June 26, 2014
No matter the media outlet, there are certain conclusions that the bulk of US news consumers reach. Russia is in serious danger from a long-term business perspective. The United States is in a bad position and failing to thrive economically. Mexico continues to be a gang-controlled danger zone and, thus, will be held back from a business standpoint. Chinaâ€™s downturn should be worrying credit grantors. These, among other assertions and conclusions, would be hard-pressed to be further from the truth, said Kevin Hebner, â€Žsenior FX Strategist at JPMorgan.
While serving as an instructor at the inaugural year of NACM's Graduate School of Credit and Financial Management International (GSCFMI) last week, Hebner poked holes in all of these assertions to show that mainstream media's surface-level coverage often paints an incomplete or inaccurate picture.
Regarding the United States, Hebner suggested media coverage and, in some ways, consumer confidence is tainted by equating business conditions with the general disappointment with the effectiveness of the US Congress. "Washington, DC, fortunately, has been more of a spectator and doesnâ€™t have much in the game right now," Hebner said. "The US is actually doing quite well." He called it the least-volatile economy in the world at present.
Its southern neighbor, Mexico, is doing as well as ever, according to Hebner. It has become a cheaper, more skilled production base than China with its newfound cheap energy (like the US, it is benefitting from natural gas and shale). The new government has clamped down on the violent drug war. Energy reform is underway, and the peso has become one of the most favored world currencies in the last 12 months. "Mexico is easily the best reform story in the world," he said.
On other nations, Hebner believes that while Russia will have its struggles, there is virtually no chance of implosion there as some would vaguely hint. Its issues are well-known, and there are plenty in credit that simply donâ€™t have a choice but to continue doing business there. In China, he simply commented that "people are too worried about Chinaâ€™s slowing growth rateâ€¦it's not a market economy, so they will be able to control it."
- Brian Shappell, CBA, CICP, NACM staff writer
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One of the wrinkles in the unfavorable factors portion of the May Credit Managers' Index (CMI) was a perplexing deterioration in disputes. "It may indicate that there is a stronger desire to adjust credit arrangements as companies anticipate a period of better growth," said NACM Economist Chris Kuehl, PhD, explaining the sharp decline from 54.7 to 50.2 in May's disputes reading. "It may also reflect the impact of the first quarter slump and the temporary nature of that economic dip."
By and large, however, 2014 has been par for the course when it comes to disputes for most credit professionals. In NACM's June Survey, when asked the question "Over the first half of 2014 have you or your company experienced an increase in customer disputes?" only about a quarter of the respondents answered "yes." The remaining 73% hadn't seen any noticeable rise in disputes this year, with many reporting in the comments that disputes and deductions were at levels comparable to 2013.
As ever, the CMI is a forward-looking indicator and often reflects developments in the economy one to three months ahead of time. The May CMI's rapid drop in the disputes figure, signaling an increase in actual disputes, could suggest that credit professionals can expect to see more disputes in the back half of 2014. In fact, a number of survey respondents mentioned in the comments that they expected to see disputes creep upward, just as the CMI suggested, and for a variety of different reasons.
"We just went to an automated cash application process in May, so I expect to see an increase due to this process, until we can work the bugs out of it," said one participant. "We have more pricing issues with a new pricing system," said another.
Others noted that their dispute increases were driven by customers continuing to plead ignorance. "We get disputes over service charges and they are increasing," one respondent reported. "Usually it is the excuse 'I didn't receive.' Lately we have been sending the invoices with the statement to ensure it's received. We still hear the excuse, even when they call about the statement that was included with the invoices."
Cash flow issues seemed to be generating disputes for many other survey participants too, as belt-tightening buyers try to cut down on their expenses as drastically as they can. "I've seen an increase in customers holding payment for the whole invoice versus the disputed portion," said one respondent. "I have to believe this is due to cash flow issues. If they can find anything that is incorrect, they just aren't paying any portion of it, nor are they contacting us to resolve it. They wait for us to call and follow up when the invoice is past due."
- Jacob Barron, CICP, NACM staff writer
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The smart device and tablet revolution is not a wave of the future. It's already here. Digital books, newspapers, magazines and other media are garnering a larger and larger portion of readership. As such, there is an impact on traditional, paper-based publishers and key pieces of the industryâ€™s supply chain. "You're already seeing bookstores fail because of Kindles, Nooks, iPads, and Amazon.com is taking the reins," said Jim Dezell, senior vice president of trade credit insurance at Marsh USA and GSCFMI instructor.
The industry knows this, but there is at least one area helping keep some publishers and their product suppliers somewhat flush: academia. "The academic world has been very slow to move toward digital textbooks," Dezell said. "Thereâ€™s been a lot of resistance, in part because there is a lot of money in it. But how long can they wait?"
Dezell is not alone in wondering how long change can be held at bay in academia. Gary Mulherin, ICCE, head of credit management for North America at Archroma, notes the generational shift is becoming increasingly difficult to ignore. "There is also some resistance because of the tactile, leisure aspect of paper books," said Mulherin. "But the older generation that wants that is going to narrow and narrow."
Once colleges and high schools move en masse to more electronic options, financial difficulties for paper-based publishers are likely to follow.
- Brian Shappell, CBA, CICP, NACM staff writer
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Political observers were stunned after House Majority Leader Eric Cantor (R-VA) lost his primary to Tea Party upstart David Brat, but the ensuing rearrangement of the House leadership in the wake of Cantor's departure could wind up being the bigger story, at least for advocates of international trade.
The House of Representatives elected Rep. Kevin McCarthy (R-CA) to replace Cantor as the GOP Majority Leader. McCarthy is a staunch conservative, but his political identity seemingly straddles the line between Tea Party stalwart and establishment Republican. Nonetheless, one of his top policy priorities lately has been to shutter the Export-Import Bank of the US (Ex-Im). In recent interviews the newly-elected Majority Leader has stated that he believes Ex-Im's charter should be allowed to expire, and that the Bank occupies a void that could easily be filled by the private sector.
A number of conservatives have leveled similar charges at the bank, arguing that it isn't the government's responsibility to function in a space where a workable private sector alternative exists and also that Ex-Im's activities operate as a form of corporate welfare for the nation's largest companies. Nonetheless, a number of typically lockstep conservative groups are lining up to support Ex-Im, whose mission has always historically been to operate and support export sales that private lenders wouldn't touch if their futures depended on it.
The US Chamber of Commerce and the National Association of Manufacturers (NAM) earlier this week announced a coalition urging Congress to act swiftly to reauthorize Ex-Im before its charter lapses on September 30. "The Ex-Im Bank is critical to leveling the playing field in a fiercely competitive global economy where many foreign export credit agencies offer generous terms to our competitors," said NAM President and CEO Jay Timmons. "Reliable access to export financing is vital to our global competitiveness, particularly in today's unsettled financial environment. Manufacturers in the United States can't afford to be defenseless in the global marketplace. Allowing the Ex-Im Bank to shut its doors would be a gift to foreign producers overseas and would result in the loss of exports, manufacturing and jobs here in the United States."
Underscoring Timmons' point, Ex-Im also released its Annual Competitiveness Report to Congress this week, highlighting the fact that the Bank's foreign counterparts' increasingly aggressive approach to financing export sales is posing an ever-greater threat to American companies. "While for decades, global export competition was governed by international standards put in place to ensure that companies could compete on free-market factors like price and quality rather than on aggressive government financing, today the global marketplace is changing," Ex-Im said in a release. "While 100% of official support for trade operated under these international rules 15 years ago, today that number has plummeted to 34%."
Ex-Im's report also found that commercial banks have largely withdrawn from pockets of the export-finance arena, including providing support for small businesses, in the wake of Basel III and other banking reforms.
- Jacob Barron, CICP, NACM staff writer
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While a previous report painted a somewhat negative portrait of the US economy in the first quarter, the most recent data suggests that the reality was even worse. Real gross domestic product (GDP) for the US decreased at an annual rate of 2.9% in the first quarter of 2014 according to the Bureau of Economic Analysis' (BEA's) latest revision. The downward revision marks the first quarter of 2014 as the worst for the American economy since the recession ended in 2009.
A major driver of the broader GDP decline was a downward revision to consumer spending, primarily on services and specifically health care. Previously the BEA had estimated that health care spending had added 1.01 percentage points to the full GDP figure for the first quarter of this year, but revised it down so that it was actually reduced by 0.16 points. Many believe this reflects the changing nature of health care spending in the wake of the Affordable Care Act (ACA) taking effect as of the first day of 2014. The BEA's preliminary estimate suggested that health care spending was increasing, but now it appears that it did the opposite.
Although health care was the main culprit of the downward revision, elsewhere in the economy things weighed negatively, particularly a downward revision in exports combined with an upward revision of imports, squeezing the GDP to lower numbers from both sides. Corporate profits for Q1 of 2014 also declined by 9.1% at a quarterly rate, amounting to a whopping $198.3 billion drop, after increasing by 2.2% in the last quarter of 2013, putting further pressure on the economy in the beginning of the year.
Despite the dramatic nature of the latest figures, economists appear to be taking the 2.9% negative growth rate in stride and still predict much higher growth for the second quarter, which ends next week. Led chiefly by the weather-related issues that dogged the economy in the first quarter, as reflected in the February Credit Managers' Index (CMI), many analysts wrote the sharp decline in GDP off as the result of a unique set of circumstances and noted that other indicators released in the first quarter, and more recently, continue to point toward stronger growth moving forward.
- Jacob Barron, CICP, NACM staff writer
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