August 2, 2012
The Credit Managers' Index reflects the grim reality of the economy of summer 2012, dropping in July from 54.5 to 53.4. It became obvious some months ago that another spring swoon was underway, and like the last few years, the summer is becoming an extension of the deterioration. The problems besetting the economy earlier in the year have not abated, and now there are new ones emerging. Thus far it is hard to see what impact the drought will have on the greater manufacturing and service economies, but given that it was the farm sector that helped drive manufacturing last year, the sudden drop in the demand for machinery isn't helping.
There are some signs of nascent recovery, but thus far these have not been enough to reverse the course of the last few months. Favorable factors usually signal future growth, but there is evidence in the data that the slump is setting in more aggressively. For the first time in over a year, sales fell below 60 and by a significant degree. The reading is now 58.5, worse than at any point in 2011. New credit applications stabilized to some degree; June's reading was 57.5, and now it sits at 57.2. This is a long way from the 61.9 registered in January when expectations were upbeat. Rounding out the decline in favorable factors were dollar collections and amount of credit extended. Altogether, favorable factors slid from 60.2 to 58.8, marking the first time the reading has fallen under 60 since November 2011.
"This was not what this year was supposed to look like," said NACM Economist Chris Kuehl, PhD, "and when the specifics of the decline are examined, it is apparent that the real damage has been in the volatile service sector."
Unfavorable factors are not telling an upbeat story either, and that is more worrying than the slide in the favorable indicators. Over the last couple of CMI reports, it was noted that the economy can survive a stall in growth, provided there is no further deterioration in business conditions. The good news from this period had been fewer issues for the companies that survived the first round of economic downturn. Now there is some evidence that the last few months are starting to catch up. Rejections of credit applications managed to remain stable and is better than many expected. It would appear that the companies applying for credit are the ones doing well, and approvals are not generally suspect. There was a small improvement in accounts placed for collection, but it remains under 50 at 48.9. There were more disputes than in the past, as the reading slipped deeper into the mid-40s and dollar amount beyond terms fell under 50 again after managing to hit 50.5 in June. It now stands at 47.8, and that is the lowest reading since September of last year. This is not trending in the right direction. Finally, dollar amount of customer deductions and filings for bankruptcy also worsened slightly.
The index of unfavorable indicators has now dipped below 50, the number that separates expansion from contraction. This is the first time the unfavorable index has been in contraction since the end of 2010. In July, there was only one unfavorable factor above 50, whereas in March all were over 50. This is a precipitous fall, and it is unlikely that a reversal will be swift.
Kuehl noted that as the year progresses, there are more problems to contend with and these are already pulling business expansion down. Europe's continuing crisis affects exports, the potential for plummeting off the fiscal cliff has almost every business uneasy and now there are the billions of dollars lost to the drought. The two sectors that had been pulling more than their own weight were manufacturing and the farm sector.
The complete CMI report for July 2012 contains the full commentary, complete with tables and graphs.
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The agricultural sector, like manufacturing, had been doing a strong job of pulling its own weight as well as helping others during the period of slow U.S. economic growth and recovery. But things change. The drought that has plagued America's heartland through much of the spring and summer is likely to lead to seriously affected crop yields and a domino effect leading to higher domestic food and fuel costs that some struggling business can ill afford.
The latest Credit Managers' Index, as noted above, reported "Thus far it is hard to see what impact the drought will have on the greater manufacturing and service economies, but given that it was the farm sector that helped drive manufacturing last year, the sudden drop in the demand for machinery isn't helping."
And that's not expected to change. The Federal Reserve's July edition of the Beige Book economic roundup found that its Chicago, Kansas City and Dallas districts were showing widespread reports of stressed crops because of excessive heat and drought conditions. Among the hardest hit crops is corn, which is used in everything from cattle feed to ethanol production.
Fortunately, for those directly tied to the farming sector, the Fed and NACM experts noted that insurance is widespread for important crops like corn and soybeans. Additionally, independent farmers and farming-based companies should have a financial reserve to cushion a one-year blow.
"Net farm income has increased farily well over the last few years. Many of the farmers are probably in pretty good financial shape to get through a rough patch," said one credit manager working in the Ag industry. "As far as our exposure, it's not going to be an easy situation, but there are circumstances that will help us quite a bit. It'll have an impact, but not to the extent that one year will devastate a lot of people."
Despite that upbeat outlook, the veteran credit manager, who wished to remain anonymous, believes there could be considerable, perhaps damaging, bleed-over into other segments of the economy.
"Any time you have an economy you are dealing with these days, the ups and downs on prices, any disruption causes concern for those not in a prime financial position," he told NACM. "That could have an impact on some of them."
- Brian Shappell, CBA, NACM staff writer
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Opposition to the proposed settlement in the credit card interchange case continues to grow, as another major plaintiff in the case rejected the agreement last week.
The National Association of Convenience Stores (NACS) has led the opposition, joined by Walmart, Target, SIGMA, an association representing independent motor fuel marketers and chain retailers, and now the National Grocers Association (NGA), which is among the most prominent of the class action plaintiffs in the original case. NGA cited the settlement's lack of a mechanism to allow merchants to have a say in how interchange fees are set as their primary reason for joining the opposition.
"NGA joined the lawsuit on behalf of its independent retail grocer members over seven years ago to bring about real reform of the anticompetitive credit card swipe fee system. This proposed settlement agreement fails in this regard by allowing Visa and MasterCard to continue their dominant anticompetitive practices," said NGA President and CEO Peter Larkin. "Meanwhile, merchants and consumers will continue to pay exorbitant swipe fees with no hope of reform. NGA's members are also concerned about Visa and MasterCard's ability to use their dominance to prevent emerging and innovative lower-cost payment options."
Interchange, or "swipe," fees are currently set unilaterally by card processors like Visa and MasterCard. While the proposed settlement provides for a $6 billion payment to retailers and allows merchants to pass on their future processing costs to their customers, it does not provide for transparency in the way that the fees themselves are set, meaning Visa and MasterCard could continue to charge fees at whatever rates they see fit without many options for recourse from merchants or buyers.
"The proposed settlement represents a small fraction of the $350 billion in swipe fees the card companies have charged merchants, and ultimately consumers, for the last seven years. This agreement only ensures that the card companies will continue to fix hidden swipe fees and be able to increase them at will for years to come," said Larkin.
Despite the intensity of the opposition, resistance to the settlement could prove futile. The opposition by trade groups means only that the groups themselves reject the settlement, not necessarily their members. Merchants will individually have the ability to formally opt out of the settlement should it be approved and if merchants representing 25% of Visa and MasterCard's credit card sales do choose to opt out of the agreement, the card processors will be able to cancel it. Still, even with retailers like Target and Walmart and trade groups like NACS and NGA, the opposition is likely to fall well short of that 25% threshold, meaning the settlement would be approved. Visa and MasterCard wouldn't have to make any further concessions, and individual merchants would be allowed to opt out of the agreement at their own risk.
- Jacob Barron, CICP, NACM staff writer
Stay tuned to NACM's blog and eNews for more updates.
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The two chambers of the U.S. Congress have until the end of the week to smooth out the wrinkles in two competing plans to establish permanent normal trade relations (PNTR) with Russia. Failure to do so could put billions of dollars worth of American exports at risk when Russia joins the World Trade Organization (WTO) on August 22.
Congress adjourns for its five-week August recess after the close of business on August 3, meaning that a bill has to be enacted by then if the United States is to have any hope of taking full advantage of Russia's WTO membership right from the start. Under WTO rules, should the U.S. not have established PNTR with Russia by the time they officially join the global trade body, Russia can increase tariffs on U.S. goods entering the country, ultimately giving goods from other countries a competitive advantage over their American counterparts.
Standing in the way of PNTR is the Jackson-Vanik amendment, a Cold War regulation that made U.S. preferential tariff rates for Russian products conditional on the country allowing Jews and other minorities to emigrate freely. Although the amendment is regularly suspended as a matter of course, its presence on U.S. books gives Russia the right to deny U.S. companies access to the markets it will open as part of its WTO accession agreement.
Repealing Jackson-Vanik isn't as simple as erasing it from the record, however. Panels in both the House of Representatives and the Senate have approved bills instituting PNTR with Russia, but differences remain in the two chambers' approaches to enacting the Magnitsky Act, legislation named for anti-corruption lawyer Sergei Magnitsky, who died in 2009 under mysterious circumstances after serving a year in a Russian prison. Congressional concerns about Russia's human rights record have made the inclusion of some version of the Magnitsky legislation a prerequisite for establishing PNTR.
Under the Magnitsky bill approved by the House Ways and Means Committee, the U.S. would deny visas and freeze the assets of parties suspected of involvement in Magnitsky's death. The Senate Finance Committee, however, approved a much broader version, wherein the law could be applied to human rights violators outside of Russia and beyond the scope of the Magnitsky case.
So far no votes on either bill in either chamber have been scheduled. Stay tuned to NACM's blog for updates.
- Jacob Barron, CICP, NACM staff writer
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As expected, unsecured creditors will get pennies on the dollar at best if the initial proposal for Solyndra's freshly filed reorganization plan is adopted (eventually) in anything resembling its present form by a U.S. Bankruptcy Court judge. Solyndra, which sought Chapter 11 protection in September due to the solar market decline during the recession, high overhead, foreign competition and accusations of fraud, has filed its reorganization plan where many companies do when insolvency strikes—in the Third Circuit/Delaware Court. It has long been perceived that said court, based in Wilmington, is the most bankruptcy-friendly in the nation. In the plan, Solyndra would end up paying out a maximum of 6% of what it owes to unsecured creditors, and that is if proceedings go smoothly. Solyndra also proposes to pay back the federal government only $24 million of the $537 million it received in Energy Department grants.
Another of the more than half-dozen solar products companies to file for some form of bankruptcy protection was in court this week as well, only this one was for a liquidation plan. Citing a complete inability to compete in the global marketplace (re: price undercutting by Asian counterparts), Energy Conversion Devices saw its liquidation plan for itself and subsidiary United Solar Ovonic LLC approved in U.S. Bankruptcy Court for the Eastern District of Michigan.
In the publishing industry, the infighting—highlighting some of the problems with the bankruptcy system and the delays stakeholder beefs can cause—continues even after a Delaware-based bankruptcy judge approved Tribune Co.'s Chapter 11 reorganization plan. A Tribune creditor, a hedge fund, has appealed the July decision of U.S. District Court Judge for the Third Circuit, Kevin Carey. It appears unlikely the appeal will have any legs but, with a case that has already dragged on for more than four years, that is not the safest bet.
Finally, in municipal bankruptcy news, unsecured creditors involved in the Jefferson County, AL Chapter 9 proceedings made news by joining forces with county officials in an attempt to slow down the process. While a secured creditor tied to the county's failed sewer retrofit project is trying to force judges to impose a hard September deadline for a reorganization plan, a group of unsecured creditors actually wish to extend the process, noting they need more time for analysis and to preparation. Bruce Nathan, Esq. of Lowenstein Sandler PC told NACM that he wasn't surprised by the sides coming together because "everything is out of the ordinary in Chapter 9."
- Brian Shappell, CBA, NACM staff writer
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