January 3, 2013
As it did in October, the Credit Managers' Index (CMI) from the National Association of Credit Management (NACM) slipped again this month, from 55.2 to 54.9. The most dramatic movement was in sales, which plummeted to 56.7, a low last seen in December 2009 and almost a full point lower than in October 2012. This reinforces the notion that business is stalled out in anticipation of what might happen with spending and taxation next year. There was some cautious optimism just a month ago, but that optimism has evaporated, as it seems all but certain that there will be no settlement of lasting value on the "fiscal cliff."
Strangely enough, the other favorable factors did not register the same level of distress, although they declined as well. New credit applications actually increased from 56.5 to 57.7, suggesting many companies still expect something will get done in Washington before the first quarter of 2013 is completed. At least they seem to be taking steps to get prepared for a better year. Dollar collections fell from 61.3 to 59.2, which was not a huge drop, but indicates that companies are back to protecting their cash flow and may have started to stretch out their creditors again. There was also a decline in the amount of credit extended, which dropped from 63 to 61.5, taking it back to the numbers seen for most of the year. Overall, the favorable factor index fell from 60.3 to 58.8, a drop that would have been far worse if it were not for the slight improvement in new credit applications.
In contrast, the unfavorable factor index improved from 51.7 to 52.3. "Business conditions have not worsened appreciably, it's just that there is not all that much improvement given the concerns that remain in place regarding next year," said NACM Economist Chris Kuehl, PhD. Rejections of credit applications improved slightly from 51.1 to 51.5, as did disputes from 50.1 to 50.5. Likewise, there was a small improvement in accounts placed for collection from 51.2 to 52.1, suggesting that more companies are staying current on their accounts. "Either that or creditors are feeling more patient," said Kuehl. Dollar amount beyond terms made a bigger jump from 49.9 to 50.9, and dollar amount of customer deductions by a more significant amount, from 49.7 to 51.3. Only filings for bankruptcies declined, from 58.4 to 57.4, but this is a small reduction, and the whole category remains very strong compared to where it was just a few months ago.
The overall sense is that this month's decline is due to the tensions created by the fiscal cliff debate. The inability of Congress and the president to make a deal has already cost significant economic growth, and it is now anticipated that real decline in GDP growth will be the next outcome. "The reaction captured in this month's CMI shows a stark lack of confidence as opposed to anything substantial," said Kuehl. "The overall news for the economy has been pretty good, and so it is with much of the CMI. The factors most connected to mood and confidence are the ones slipping. The whole business community seems to be in a state of suspense."
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In case you missed it because of the holidays or just a few needed days away from the office, plenty has been brewing in the world of bankruptcy regarding Chapter 9 and 11 cases, not to mention the potential for new filings.
Struggling publisher Tribune Company, which became a symbol of struggles in the newspaper media industry, as well as somewhat of a laughing stock based on the apparent reckless and "good old boy" internal policies, has finally exited bankruptcy after several failed attempts. Tribune, which fell victim to an ill-fated, overleveraged buyout by Sam Zell several years ago, is now expected to sell off some of its remaining newspaper assets. Its new board of directors is made up almost entirely of members with no experience in the industry, rather, in areas of other Tribune interests, such as television.
In the San Bernardino, CA Chapter 9 case, a U.S. Bankruptcy Court judge in the state ruled against the California Public Employees' Retirement System (CalPERS), which sought to bypass the bankruptcy system to collect past-due pension payments from the city. The city council had moved to stop payments to its pension program at least temporarily because of ongoing debt problems. CalPERS based its argument on the deep concern that such a move could be damaging by encouraging a flood of Chapter 9 filings in the state. Paul Laurin of Barnes & Thornburg, LLP called the case a "national bellwether on how municipalities handle the powers of Chapter 9."
In Michigan, Governor Rick Snyder recently signed into law legislation that allows municipalities and local officials more ability to seek debt solutions that include Chapter 9 bankruptcy. While such a move would still require approval by the governor, the path was made significantly easier for municipal governments and school districts. It seems to open the door for a filing out of Detroit, where city officials have acknowledged that it has massive cash-shortage issues and have moved to solutions that include employee furlough days. Barnes & Thornburg LLP's Deborah Thorne, Esq. told NACM in recent weeks that "if I were selling to Detroit, I'd be pretty careful right now."
Meanwhile, in what appears on the surface to be a small step toward greater business transparency in Russia, a nationally-run bankruptcy registry on the Internet was launched on January 1. Local media outlets reported the Russian bankruptcy registry is designed to help businesses discover more information about those from which they are selling to or buying. Granted, the site is only available in Russian. Still, it represents progress for a nation with vast economic opportunity, but one constantly dogged by perceptions of high risk because of fraud, corruption and a lack of credible information.
- Brian Shappell, CBA, NACM staff writer
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A deal was reached to ameliorate the effects of the United States going over the so-called "fiscal cliff" on January 1, but few seem satisfied with the legislation.
The bill, dubbed the American Taxpayer Relief Act of 2012, initially passed through the Senate in the early hours of 2013 by an overwhelming 89-8 vote. It faced a less certain future in the House of Representatives, but the bill eventually overcame a Republican party split to successfully emerge from the lower chamber in a 257-167 vote.
Even the legislation's supporters framed it as a stopgap measure that did what was necessary to neutralize the cliff's automatic spending cuts and tax increases, which took effect on January 1, but did little more than that. "There's more work to do to reduce our deficits, and I'm willing to do it," said President Barack Obama. "But tonight's agreement ensures that, going forward, we will continue to reduce the deficit through a combination of new spending cuts and new revenues from the wealthiest Americans."
According to the Congressional Budget Office (CBO), the Act will reduce the country's deficit by $737 billion, mainly due to a tax increase on individuals earning more than $400,000 a year and households earning $450,000. While the bill also makes $107 billion worth of spending cuts, Republican leaders promised substantially greater reductions in the future, while trying to shift the blame to the White House when possible. "With the revenue piece settled, Washington must now turn to solving the rest of the fiscal cliff—the out-of-control spending that has led to record debt and deficits under President Obama," said House Ways and Means Committee Chairman Dave Camp (R-MI).
"This legislation is far from perfect—it is merely a bandaid for the tremendous challenges facing our country," said Senate Finance Committee Ranking Member Orrin Hatch (R-UT). "For one, this legislation does not reduce federal spending to cut our more than $16 trillion debt. We must confront that challenge and make those difficult decisions in the coming months ahead."
From an economic perspective, the initial reaction to the bill's passage was positive, as stocks soared on the second day of the New Year. But in the longer term, much of the damage might have already been done, as the hysteria surrounding the fiscal cliff's resolution wore on the U.S. consumer."Even if the powers that be manage to cobble something together, it may be too late to shift the attitude of the consumer and it is entirely possible that there will be significant retrenchment in spending for the next few months," said NACM Economist Chris Kuehl, PhD. "In many ways the current dilemma looks like the austerity effort that has swept Europe and we all know what that has looked like. Americans do not seem ready to riot and take to the streets in protest, their reaction will be more subtle and insular—a quiet withdrawal from the process and that may prove to be more damaging to the economy than street demonstrations."
- Jacob Barron, CICP, NACM staff writer
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In what some in the business community see as an unfortunate antithesis of the Obama Administration's outlook on free trade agreements (FTAs), especially bilateral ones, India continues its attempts at bolstering its emerging economy and its exporting prospects through such pacts.
To close 2012, India concluded the final details of an FTA with the Association of Southeast Asian Nations (ASEAN), for which the original framework was agreed to in 2009. The deal is expected to help increase commerce between India and ASEAN by nearly $20 billion in three years—it is currently estimated at a value near $80 billion. ASEAN is India's fourth biggest trade partner, behind the debt-diminished European Union, the United States and a slightly slowing China.
India is also finishing a long-in-the-works bilateral pact with Thailand, which is expected to be concluded this year. Additionally, India will hold its sixth round of talks with Israel this month on a potential FTA there. Earlier talks reportedly proved positive and promising.
While the United States has been pursuing one or two multilateral talks, U.S. Chamber of Commerce Vice President John Murphy has intimated it should be looking a lot more closely at diverse approaches like that of India. As it stands, representatives from the Chamber and the federal government have said there appears to be little or no appetite for approaching new bilateral trade agreements involving the U.S. following the extreme delays in installing the last three FTAs with Panama, Columbia and South Korea, which seemed like slam dunks, but ran into countless delays.
"There's not interest at this point, but in the long term we should be working toward that," Murphy told NACM. "The potential of an FTA with Brazil or India would be colossal."
- Brian Shappell, CBA, NACM staff writer
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Following the New Year's Day fiasco surrounding the "fiscal cliff," the United States Congress unwound with a bipartisan bill that will lower taxes for manufacturers.
The U.S. Job Creation and Manufacturing Competitiveness Act of 2013 (H.R. 6727) provides temporary tax relief to help U.S. companies compete and expand, mainly by lowering the cost of manufacturing inputs and some finished products not made or available here in the United States. The package is broadly-supported and includes provisions from more than 2,000 bills introduced in the House of Representatives and Senate via the Miscellaneous Tariff Bill (MTB) process.
Each year, the House Ways and Means Committee and Senate Finance Committee commence the MTB process by inviting members to introduce temporary miscellaneous tariff bills for consideration and inclusion in the resulting bill. Each of the bills is then reviewed by the Ways and Means Committee, the Finance Committee, the International Trade Commission and the Department of Commerce, and then summarily combined into a final bill, such as H.R. 6727.
"The MTB is a jobs bill, pure and simple," said Ways and Means Trade Subcommittee Chairman Kevin Brady (R-TX). "Suspending duties temporarily on products such as manufacturing inputs is an essential step in helping to make U.S. manufacturers more competitive and creating U.S. jobs...we look forward to working with our House and Senate colleagues to ensure that we can get this bipartisan, bicameral tax relief bill over the finish line."
"This bill has undergone one of the most extensive, open and transparent legislative processes around. Many of our manufacturers, and the workers they employ, will benefit from this bill," said Ways and Means Trade Subcommittee Ranking Member Jim McDermott (D-WA). "And I hope our bipartisan action on this trade bill today is a harbinger of things to come on the trade agenda in 2013."
A new batch of senators and representatives will be sworn in today, January 3, but despite the new arrivals, the bill is expected to eventually be passed.
- Jacob Barron, CICP, NACM staff writer
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