, NACM staff writer

Let an NACM Affiliate Help You When Collection Litigation is Necessary

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Fed Beige Book: Economy Continues to Buck Fear-Based Forecasts, Albeit Slowly

Continued fretting over the potential for a double-dip recession again belies the facts presented by the Federal Reserve. The Fed's latest Beige Book roundup of economic conditions illustrates reason for optimism, though certainly not enough to fuel widespread cork-popping heading into 2010's swan song days.

The Dec. 1 edition of the Beige Book, the last to be released in 2010, found Fed contacts reporting improved economic conditions as well as optimism, cautious as it may be. The Fed noted overall improvements in 10 of the 12 reporting districts with the strongest overall gains found in the New York, Richmond, Chicago, Minneapolis and Kansas City regions. Manufacturing, as has been the case throughout a year defined by a tepid recovery, continued to carry most of the water, so to speak. The Fed notes in Beige Book: "Manufacturing activity continues to expand in most districts...Metal fabrication increased in Chicago, Kansas City, Dallas and San Francisco. Contacts in automotive industries reported gains in Boston, Cleveland, Richmond, Atlanta and Chicago. The Boston, Kansas City and San Francisco districts reported increased sales for high-technology manufacturers." Moreover, Fed contacts noted that even long-constrained capital spending plans are ramping up in areas including Philadelphia, Cleveland and Chicago. Only New York and Dallas have reported mixed or weakening manufacturing conditions during the most recent six week period.

The agriculture sector performed well, too, according to the Beige Book. Several districts reported record-setting yields for groups on strong global demand caused largely by weather and land problems in several European nations and Canada.

The struggling commercial real estate industry has yet to experience a significant rebound, but conditions improved in some areas, such as Boston, Richmond, Kansas City and Dallas, all of which have contacts feeling optimistic about even short-term prospects. It's been a few years since that has occurred. Still, there are just as many regions contending with flat demand and high vacancy rates, which will continue to constrain new construction activity. This was particularly notable in over-supplied markets such as New York and Atlanta, Fed contacts noted.

Meanwhile, credit quality appeared to improve in more districts than in previous months. Still, lending appeared to be a mixed bag throughout November with tightening standards reported in the New York region, little change in the central United States and noticeable easing for small firms in Atlanta.

See NACM's popular region-by-region breakdown of the Beige Book now, not to mention breaking news each week, on our Credit Real-Time Blog.

Brian Shappell, NACM staff writer

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For more information on NACM's MLBS, click here.

NACM Offers Two Added-Advantage Teleconferences Next Week

NACM's teleconference series ramps up for the holiday season next week, offering two 90-minute "Added Advantage" programs focused on providing the highest level of credit education.

Next week begins with attorney Bruce Nathan's latest session, "Risk Mitigation Devices When Dealing With a Troubled Company." Despite the nation's nascent economic recovery, no industry is yet immune from the threat of a financially distressed customer base. As any good seller knows, the time to protect one's company isn't after things turn sour, but well in advance. This teleconference, scheduled for December 6 at 3:00pm EST, will give attendees the tools they need to increase their chances of payment now, even if things with a customer go south later.

A number of credit enhancements exist that even experienced credit professionals might not know much about. Whether it's selling on a consignment or purchase money security interest basis, statutory lien and trust fund rights, or setoff and recoupment rights, creditors have a number of tools available to guard themselves from the risk of customer default, ensuring their company's livelihood isn't directly tied to their customers'. Nathan, of Lowenstein Sandler PC, will also discuss enhancement options that involve a third party, such as letters of credit, credit insurance, puts, guarantees and side collateral.

To register and learn more about how to mitigate your company's risk, click here.

Again, creditors looking to protect themselves from customer bankruptcy or default usually fare better when they've taken steps ahead of time to ensure they get back what they extended. Most business relationships begin with a contract, which is not only a place to set terms and prices, but also to establish the tone of the transaction and reduce the risk of future problems.

To learn how to use contract terms to get the upper hand from inception, join Jim Fullerton, Esq. on December 8 at 3:00pm EST for his latest NACM teleconference, "Advanced Contract Terms." Focusing on construction credit, Fullerton, of Fullerton & Knowles PC, will discuss a number of high-level terms to be used in credit applications, proposals, quotes, guarantees, lien waivers and joint check agreements. With Fullerton's expertise, attendees will leave the session able to win the routine "Battle of the Forms" that occurs in UCC sales, and able to determine which terms are binding on their company and their customer.

Fullerton will also review other advanced subjects like trust fund agreements, which can be used to make your customer a trustee for your receivable, limitations on your liability to a return of the purchase price, limitations on claims of defect or delay, and dispute resolution procedures like arbitration. To learn more, or to register, click here.

Jacob Barron, NACM staff writer

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EU Sending Green to Bailout Struggling Irish

The "Emerald Isle" dubiously and tentatively became the second EU member nation this year to officially ask for a financial bailout from the European Union's central bank as the global economic downturn continues to plague high-debt countries across the Atlantic. Pressured into taking it, Ireland will receive a bailout loan package worth about $90 billion.

The EU confirmed it will send a total of about 67.5 billion euros to Ireland, which is choking on debt from the real estate and banking crashes, starting with an immediate 10 billion euro infusion. The EU is requiring the nation to bring its annual deficits below 3% of its total gross domestic product by 2015 and is forcing the Irish to dip into the national pension fund to alleviate some immediate financial problems. The latter is an unprecedented move in Europe.

Ireland's Prime Minister Brian Cowan, after months of putting on a brave public face that the nation would not need assistance, announced last week that Ireland agreed to take a bailout package and will commit to a four-year austerity plan to reduce its swelling budget deficit. Still, making the bailout official has soured some investor outlooks on spending in European nations, especially debt-saddled Portugal, Ireland, Italy, Greece and Spain. Greece earned the distinction of being the first to take an EU bailout. Portugal appears next on the list of most vulnerable, as at least one ratings agency warned about financial peril and likely credit rating downgrades in the near future.

Ireland's economic situation became increasingly untenable amid rising budgetary costs tied to widespread bank failures caused largely by the bursting of an overheated, unsustainable housing bubble that ushered in a new wave of prosperity last decade. The situation is not entirely unlike the real estate bubble that struck in the United States, among many other nations, and helped spark a deep economic downturn. Earlier this year, Ireland's credit rating was downgraded significantly by both Moody's Investment Services and Standard & Poor's on debt fears.

Moody's Analytics Economist Melanie Bowler predicted the move will likely help European banks regain some confidence, at least in the short term, but it also almost assuredly will impede the prospects for any kind of Irish rebound and longer-term growth.

"Multinational companies, the backbone of the Irish economy, may start to look elsewhere," she said. "Following a sharp deterioration in competitiveness in the 2000s, some firms decided to relocate to cheaper locations in Europe. While recent wage cuts and weak price pressures are helping boost Ireland's traditional advantage, the bailout will raise questions about the stability of Ireland as a destination for foreign direct investment."

Perhaps more important is the likelihood that corporate taxes will be increased, said William Reinsch, director of the National Foreign Trade Council trade association. Those companies that made significant financial investments, such as the construction of large factories, may be stuck. However, those without as many strings indeed may look elsewhere. The most sensible way prevent flight may be to hold back on the likely desire to up those taxes, but the needs of the badly damaged economy might make such a strategy impossible, said Reinsch.

"What happens to their tax rates is the first question that needs to be asked, but it is not the first question that will be answered, honestly," Reinsch told NACM. "Those who made less of an investment [such as doing little more than locating some research and development operations there] may have incentive to relocate. It's hard to say, as none of that has been broached yet."

Working in Ireland's favor on the business front, however, is the fact that many of the companies that moved some operations are very large. This could render a quick exit strategy difficult to implement or unlikely to occur, based on previous history.

"Some companies are like aircraft carriers—they don't turn on a dime," Reinsch told NACM. "It takes them a while to evaluate what's happening."

Brian Shappell, NACM staff writer

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New U.S.-Panama Tax Agreement Paves Way for Free Trade Approval

The U.S and Panama have signed a new tax information exchange agreement (TIEA), allowing each country mutual access to the other's tax records and statutes.

In a ceremony at the U.S. Department of the Treasury, Treasury Secretary Tim Geithner and Panamanian Vice President and Minister of Foreign Affairs Juan Carlos Varela signed the agreement, hoping to usher in a new era of transparency between the two nations and potentially clear the way for the approval of Panama's pending free trade agreement (FTA). "Today, we are ushering in a new era of openness and transparency for tax information between the United States and Panama" said Geithner. "This bilateral agreement to provide for the exchange of tax information between our two countries reflects the commitment of the United States and Panama to the importance of transparency of tax information."

Under the terms of the TIEA, both countries will be able to seek information from the other on national taxes in both civil and criminal matters for tax years on or after November 30, 2007.

For Panama, the move was seen as more than just a statement of its commitment to openness, and added another feather to its increasingly impressive global economic cap. "Over the last year, Panama has signed double taxation treaties and agreements with many countries, including Mexico, Barbados, Portugal, Italy, Spain, France and Luxembourg. We have also completed similar negotiations with many more European and Asian countries as part of our National Strategy for the Promotion of International and Financial Services," said Panamanian President Ricardo Martinelli. "These agreements demonstrate that the Panamanian economy is one of the most competitive in Latin America and is becoming a destination for international investment, in part due to its world-class financial sector."Martinelli also noted that, in the past year, Panama was upgraded to investment grade by the Moody's, Standard & Poor's and Fitch ratings agencies, making them one of only five Latin American economies to hold such a title.

"This new tax accord moves us closer to final approval of a trade agreement between our countries that is vital to our economies—especially at a time when the United States is trying to increase exports," said Panamanian President Ricardo Martinelli after the TIEA was signed. "The FTA we negotiated, and which Panama has approved, would make over 88% of U.S. consumer and industrial exports to Panama duty-free immediately, with the remaining tariffs phased out over 10 years."

The U.S. and Panama drafted an FTA in June 2007, but while Panama approved the document less than a month after it was completed, the U.S. has yet to take any action on it.

Jacob Barron, NACM staff writer

Winter Arrives With Newfound Hope From Small Business, Commercial Real Estate Sectors

The story of 2009 for most involved in commercial real estate or small business was pain, as financial losses mounted for most with little light at the end of the tunnel. The story in 2010 was one of disappointment, as the long-predicted economic rebound never did materialize in any significant way, despite what some government "experts" tried to tell those on "Main Street." However, it appears at least possible that in 2011 the tale can be about hope and growth for the first time in several years, if recently optimistic studies hold true.

A trio of new studies found that small businesses and commercial real estate developers/landlords feel increasingly confident heading into this holiday season than in recent years. Still, that's not to say people are blindly drinking egg nog and expecting a boom year like five or six years ago.

"We see slight improvements in nearly every survey category of the index," said Discover Financial Services Director Ryan Scully of Discover's monthly Small Business Watch. "There would appear to be some measurable hope for the holidays that businesses will improve. Even still, there's no getting around the fact that 59% of America's small business owners still rate the economy as poor."

Unveiled Monday, the November index showed its third consecutive monthly gain, rising to a level of 87.2 from 84.2. The most recent figure is 11 points higher than in late 2009. Increases were logged in the number of small businesses planning to increase spending within six months, now one-in-four, and those who believe the economy is improving noticeably, now one-in-three. Perhaps most significantly, cash-flow concerns are down to their lowest level in 17 months, the Discover statistics indicate.

Meanwhile, a BancorpBank/Prepaid Expense Card Solutions Inc. study for November, found that 34% of small business respondents believed their profits would be "significantly better" in 2011, and 28% projected "slightly better" profits. Both levels were improvements from much of 2010. Only 5% expected a decline in profits next year, said the study. Additionally, more than half of the business owners predicted they would add full-time staff in 2011.

In the commercial real estate area, the National Association of Realtors (NAR) again noted signs of market stabilization and a foundation for improvement during the next year. Key for those in the commercial construction and renting game is a leveling-out of vacancy rates, which have hovered around sky-high levels since 2009.

"The basic fundamental of rising commercial leasing demand, resulting from a steadily improving economy, means overall vacancy rates have already peaked or will soon top out," said NAR Chief Economist Lawrence Yun. "The outlook for the office and industrial markets has moderated with modestly declining vacancy rates expected as 2011 progresses, while the retail sector should hold fairly steady." Granted, there are still many impediments to a robust recovery in the industry, which hit its downturn later than several other sectors and, as such, is a bit behind the curve.

Brian Shappell, NACM staff writer

To view past eNews issues or to visit the NACM Archives, click here.



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