eNews January 19, 2012

January 19, 2012

News Briefs

  1. S&P Downgrades France, Italy, Among Several Others
  2. Russian Politics Leading to Shaky Ground? Fitch Says Yes
  3. President Obama Looking to Gut Commerce Department, Streamline
  4. "Insourcing" Replacing "Outsourcing" as Companies Bring Jobs Back Home
  5. Manufacturing Outlook Blurred by Europe, But Far from Negative
  6. Small Business Outlook Remains Dim, According to Chamber


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S&P Downgrades France, Italy, Among Several Others

Standard & Poor's (S&P) threw fuel onto the euro fire last week as the agency stripped France of its formerly pristine AAA credit rating. The country now has a AA+ rating, a single notch lower than the top-level AAA.

In addition to downgrading France, S&P took ratings actions on 15 other members of the euro zone: the long-term ratings on Italy, Portugal, Spain and Cyprus were lowered by two notches, the long-term ratings on Austria, Malta, Slovakia and Slovenia were, like France, lowered by one notch, and the long-term ratings on Belgium, Estonia, Finland, Germany, Ireland, Luxembourg and the Netherlands were affirmed.

The reason for the downgrades was uniformly related to lackluster policy reactions on the part of the continent's leaders. "Today's rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone," said S&P in their announcement. "In our view, these stresses include: (1) tightening credit conditions, (2) an increase in risk premiums for a widening group of euro zone issuers, (3) a simultaneous attempt to de-lever by governments and households, (4) weakening economic growth prospects and (5) an open and prolonged dispute among European policymakers over the proper approach to address challenges."

While the downgrades are by no means appreciated by the ailing euro zone, S&P noted that the ratings still remain at comparatively high levels, with only three member nations below investment grade (Portugal, Cyprus and Greece). NACM Economist Chris Kuehl, PhD also noted that the downgrades could have bigger ramifications for the ratings agencies themselves, rather than for the countries receiving them. "It will be the rare set of leaders that will seek to please the ratings agencies instead of making the voter happy," said Kuehl. "As a matter of fact, the governments in Europe have been calling for restrictions on the ratings agencies, and this latest set of assessments will add fuel to that fire."

Outlooks for the 16 countries considered in this batch of ratings actions were largely negative, with 14 of them suffering from a one-in-three chance of another downgrade in 2012 or 2013. Only Germany and Slovakia's ratings outlooks were changed, both of them upgraded from negative to stable.

Jacob Barron, CICP, NACM staff writer

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Russian Politics Leading to Shaky Ground? Fitch Says Yes

Though somewhat overshadowed by the flood of attention created by Standard & Poor's sweeping European downgrades, fellow "Big Three" agency Fitch Ratings changed its optimistic tune on one of the vaunted BRICs (Brazil, Russia, India and China) due to deepening political, rather than economic- or contagion-based, concerns.

Fitch revised the Russian Federation's long-term foreign and local currency Issuer Default Ratings (IDR) to stable from positive. While Russia was recently accepted into the World Trade Organization after a lengthy attempt at inclusion, political uncertainty is a growing concern. Though Prime Minister Vladimir Putin's likelihood to regain his post as president—some would allege he never really ceded power, only title—after elections in March is essentially a done deal, there is widespread evidence of unrest stemming from alleged deep corruption in Russian politics. The growing, and surprisingly brazen unrest, not seen so publicly since the fall of the Soviet Union, could spike the risk of investor capital flight, likely putting pressure on Russian bank reserves and the ruble.

"It is unclear how the country's leadership will respond to the unexpected wave of protests triggered by the elections to the Duma on 4 December and to the broader shift in the political landscape," Fitch analysts noted in a statement this week. "Voters handed the ruling United Russia party a much-reduced majority, and demonstrators protested against electoral fraud. More protests are expected in the run-up to the presidential election. In the long term, democratic development that leads to better governance could be positive for Russia's ratings, but in the short term, uncertainty has increased."

Financially, the Russian Federation performed very well in 2011, largely on above-expectations oil prices. However, Russian growth still remains dangerously tied almost solely to the oil/natural resources sector, as noted by an unexpected and sharp slowdown caused then by oil price changes. Additionally, faith in Russian businesses to honor their credit terms and in banks to become more transparent and trustworthy also has been slow to improve from near punchline status. Though each of the BRICs has seen challenges regarding their emerging economic strength, Russia continues to show signs that it may be in the most precarious position, not to mention perhaps the riskiest of the four with which to do business.

Brian Shappell, NACM staff writer

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President Obama Looking to Gut Commerce Department, Streamline

President Barack Obama has started off 2012 in the same vein as 2011—by trying to cozy up to business owners and, in theory, streamline the processes and structures of agencies dealing with U.S. companies.

In a recent speech, Obama publicly asked Congress to reinstate the president's authority to, as needed, reform and update the Executive Branch, which was in place until 1984 when President Ronald Regan was wrapping up his first term. Obama plans to use said authority, should he garner it, to bring the various departments focused on business and trade under one umbrella. The plan would largely gut the existing structure of the Commerce Department and place great emphasis on exporting. Doubling exports between 2010 and 2015 has been an oft-repeated priority of the Obama Administration; new statistics from the Bureau of Economic Analysis noting the increase in exports, up to $177.8 billion in November, puts the U.S. on track to do just that.

The president believes the changes would modernize and streamline matters for all U.S. businesses, which currently have to deal with six different departments or agencies focused on business and trade. He called the current system "a maze."

"Six is not better than one...it produces redundancy and inefficiency," Obama said. "It's a mess. We're supposed to make it easier for them. And we can. There are some tools that we can put in place that every day are helping small business owners all across the country, but we're wasting too much time getting that help out. And if Congress would reinstate the authority that previous presidents have had, we would be able to fix this."

Obama quipped this should not be "a partisan issue," but this ignores that it is an election year (re: little happens) and that Congress is as divided, if not more so, than at any time in decades.

The president threw an additional olive branch to the small business community during the same speech, as he announced that the Small Business Administration was being elevated to a Cabinet-level agency. The speech also marked the formal acknowledging of Business USA, a government website to be launched within weeks that is designed as "a one-stop shop for small businesses and exporters." Its purpose is to consolidate information presently spread haphazardly among various government sites.

Brian Shappell, NACM staff writer

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"Insourcing" Replacing "Outsourcing" as Companies Bring Jobs Back Home

"Outsourcing" is a term that has struck fear in the hearts of U.S. workers, nowhere more so than among those in the manufacturing sector. And in the early part of the last decade, it was hard to argue that outsourcing was something that the U.S. shouldn't be afraid of.

From 2001 to 2007, investment in equipment and software to make companies more productive declined by 15% as a share of gross domestic product and the U.S. manufacturing sector simultaneously lost more than three million jobs. While investment declined, jobs didn't so much disappear as much as migrate to more favorable business locations, according to a recent report from the White House.

"Over the past decade, real business investment in production capacity stagnated. Economic growth in the U.S. relied far too heavily on an unsustainable boom in residential and commercial real estate fueled by an unchecked financial sector," said the report. "The bubble created by this boom distorted our economy and undercut the international competitiveness of our products and services. Companies increasingly chased low-cost labor outside of the U.S., moving their manufacturing production, and some of their services, like call centers and software development, abroad."

Now, however, as companies have accounted for the productivity of American workers as well as transportation, supply chain risks and other costs, production is becoming as economical in the U.S. as it is in other parts of the world, including China. "Outsourcing" is increasingly giving way to "insourcing," as companies bring the jobs they sent overseas back home.

"U.S. manufacturing productivity—which has always been strong—continues to improve, rising nearly 13% since the first quarter of 2009," said the White House. "Combined with an increased cost of labor elsewhere in the world, it is now more cost competitive to invest in American manufacturing workers."

Manufacturing isn't the only sector that's beginning to see a bump. Typically, high-wage services like engineering, research and development, finance and software production can now be more easily traded across countries, leading to an expansion in the U.S. trade surplus in services that has tripled since 2003. "The highly-skilled U.S. workforce continues to be a source of advantage across the service sector," said the report. "Companies 'insourcing' to the U.S. point to better performance in U.S. service centers relative to many foreign locations, offsetting the benefits of lower wages abroad."

Jacob Barron, CICP, NACM staff writer

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Manufacturing Outlook Blurred by Europe, But Far from Negative

Production in the United States should continue to move forward with solid growth through much of 2012, largely on the strength of the automotive and aerospace industries, says a manufacturing trade association economist and a recent study. Perhaps the bigger question is whether growth in other parts of the world, most notably Asia, will be enough to neutralize problems being caused by the European spiral.

Dan Meckstroth, chief economist and director of research for the Manufacturers Alliance for Productivity and Innovation (MAPI), noted at a January meeting of the National Economists Club in Washington, DC that the organization's latest measurement of the overall business outlook was essentially unchanged between November and December. Meckstroth characterized the level of the index (66) as an "extremely optimistic" view for continued expansion over the next three to six months. Granted, small businesses are somewhat less optimistic because of their dependence on real estate values as a primary asset in most cases.

Meanwhile, because of European Union problems, he estimated the chance of another global recession near 40%. Still, Meckstroth said that he believes Asia's emerging economies, along with the much needed post-disaster Japan should help drive growth and provide enough stimuli for the rest of the world to avoid an outright global downturn.

Meckstroth noted a "major driver" for U.S. manufacturing will be necessary capital spending on the part of most U.S. businesses. "So much capacity was shed [during the downturn], that pickup in demand has created a great need for capital equipment," Meckstroth noted. Other significant drivers for manufacturing, according to the recently unveiled forecast, are tied to aerospace and motor vehicle/parts production. Both are expected to see an annual percentage increase in the double digits. On the latter, Meckstroth noted, "The stock of vehicles has been declining for five years, but it should be growing based on increasing population trends; there is pent-up demand." Computer products and machinery are also expected to make large enough gains to offset expected losses in areas such as printing support activities and textile production, the economist noted

"The U.S. is not going to recapture textiles, and we've lost electronics," said Meckstroth. "But in aerospace, natural gas and mining equipment—high valued products—there is strength."

Brian Shappell, NACM staff writer

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Small Business Outlook Remains Dim, According to Chamber

A recent survey of small businesses found economic optimism in short supply, at least on a national level. Locally, however, the outlook was considerably more positive.

In the U.S. Chamber of Commerce's Small Business Outlook Survey for Q4 2011, a whopping 85% of respondents said that the U.S. economy was on the wrong track, while 63% said that they would keep the same number of employees over the next year. On a local basis, however, the most recent data showed a significant increase in the percentage who believed their local economy was on the right track, from 33% in Q3 to 45% in Q4. The data was even more positive on a company-by-company basis, with 69% of respondents saying that they believed their business was headed in the right direction.

The poll indicated that the larger the scale, the more pessimistic the outlook was for small businesses, and the chief culprit for all the national economy's trouble could be found on Capitol Hill. Seventy-eight percent of small businesses surveyed reported that the taxation, regulation and legislation from Congress make it harder for their business to hire more employees, and 86% said they would rather have more certainty from Washington than more assistance (6%) to deal with the economy.

"The policies coming out of Washington are only exacerbating the economic uncertainty that small businesses continue to cite as their greatest challenge," said U.S. Chamber President and CEO Thomas Donohue. "Heading into an election year, our country's job creators are speaking with a unified voice in saying that we need a change of course in Washington. With government spending and regulations out of control, small businesses don't know what's going to hit them next."

Many small businesses blamed both parties for the current state of the nation's economy, but reserved the harshest judgment for the Democratic Party. Whereas 55% of participants disapproved of the GOP, 88% disapproved of the Democrats, which could have major ramifications for this November's elections. In the same poll, 98% of small businesses said that they considered a candidate's position on free enterprise and business issues as "important" in deciding how they'll vote.

The survey defined a small business as a company with fewer than 500 employees and annual revenues of less than $25 million. A total of 1,322 company executives were polled, 515 of which were U.S. Chamber members, and 807 of which were not.

Jacob Barron, CICP, NACM staff writer

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