eNews July 14, 2011

July 14, 2011

News Briefs

  1. Oil Prices Driving Near Record Trade Deficit
  2. China Bucks Talk of Slowing Economy, Inflation with Growing Trade Surplus
  3. U.S. Treasury Mandates E-Invoicing from Bureaus and Suppliers
  4. All Three FTAs Pass Committee Mock Markup, TAA Intact
  5. Newfound Concern over Italy Gripping World Markets
  6. First Wave of Small Business Lending Fund Hits Community Banks


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Oil Prices Driving Near Record Trade Deficit

At nearly every opportunity of late, the Obama Administration has tried to reiterate its commitment to trade and its goal to double exporting levels by 2015. Unfortunately, those efforts appear to be doing little to stem the tide of a trade gap increasingly beholden to volatile commodity prices that again flared in May.

Little could be done to put a positive spin on trade statistics for May, unveiled on Tuesday by the Commerce Department: the trade deficit increased as a near-record $225.1 billion in imports was logged in May compared to $174.9 billion in exports, and the $50.2 billion deficit stands as the second worst on record. Exporting of goods actually decreased by $1.4 billion in the month, while importing of goods jumped by $5.3 billion. And the small exporting increase on the services side ($0.4 billion) was largely erased by services' imports uptick ($0.3 billion).

The key driver of the widening deficit for the month was high oil/fuel/petroleum-based product prices. The surge in said prices was felt by nearly every U.S. industry. In fact, Commerce Department statistics illustrate that the U.S. trade deficit to OPEC alone rose to $11.3 billion from the previous month's $9.6 billion. It was the second largest increase behind that of China, which rose to $25 billion from $21.6 billion in April.

However, one somewhat positive point is that some tightening in the deficit could be expected for June or July, as oil/petroleum prices eased considerably as the U.S. summer began. In addition, the United States maintained trade surpluses with the likes of Hong Kong and Australia while lowering its deficits or keeping levels stable with key trade partners in Germany, Japan, Ireland and Nigeria, according to the Commerce Department.

Though not particularly good news for U.S. businesses involved in international exporting, economist Ken Goldstein, of The Conference Board, argued the statistics have little chance to have any measurable impact on business or consumer confidence as well as the pace of economic recovery. Thus, the May Commerce statistics are not worthy of panic.

"The bill for imported oil jacked up the deficit in May," Goldstein told NACM. "Take that out, and the story is weak exports and weaker imports. And that's the lead for not just this report but the next few. And so, trade is moving from a strong positive for GDP growth to more neutral. It's one more reason why the U.S. economy is stuck in first gear and will be through the second half of 2011. It's not a slowing economy but one very unlikely to regenerate strong positive momentum."

For full Commerce Department trade statistics for May 2011, click here.

Brian Shappell, NACM staff writer

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China Bucks Talk of Slowing Economy, Inflation with Growing Trade Surplus

China, for several years now the king of the world's "emerging" economies and overall the second largest in the world, continued to expand its trade surplus despite domestic issues that include rising wages for its domestic workers, surging inflation and talk of dramatically slowing economic growth. Still, the nation may be on the brink of massive change.

Chinese officials noted this week that its trade surplus increased to $22.3 billion in June, up more than $10 billion from the previous month. Hinting at signs of a slowing economy, China's import growth rate, though still high at 19.3% in June, fell from May's 28.4% import growth rate. Meanwhile, exporting continued to surge, up 17.9% for the month.

The drop in importing could be a hit for U.S.- and European Union-based businesses that have been increasingly reliant upon growth, especially in China's middle class consumer culture, to offset losses and stagnation caused by the lack of a strong economic rebound in most parts of the globe.

Officials from other economic powerhouses, both traditional and emerging, have been pushing the Chinese on the topic of undervalued currency and the perceived trade advantage it provides. Just last month, U.S. Export-Import Bank officials raised the idea again, noting that the United States needs to "address market distortions that hinder our global competitiveness" and that emerging economies' influence on export markets, which includes more of a role being played by foreign state-owned banks, means "the rules of the game have changed."

However, Armada Corporate Intelligence Managing Director Chris Kuehl, PhD, who also serves as NACM's economic advisor, noted that China's export advantages are already eroding for reasons such as wage hikes for its increasingly demanding middle class. He characterized China's trade situation and manufacturing economy as one heading for a significant transition, one inspiring a "litany of questions about the future that is almost numbing."

"The Chinese economy of the next 10 years will look far different than it does today," Kuehl said in Armada's Business Intelligence Brief. "It will be more internally focused, and it will be more oriented toward the higher-value manufacturing that now comes from the U.S., Europe and Japan. This will have some profound implications for the country as a whole, as this will likely mean a more restless and demanding middle class combined with a growing population of people unable to get jobs as the nation transitions away from those labor-intensive sectors." The latter point, if it proves accurate, could lead to a lengthy trend of diminishing demand for consumer products in China.

Brian Shappell, NACM staff writer

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U.S. Treasury Mandates E-Invoicing from Bureaus and Suppliers

The U.S. Treasury announced yesterday that it is mandating that all Treasury bureaus implement electronic invoicing by the end of the 2012 fiscal year. Moreover, in fiscal year 2013, the Treasury will require all of its commercial vendors to submit their invoices using electronic means only.

The government's invoice processing solution of choice will be the Internet Payment Platform (IPP), which several other federal agencies like the Small Business Administration (SBA) and, most recently, the Social Security Administration (SSA) have been using since November 2007.

In the announcement, the Treasury noted that the e-invoicing mandate will apply to the department, meaning that it will apply to the Treasury itself and to its many bureaus. IPP is actually supported by the Treasury Financial Management Service (TFMS), a bureau existing beneath Treasury's umbrella, but now, IPP will be adopted by the department's remaining bureaus, which are the Alcohol Tobacco Tax and Trade Bureau, the Bureau of Engraving and Printing, the Bureau of Public Debt, the Financial Crimes Enforcement Network, the Financial Management Service, the Inspector General, the Treasury Inspector General for Tax Administration, the Internal Revenue Service, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the U.S. Mint and the Departmental Offices. All of these will have to implement IPP and begin processing invoices electronically by the end of FY2012. Suppliers and sellers to these bureaus and agencies will have to submit their invoices via IPP by FY2013.

"Electronic invoicing will mean lower costs for taxpayers and faster payments for private sector companies doing business with the federal government," said Deputy Secretary of the Treasury Neal Wolin. "Treasury is continuing to move forward to identify innovative ways to use technology to cut waste and improve efficiency."

IPP, as both an invoicing tool and a processing tool, offers the federal government the same advantages that a similar electronic system would offer to a company and its customers. IPP is expected to reduce Treasury's invoice processing costs by 50% and save approximately $7 million annually, while offering vendors who use IPP the advantage of faster payments for their services, greater assurances that their invoices are received and processed accurately, and immediate online access to their invoice status for all agencies using IPP.

"The U.S. Treasury's announcement today is another positive step as we work toward improved government efficiency and transparency, and overall better governance," said Sen. Tom Carper (D-DE), chairman of the Homeland Security Committee's Subcommittee on Federal Financial Management. "As we work to rein in our massive federal debt and deficit, we have to look in every nook and cranny of the federal government to find ways to save taxpayer money while still delivering the services that Americans need and expect from the government."

Jacob Barron, NACM staff writer

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All Three FTAs Pass Committee Mock Markup, TAA Intact

One remaining sticking point on the United States' pending free trade agreements (FTAs) with South Korea, Panama and Colombia was whether or not passage would include an extension of the Trade Adjustment Assistance (TAA) program. Republicans argued against prolonging the TAA while Democrats and the White House wanted an extension coupled with the FTAs' approval.

However, a recent mock markup of legislation that would approve all three FTAs and extend the TAA program passed the Senate Finance Committee, indicating that there is enough of a bipartisan appetite for the two aspects of the current administration's trade agenda.

Under the most recent agreement, the result of bipartisan discussions among the Senate Finance Committee, the White House and the House Ways and Means Committee Chairman Dave Camp (R-MI), the TAA program would be extended through December 31, 2013 and included in the bill to approve the U.S.-South Korea FTA. Other implemented bills would approve the Colombia and Panama FTAs, and establish the necessary conditions for their enforcement. None of the draft bills considered were passed with any amendments.

"Today's vote brings us one step closer to creating the hundreds of thousands of new U.S. jobs and the growth that our economy desperately needs. It means small business owners will have new opportunities to expand their businesses and hire new workers and many folks searching for work can get the training they need to get a new job," said Sen. Max Baucus (D-MT), chairman of the Finance Committee and a heavy TAA advocate. "Our bipartisan agreement on Trade Adjustment Assistance in tandem with the free trade agreements will open lucrative new markets to American goods while ensuring U.S. workers have all the help they need to adapt and thrive in the 21st century global economy. The jobs and opportunities this package creates are simply too important not to work together to enact both Trade Adjustment Assistance and the trade agreements—and to do so without delay."

Under the Trade Promotion Authority Act and its "fast track" procedures, Congress cannot technically offer amendments to the final implementing bills submitted by the White House. Mock markups are the only opportunities in which Congress gets a chance to offer amendments and make recommendations to the administration's proposals. Following the administration's review of any amendments that the Senate Finance and House Ways and Means Committees approve on the mock markups of these draft implantation bills, the final version is submitted to Congress for a vote.

Jacob Barron, NACM staff writer

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Newfound Concern over Italy Gripping World Markets

Italy, the third largest economy in the European Union (EU), has long been among the highest-debt nations in Europe, which is why they've been included in the PIIGS grouping with Portugal, Ireland, Greece and Spain. However, concern about its debt situation spread like wildfire throughout the mainstream media on both sides of the pond in the last week or so, and the nation's borrowing costs have reached record highs.

Even as Ireland's credit rating was cut to junk levels by Moody's Investment (see NACM's blog) and the EU and International Monetary Fund struggled to figure out how to keep Greece afloat, a crisis in confidence in Italy's ability to handle its financial situation gripped the headlines. Perhaps it's for good reason.

While the bailouts of three other PIIGS nations have been well-documented, Italy's outstanding debt load of about USD $2.2 trillion is nearly five times the size of Greece's debt and more than 10 times that of the respective commitments of Ireland and Portugal. The more it has been discussed, the more damaging it has been to investor confidence. To wit, Italy's borrowing costs reached a record and its government bonds are being considered as risky as ever in recent days. All this can't help but act as a further drag on the long-awaited and underwhelming global economic rebound.

Analysts believe Italy needs to take quick and sharp austerity actions to stave off problems. Though resistant at first to a level some could call petulant, Prime Minister Silvio Berlusconi now appears ready to push to get a better hold the nation's debt problem. However, the various scandals that have dogged the Berlusconi government have led investors, citizens, opposing politicos and even former high-level supporters to unilaterally question his competence in public.

One thing that appears to be clear is that the Italian debt issue, as well as the intertwined topic of a potential need for political reform there, is unlikely to abate in the short term, which likely is increasingly bad news for EU and United States businesses alike.

Brian Shappell, NACM staff writer

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First Wave of Small Business Lending Fund Hits Community Banks

The $30 billion Small Business Lending Fund (SBLF) issued its first batch of capital to community banks last week, to the tune of $123 million. Enacted by a slightly less-divided Congress last year as one of the more notable provisions of the Small Business Jobs Act of 2010, the fund was designed to create jobs by encouraging banks to free up credit for small companies.

Under the fund, the U.S. Treasury releases money to smaller community banks and the price they pay for that SBLF funding decreases as the bank's small business lending increases. The initial dividend rate is 5% at the highest, but if a bank's small business lending increases by 10% or more, the rate will fall to as low as 1%. Banks that increase their lending by amounts less than 10% can still benefit from rates set between 2% and 4%, but if lending does not increase in the first two years after receiving funding, the dividend rates increase to 7%.

"I fought on the floor with my former colleague, Sen. George LeMieux, working hard to include credit relief for small businesses as an addition to the Small Business Jobs Act of 2010," said Sen. Mary Landrieu (D-LA), chair of the Committee on Small Business and Entrepreneurship. "With my Democratic colleagues and [former] Sens. LeMieux and [George] Voinovich, we continued to push the envelope for this new and innovative program to get capital into the hands of small businesses and, today, we are seeing our hard work come to fruition."

Six banks received money in the first disbursement, with the two greatest shares of funding, $48.3 million and $40 million respectively, going to Community Trust Financial Corporation in Landrieu's home state of Louisiana, and ServisFirst Bancshares Inc. in Alabama. The remaining four banks receiving money were Virginia Heritage Bank in Virginia, Level One Bancorp, Inc. in Michigan, U&I Financial Corp. in Washington, and Pioneer Bank, SSB in Texas.

Jacob Barron, NACM staff writer

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