October 3, 2013
The National Association of Credit Management's (NACM's) Credit Managers' Index (CMI) inched up in September, improving from 56.4 to 56.6. The figures continued the growth trend begun in May of this year, driving the CMI to its highest reading in more than three years.
September's growth was driven primarily by increases in the index's unfavorable factors, all of which registered improvements and some by substantial margins. The overall unfavorable reading leapt from 53 to 53.8, driven by big improvements in accounts placed for collection, from 52.5 to 54.3, dollar amount beyond terms, from 51.1 to 52.2, and filings for bankruptcy, from 58.7 to 59.8.
NACM Economist Chris Kuehl, PhD noted that this reflected a shift in debtor behavior toward friendlier payment behavior with regard to their trade creditors. Essentially, businesses are settling their debts rather than trying to test the waters of late payment. "When times are tough, debtors begin to take advantage of what leverage they have and start to test those that have given them credit. There are more slow pays and many of the negative indicators get progressively worse as companies try to hang on to their cash and test the patience of the credit manager," Kuehl said. "There comes a point when these companies want to get access to credit again and that prompts them to try to catch up and get back in the good graces of those from whom they seek credit. This phenomenon could explain why the data within the unfavorable categories has improved."
Elsewhere in the index, all but one of the favorable factors fell in the overall index, although each of them remain well above 50, the line that indicates each of these categories is still in expansion. Much of this decline in the favorable factors can be attributed to a slide in sales, which slipped from 63.1 in August to 62.7 in September. Improvements were also seen in the manufacturing and services sectors, again by improvements in the unfavorable factors, which further suggest that businesses are taking the time settle their existing debts before taking on new ones.
The CMI has often functioned as a leading indicator, and other economic indicators have begun to mirror its growth readings, according to Kuehl. "The CMI started to show these solid gains at the start of the summer and, in the months that followed, the Purchasing Managers Index (PMI) followed suit and was sitting at its highest point this year in August," he said. "Thus far the expectation is the PMI will continue to trend in the same direction as the CMI. This is a logical relationship that has been manifesting for some time. The thinking behind using the actions of purchasing managers to gauge the economy is that nothing happens in a business until a purchasing decision is made. By that same logic, no purchasing of significance is going to be made without a credit decision."
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The Federal Reserve has reached out to the business community, particularly those involved in facilitating and using payment systems, to improve such systems, especially in the area of electronic processing.
"Payments in the United States and around the world are undergoing a remarkable period of change that may have been unimaginable 20 years ago," the Fed said in the report, Payment System Improvement–Public Consultation Paper released in September. "Payment preferences are evolving rapidly due to demographic shifts and application of new technology, among other factors. The payment system is becoming more complex...In such an environment, ongoing innovation is necessary to ensure safe, efficient and accessible payments that support economic activity and help maintain global competitiveness."
The Fed wants to bring industry stakeholders together to create a framework to address obstacles to payment systems safety, efficiency and innovation. Questions listed in the Fed report seek information from those in the industry on existing and potential gaps in efficiency of the U.S. payment system, outcomes that should be pursued, the potential for increased fraud risk and what role the Fed should take. The deadline for responses is December 13. The Fed is hoping that engagement with the industry will help create "enduring" improvements on electronic payments.
One of the Fed's key concerns regard existing gaps in the systems focused on end-user needs for more "real-time" transactional and information features. "Legacy payment systems provide a solid foundation for payment services. However, some of these systems (e.g., checks and ACH) rely on paper-based and/or batch processes, which are not universally fast or efficient from an end-user perspective by today's standards. The challenge for the industry is to provide a payment system for the future that combines the valued attributes of legacy payment methods with new technology that enables faster processing, enhanced convenience and the extraction and use of valuable information that accompanies payments." Of particular concern is the costly inefficiency and lack of speed of cross-border payments to and from the United States, as an increasing number of businesses seek customers in markets abroad to maintain or drive growth.
For more information on the Fed electronic payments effort, click here.
- Brian Shappell, CBA, CICP, NACM staff writer
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The Obama Administration has had a somewhat adversarial relationship with the business world, but if there's one issue where the two oft-opposing sides remain in lock-step, it's on the Trans-Pacific Partnership (TPP).
Business groups like the U.S. Chamber of Commerce and the Business Roundtable have lent their full support to a high-standard TPP, the particulars of which are still being hammered out by negotiators from the United States and the 11 other TPP member countries: Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Most recently, the group met for four days in Washington, DC, making progress on issues such as customs, telecommunications, technical barriers, cross-border services and labor concerns, among others, and will also continue negotiations at the forthcoming meeting of the Asia-Pacific Economic Corporation (APEC).
As these negotiations have progressed toward their anticipated conclusion at the end of 2013, business advocates have re-doubled their efforts to support a lucrative agreement, both by meeting with business and government leaders in TPP countries and by detailing the economic benefits that the agreement will create for the United States. "America's future prosperity is clearly linked to how well we do in Asia, and TPP is the best opportunity the U.S. has to engage with Asia's trading system," said U.S. Chamber President and CEO Thomas Donohue, ahead of a planned trip to Tokyo and Jakarta. "As discussions enter their end game, we strongly urge the negotiators to hold fast to the goal of making the agreement a 'model of ambition' to address traditional trade issues, as well as the challenges of 21st-century commerce, without short circuiting our ambitious objectives for the sake of expediency."
Meanwhile, the Business Roundtable, comprised of CEOs from leading U.S. companies, released new economic data indicating how beneficial the TPP will be to U.S. trade and investment. Specifically, on a national level, the current TPP countries combined represent the largest market for U.S. goods and services exports in the world, amounting to 45% of U.S. goods exports in 2012 alone. The U.S. also exported $598.3 billion worth of goods in 2012 and $110.8 billion worth of services in 2011 to just six of the 11 TPP countries with whom the U.S currently has bilateral free trade agreements (FTAs)—Australia, Canada, Chile, Mexico, Peru and Singapore. The TPP would allow the U.S. to expand trade with these countries and also create new trade connections with the other TPP members.
"As the United States and the other 11 TPP countries prepare to meet during APEC in Bali to take stock of the TPP negotiations, with a goal of completing an ambitious agreement this year, Business Roundtable's new fact sheets underscore the benefits of trade with these dynamic economies," said Doug Oberhelman, chairman and CEO of Caterpillar Inc. and chair of Business Roundtable's International Engagement Committee. "Given the significant potential of the TPP to help increase U.S. exports and support American jobs by removing trade barriers, improving intellectual property protection and creating new 21st century trade rules, we urge negotiators to press ahead and complete a high-standard agreement."
- Jacob Barron, CICP, NACM staff writer
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Mexico's place as one of the key emerging economies to watch, after the BRICs (Brazil, Russia, India and China), has slipped considerably this year. However, there are still some very pro-Mexico market watchers and trade credit grantors undeterred by potential headwinds. In any case, Mexico's economic prospects continue to be one of the most heavily debated in the world.
July statistics unveiled by the Mexican government in late September showed an encouraging 0.47% increase in economic activity from the previous month. Though the consensus from analysts is that annual economic growth in 2013 will pale in comparison to the 3.8% posted in 2012 and likely fall short of 2%, the July statistics offer "tidbits of better times ahead," according to a Wells Fargo Economics Group commentary. The report highlighted notable improvement in the service sector, the economy turning a bit of a corner after a weak first half and the important positive implications of fiscal reform in the long term.
However, Wells Fargo Senior Economist Eugenio Alemán warned that Mexico isn't "out of the woods" yet and that fears over reforms, whether real or perceived, under new President Enrique Peña Nieto could have a chilling effect on growth in the short or even medium term. That said, other promised reforms in areas like Mexico's traditionally tightly held oil industry could be a boon for the economy that some experts believe could dwarf the surge in natural gas and shale seen in the United States.
On the trade credit front, Mexico was a hot topic at FCIB's Annual Global Conference in September. A number of attendees expressed concern about offering open terms to Mexico-based buyers, with some saying they flat-out won't do it. Perceptions of problems continue to weigh heavily on creditors, including fear of slow payment, the government's inability to reign in the violent drug war in several regions and the varying and inconsistent laws in the various states that can impede collection efforts. However, an even greater number of FCIB Global attendees spoke in defense of Mexican customers and business partners. Their sentiment was that there were few if any problems with timely payments and that they were not overly concerned with recent economic challenges facing the nation as a whole. Those credit managers also spoke of the high value they put on developing a strong relationship with their Mexican business debtors as much as any in the world.
"Mexico is a wonderful place to do business," said John LaRocca, CICP, director of global credit at Hitachi Data Systems Corp. "When people there make a commitment, they keep it. Our Latin collectors are among the best performing in the company."
- Brian Shappell, CBA, CICP, NACM staff writer
Businesses risk billions of dollars each year on sales on credit. How do you find your way between fact and fiction, hope and charity, and faith and foolishness?
Join an NACM industry credit group.
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Demographics have an immense impact on economic growth. Right now the world as a whole is divided between those nations that are struggling with both extremes—too many young people and too many old people. The developed nations are facing an elderly population that will soon be more than a third of their total. The Japanese have been in this position for years as the average family has only one child and the life expectancy for the population has increased dramatically over the last few decades. They have the highest average age in the world at 83. There is not enough youth in the labor force to sustain the retired population, and the issue gets steadily worse in the years ahead—to the point that there is a one-to-one relationship between those who are working and those who are not. The Western Europeans and the U.S. have the same issue, and will see this problem worsen as the Baby Boom generation ages.
The most serious issues may start to arise in the countries that once made up Eastern Europe. The age expectancy is going up a little for people, although overall health is not improving all that much. The real issue is that more of that Baby Boom generation is leaving the workplace and there are far too few people to replace them. The lack of a younger workforce is attributed to three factors that will be very hard to reverse. The first and most apparent is that families have been having far fewer children than in the past. Since the collapse of the communist governments in the late '80s and early '90s, the average family has chosen to have no children at all or perhaps one.
The second major problem is that most of the young population is forced to leave the country if they expect to find work. Finally there is the fact that many of the younger people have dropped out of society altogether. This is truly the lost generation as they will likely never be able to enter the mainstream. This will become a permanent underclass that contributes nothing, and costs the state millions in direct and indirect costs.
The split between the needs of the elderly and the needs of the youth will strain most systems to the breaking point as both groups need very different kinds of assistance. The older population will need health care and living assistance if their retirement money is insufficient. The young need education and training, as well as opportunity. The overall challenge is that there is not very much left of the middle and they are the ones who will be expected to foot the bill for both the older and younger worker. Given the shrinking population of working people in the developed economies, there is real concern that there will be a cascading crisis in the economy for years.
Source: Chris Kuehl, PhD, Armada Corporate Intelligence
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