August 11, 2011
Few outside of Washington appeared to believe the partisan game of chicken played by Congress and the White House over the debt ceiling was necessary, but at least it didn't seem to do any real damage. That was until last weekend, when Standard & Poor's (S&P) stripped the United States of its prestigious AAA rating on what it described as unease with a political "brinksmanship" that shook its confidence in the nation's ability to deal with its large debt with the highest level of proper or efficient manner.
S&P lowered its long-term sovereign credit rating for the United States from the top level to AA+, with its short-term rating being affirmed at A-1+. Additionally, the outlook on the long-term rating is viewed as "negative" by S&P, which hit hard at federal lawmakers over the political theatrics associated with the debt-ceiling debate an increasing number of analysts are characterizing as an unnecessary, manufactured controversy.
"We lowered our long-term rating on the U.S. because we believed the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process...The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective and less predictable," said S&P in a statement. The agency continued its bashing in an uncharacteristically long eight-page report explaining the rating downgrade saying the agency was "pessimistic about the capacity of Congress and the Administration" to govern properly during a challenging economic period. S&P also noted it was wary of the current crop of lawmakers effectively tackling structural debt issues or a needed lift to the spirit of bipartisan cooperation before the 2012 presidential election.
While the downgrade caused a wild ride on Wall Street (down 634 points/5.5% on Monday, up 430 on Tuesday and down 519 on Wednesday) and general panic on the airwaves of television and radio, fears that the bond markets would crumble were not realized.
"The most important point is that this downgrade meant almost nothing to the bond markets," said NACM Economist Chris Kuehl, PhD. "The assumption was that a downgrade would mean that the demand for treasuries would drop and, therefore, the U.S. would pay higher yields. Interest rates would rise and everybody would feel the pinch. As the market dropped yesterday, the investor sought a safe haven...in bonds. The point is that ratings are not the only factor in an investment decision."
Kuehl admitted it still may be months before the full implications of the downgrade are realized. However, it is worth pointing out that S&P's reputation previously took a dive, like its two other major rating agency counterparts, for botching its ratings so badly in the run-up to the biggest global economic downturn in more than a half-century. Also, as Kuehl put it, S&P has a reputation for trying to influence behavior, sometimes with extreme petulance, with its ratings.
Brian Shappell, NACM staff writer
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Bankruptcy filings dropped by 8% in the first half of 2011 when compared to the same period in 2010. A total of 745,968 cases were filed in the first six months of the year, down from the 810,209 cases filed during the same period last year.
The decline in business filings was even sharper, with business cases for the six-month period ending June 30 decreasing by 15% to 24,680. Chapter 7 business liquidations also fell by 15%, with 17,284 in the first half of 2011 and 20,385 during the same period in 2010. Chapter 11 business filings registered the sharpest decrease, falling 16% from last year's total.
The overall 8% drop was driven largely by a separate decline in filings by individuals or households. Consumer cases fell by 8% to 721,288 in the first six months of 2011, compared to the 2010 total of 781,150. Consumer Chapter 7 cases decreased by 9% and Chapter 13 cases fell by 3%.
"The broad trend of a leveling or even decline in consumer bankruptcies in tandem with a sluggish economy is a reflection of the deleveraging of household debts and tightening of consumer credit over the past year," said Samuel Gerdano, executive director of the American Bankruptcy Institute. "Should these trends persist, we expect to see fewer consumer bankruptcies in 2011 than were filed in 2010."
On a quarterly basis, total bankruptcies actually increased by 4% in the second quarter, from 366,178 in the first, to 379,790 in the second. Consumer bankruptcies fueled the increase, rising by 4% in the second quarter, while business filings fell by 1% in the same period.
Locally, a number of districts experienced increases when considered over the 12-month period ending on June 30, 2011. While Nevada retained its title as the state with the highest per capita filing rate in the country, significant increases in total filings over the 12-month period were seen in the Southern District of Florida (15.1%), the Central District of California (13%) and the District of Utah (12.8%). A total of 19 of the nation's 94 districts experienced an increase in the last year.
Jacob Barron, NACM staff writer
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Under the intense scrutiny of world markets days after the United States' embarrassing credit downgrade (see story 1), the Federal Reserve emerged from its latest monetary policy meeting pledging to keep interest rates low and stay the course on its Treasury securities purchases. However, Chairman Ben Bernanke and company failed to unveil any new programs to help out the stalled economy, which the Fed finally admitted has been significantly slower in rebounding than predicted even as recently as six weeks ago.
The Fed's Federal Open Market Committee (FOMC) held interest rates at a range between 0% and 0.25% Tuesday. Additionally, the FOMC uncharacteristically gave a time range for keeping rates low through mid-2013. The aim is to ease concerns of the business sector. Previously, the FOMC fell back on vague statements of keeping rates low "for an extended period." The FOMC also opted to continue its "existing policy of reinvesting principal payments from its securities holdings."
"I actually was surprised to see that they committed a firm deadline on the rate," Xiaobing Shuai, economist for Chmura Economics & Analytics, told NACM. "I did not expect the Fed would tie its hands for so long. The Fed action implies that the economy was even weaker than everyone thought. I think the action will help the economy for the next year, but I worry that by committing the rate for two years, inflation may pick up even more in the second half of 2012. I'm not sure what the Fed will do then."
Without making mention of the Standard & Poor's rating decrease, the FOMC noted economic growth was not likely to increase in rapid fashion anytime soon. It pegged long-term factors such as the high unemployment rate and staggering housing prices as well as more temporary problems such as supply-line disruptions tied to the Japanese earthquake/tsunami disaster, as the main hurdles to a hot recovery period.
"The committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting...Moreover, downside risks to the economic outlook have increased," the Fed's statement noted. "The committee also anticipates that inflation will settle, over coming quarters."
Ken Goldstein, an economist with the Conference Board, noted the Fed may not have announced a Quantative Easing 3 stimulus program, but they certainly left the option on the table. However, there's reason for pessimism that any Fed effort will work effectively against the economy's ills at this time without better monetary policy coming from the federal government.
"QE3, should it be implemented, will have less impact than QE2, which itself was largely ineffectual," Goldstein told NACM. "The chance of recession is uncomfortably high, one-in-three, and there is fear that it probably will be much higher, well over 50-50, at some point. But the larger issue is that the consumer remains in austerity. Business has no need to step up investing or hiring while consumers remain in austerity; so job and income remain slow, reinforcing consumer austerity." In short, the U.S. economy may be stuck in the slow lane for a considerable period.
Brian Shappell, NACM staff writer
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Small businesses see little reason for optimism in today's current economy, and have for most of 2011.
The latest Small Business Optimism Index, conducted by the National Federation of Independent Business (NFIB), fell for the fifth consecutive month, this time by 0.9 points in July, a larger decline than in each of the preceding three months. The index now stands at 89.9, below the average reading of 90.2 for the last two-year recovery period.
"Given the current political climate, the protracted debate over how to handle the nation's debt and spending, and now this latest development of the debt downgrade, expectations for growth are low and uncertainty is great," said NFIB Chief Economist Bill Dunkelberg. "At the two-year anniversary of the expansion, the index is only 3.4 points higher than it was in July 2009. And considering the confidence-draining performance of policymakers, there is little hope that Washington will stop hemorrhaging money and put spending back on a sustainable course. Perhaps we might begin referring to the 'Small Business Pessimism Index' from now on."
Owners continued to cite poor sales as their top problem, although the percentage doing so fell by a few points, which echoes the stabilization in sales shown by NACM's July Credit Managers' Index (CMI). "In comparing the CMI readings to other indices, it is apparent the economy has still not committed to either continued growth or a real decline," said NACM Economist Chris Kuehl, PhD, in the latest CMI report. "There have been some positive signs from the latest set of leading economic indicators released from the Conference Board, but there have also been renewed signs of distress as far as consumer confidence is concerned. Not surprisingly, there is a sense that much has stalled in the economy as uncertainty has been the rule of the day."
Lawmakers in the House used the latest NFIB readings to lay into the Obama Administration, using some familiar talking points. "Between the regulatory requirements, nervousness about future tax burdens, unsustainable government spending and the cloud of massive debt that is weighing on the economy, you can see why small businesses are expressing this kind of pessimism and despair," said House Small Business Committee Chairman Sam Graves (R-MO). "What Washington needs to do is provide certainty for small businesses by reducing burdensome regulations, reforming our tax code, quickly passing free trade agreements and addressing our out-of-control federal debt."
In the survey, after poor sales, the second and third most important problems were "taxes" and "government requirements and red tape."
Jacob Barron, NACM staff writer
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The big three U.S.-based credit ratings agencies have been slow, to say the least, in handing out upgrades of credit ratings or outlooks for nations outside of the BRICs (Brazil, Russia, India, China) since they were universally lambasted for their poor analysis and risk assessment in the run-up to the global economic downturn. That's what makes last week's gushing over Panama by Moody's Investment Services all the more noteworthy.
Though leaving the nation's credit rating unchanged, Moody's upgraded Panama's outlook to positive from stable. Perhaps even more significant were the agency's statements lauding Panama's economic evolution, centered largely on the $5.25 billion Panama Canal expansion project. Said Moody's, "The Panamanian economy has continued to show remarkable and enduring dynamism, and is well positioned to grow at rates above its potential, thanks to the expansion of the Panama Canal and the government's ambitious efforts to improve and modernize the country's infrastructure...Panama continues to be one of the fastest growing and diversified countries in the Baa rated category."
As discussed in a Selected Topics story in the November/December 2010 edition of Business Credit, the expansion of what had become an antiquated pass-through will allow much larger cargo ships, among other vessels, to travel through the canal. This will open up much faster and more direct shipping options to and from many ports, especially in the United States. To wit, the biggest benefit to domestic exporters and those abroad is cheaper shipping costs for reasons including lower fuel costs because of shorter routes from the biggest ships, the lessened needs for larger ships to stay in ports longer to guarantee full load and competition largely absent from the market at present. Additionally, the expansion should spur more choice and variety as far as ports that realistically can be used. With an open, expanded canal, ports such as Savannah, New Orleans and Houston become much more important.
Additionally, it expands capabilities of West Coast-based businesses and ports to access emerging economies on the eastern shores of Latin America. This includes the pearl of economies in that part of the world: Brazil. The nation was ranked 10th among nations receiving exports from U.S. companies, taking in $41 billion in products in 2008, according to the U.S. International Trade Commission and a 2011 report from left-leaning Washington think tank the Brookings Institution. And that number is expected to rise according to nearly all predictions, as Brazil's growing appetite for products emanated from the transportation equipment industry as well as consumer products aimed at its newly emerging middle-class and tourists en route there for the 2014 FIFA World Cup and the 2016 Summer Olympics.
Brian Shappell, NACM staff writer
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The U.S. Export-Import Bank (Ex-Im) has broken its all-time record for export finance authorizations. Last week, for the first time, loan authorizations exceeded the $24.5 billion record, set just last year, and with two months remaining before the end of the fiscal year, Ex-Im will close the year out with an even higher total.
The 2011 fiscal year authorizations to date represented a 70% increase over the bank's 2008 total from the same period of $14.4 billion. Overall, Ex-Im financing supports over $31.5 billion in export sales and 213,000 American jobs, along with 2,548 small business export finance transactions.
"Today, Ex-Im Bank set an authorizations record for a third straight year," said Fred Hochberg, chairman and president of Ex-Im. "Coupled with overall U.S. exports being up over 16%, the nation is on pace to achieve President Barack Obama's goal of doubling exports by 2015. That's great news for 213,000 American workers, American businesses and the U.S. economy."
Buyers in Colombia, Turkey and India led the list of countries with the highest Ex-Im export finance authorizations by total dollar amounts. These three nations are among the nine identified by Ex-Im as offering the greatest potential sales for American exporters. The other countries on the list are Brazil, Mexico, Indonesia, Vietnam, Nigeria and South Africa.
In a happy coincidence that tipped the bank's cap to the nation's small businesses, Ex-Im noted that the transaction that pushed the bank over its record involved a smaller firm from Texas, after the board approved a $57.8 million loan to the company.
Jacob Barron, NACM staff writer
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