December 29, 2011
The holiday season has been a good one in terms of economic growth, at least for the retail community. That became pretty obvious in this month's Credit Managers' Index (CMI). After seeing a pretty meager performance in the service sector since the middle of summer, this month's gains were impressive and suggest that most of the glowing reports from retailers were accurate. The story on the manufacturing side was not so upbeat, but that is not unusual this time of year. Manufacturers do not generally see big gains in the fourth quarter. The service side of the economy is another story, especially that part connected to the consumer and the holiday season.
Overall, the gains were solid as the December CMI went from 53.5 to 54.4, the highest reading since May, but not as impressive as the index reading a year ago. In December 2010, the CMI reached 55.8 and there was some talk of a breakout year in 2011. That did not come to pass and the index started to slump by March. By the end of the summer there was concern that CMI readings would slip below growth and end up in the 40s again. That also did not take place, and by the end of this year, gains pushed the index back into the mid-50s.
"Throughout the year, the manufacturing and service sectors exchanged positions with one another, and it was a rare month when both sectors were on the same track," said NACM Economist Chris Kuehl, PhD. "December was no exception. The service sector grew much faster than manufacturing due to the strength of the retail segments of the index."
In general, the combined level of sales started to grow again and jumped back above 60 after having fallen to 58.2 in November. The other piece of good news was that dollar collections gained considerably, from 56.9 to 61.4. This kind of gain is often seen this time of year as retailers have more cash to work with and many companies are trying to get their books in order. The gains in favorable factors, which moved from 58.8 to 60.5, would have been greater were it not for the decline in new credit applications. This is also somewhat more common at the end of the retail season, and the offsetting good news is that the amount of credit extended moved from 62.4 to 64.7.
Unfavorable factor numbers were not as positive, although the majority of the movement was insignificant. The problem is that most of these index readings are still in the 40s. Rejection of credit applications is still in the contraction zone at 49.5. The index for accounts placed for collection moved into expansion territory, but just barely, rising from 49.5 to an even 50. Only the bankruptcy filing factor is solidly in expansion territory with a reading of 56, but that is down from the previous month's reading of 56.7. "In general it can be said that many companies remain in distress, and this doesn't bode well for the coming months when there will be no boost from holiday spending," said Kuehl.
The index of unfavorable factors did stay in the expansion zone, but only by the narrowest of margins—expanding from 50.1 to 50.4. "This is certainly a better trend than the one noted some months ago, but it has been more than a year since this index has been above 53," said Kuehl. "The fact remains that many businesses are still struggling with debt and cash flow. The retail sector did very well in 2011, but the gains were anything but universal. As the data starts to come out, it will be evident that some companies did not manage to turn things around this year. It has already been announced that Sears/K-Mart did poorly compared to their competitors and will soon be closing over 100 stores. There will be more such announcements in the weeks to come as retailers finish computing this year's sales season. The most persistent concern is that few companies came out of 2011 with enough momentum to carry them very far into the coming year."
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China has lobbed fresh, thinly-veiled barbs and hinted at challenges it would mount in terms of its currency and U.S.-based credit ratings agencies. Chinese banking official Zhou Xiaochuan announced that China, unsatisfied with the quality and accuracy of ratings coming out of the dominant U.S.-based credit ratings agencies (Moody's Investment Services, Standard & Poor's, Fitch Ratings), was seriously considering launching its own ratings agency. Additionally, he encouraged China's largest financial institutions to consider launching their own competition to the U.S.-based big three or at least add more researchers and analysts in order to rely less on these existing services. The agencies have grown increasingly unpopular due to what some characterize as trigger-happy downgrades of sovereign credit ratings of late, perceived conflicts of interest between actual ratings and product offerings, and shaky performances in the lead-up to the global economic freefall.
Granted, there would be a lot of obstacles to overcome in either Chinese scenario as international trust of its government and banking system still lags far behind its status as a manufacturing hub. And that doesn't even take into account the large cost to get anything competitive up and running to which potential clients, stuck in an ongoing tepid economic recovery, would be unlikely to pay a premium.
In addition, China and Japan announced a new currency and trade partnership designed to help both the renminbi and the yen. Though largely symbolic and shrouded in a lack of finite details to date, the move appears to be a message that both are trying to gradually reduce reliance on the U.S. dollar as the dominant currency. While a statement not to be ignored, it's unlikely to push the Chinese currency ahead of the dollar on the world stage at any rapid pace. As the Federal Reserve's Matthew Higgins stated in an NACM interview as well as to attendees at FCIB's New York International Roundtable in September, it could still take decades for the dollar to be replaced as the world's go-to currency.
Brian Shappell, NACM staff writer
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President Barack Obama is expected to formally request a $1.2 trillion debt ceiling increase from Congress this week.
The increase would cover the government's expenses through 2012, preventing the occurrence of a potentially bruising debt limit battle in an election year. It would also be the third increase obtained by the president under the terms of the Budget Control Act, which passed in dramatic fashion last August. The prior two increases totaled $900 billion. After the proposed increase, the nation's debt ceiling would increase from to $15.2 trillion to $16.4 trillion.
The Budget Control Act requires the president to submit a written notification to Congress when the country is within $100 billion of its borrowing limit. Treasury officials expected this to happen tomorrow at the close of business.
After requesting an increase, Congress can, within 15 calendar days, issue a "joint resolution of disapproval," which amounts to a rejection of the president's proposal. If no such resolution is approved by Congress within that period, then the debt ceiling would be increased by default. Even if Congress does successfully reject the proposed increase, the president could just as easily veto the resolution and raise the limit anyway.
Some minor controversy erupted on Capitol Hill this week after the news of the increase emerged, since the 15-day limit on a resolution of disapproval could be reached before Congress returns from recess. Assuming the written request for an increase arrives on December 30, the debt ceiling would rise on January 14, while Congress doesn't return until January 17.
Jacob Barron, CICP, NACM staff writer
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Despite seeing its bankruptcy filing thrown out by a judge and later watching that same judge dismiss an appeal over a missed deadline, the Harrisburg, PA city council's attorney is making another run at regaining the right to file for Chapter 9.
Attorney Mark Schwarz has confirmed that he has appealed U.S. Bankruptcy Court Judge Mary France's dismissal of the first appeal to the original decision rejecting the municipal bankruptcy the city council filed this fall. Schwarz argued that the decision by France, who rendered the original decision that the bankruptcy filing violated a new state law that she believed was constitutional, was arbitrary and a violation of due process.
Schwarz missed the deadline to file said appeal because of confusion regarding its due date. Schwarz said he believed the proverbial clock leading toward an appeal deadline started once France provided a written opinion as to why she rejected the council's attempt to file for municipal bankruptcy.
France rejected the infamous Harrisburg Chapter 9 filing last month on grounds that the city council, which did not have the support of the mayor or the state, was not authorized to file it. France said a state law banning such a bankruptcy filing before July 2012 was indeed constitutional, effectively cutting off the council's legs. Harrisburg's city council previously defied recommendations by the state and its own mayor, who has a contentious relationship with some council members, by voting 4-3 to file for bankruptcy. Supporters of doing so said it would give the city leverage to renegotiate debt largely tied to a massively unsuccessful trash incinerator project and to be fairer to taxpayers. The estimated size of the city's debt is upwards of five times the city's entire annual budget.
Lowenstein Sandler PC's Bruce Nathan, Esq. noted that the rejection and battle over the legitimacy of the Harrisburg filing should not be a complete shock. After all, he noted, about one-third of all Chapter 9 cases filed since 1980 have been dismissed.
"These cases are and have always been risky in terms of likelihood of success," Nathan said. "There are difficult eligibility requirements, and there's a lot of uncertainty because there's not been a lot of case law." Still, he noted the process can be positive in the right circumstances despite negatives often associated with a municipal filing, such as impact on credit ratings, cost of process and stigma.
Brian Shappell, NACM staff writer
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In its annual report to Congress on international economic and exchange rate policies, the Treasury Department urged China to take greater strides in letting its currency appreciate.
Many have noted that China's renminbi (RMB) is perennially undervalued, thereby offering Chinese producers an unfair advantage in global export markets. Progress has been made, according to the Treasury, but deeper problems have yet to be addressed. "China's real effective exchange rate has exhibited persistent and substantial undervaluation, although the estimated range of misalignment has narrowed over the course of the past 18 months," said the report. "The underlying factors that distort China's economy and constrain global growth remain."
The Treasury noted that the process of appreciation remains incomplete, arguing that, given the rapid productivity growth in China's trade goods sector, the RMB should be better aligned with its actual value by now. "China's large foreign reserve accumulation has prolonged the misalignment in China's real effect exchange rate and hampered progress toward global rebalancing, including among economies that compete with China for exports," said the report.
In its assessment, the Treasury also aimed to sell the idea of currency appreciation to China. "It is in China's interest to allow the exchange rate to continue to appreciate, both against the dollar and against the currencies of its other major trading partners," said the report. "A lack of continued appreciation by China would prevent the exchange rate from serving as a tool to encourage consumption so as to maintain strong, sustainable growth, further complicate the adjustment needed for broader financial sector reform and undermine China's stated goal of strengthening domestic demand."
While Treasury noted that China's appreciation efforts have been insufficient, it made no specific threats against the country should it continue to drag its feet. "Treasury will continue to closely monitor the pace of RMB appreciation and press for policy changes that yield greater exchange rate flexibility, level the playing field and support a pronounced and sustained shift to domestic-demand led growth," said the report.
Jacob Barron, CICP, NACM staff writer
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