April 28, 2011
April 2011 is the month the U.S. economy started to confront dual threats and the credit community almost instantly reflected the transition. For the past two years the focus of the business community has been almost solely oriented toward recovery and finding strategies that would propel them toward that recovery. The threat of inflation was not a concern beyond the sense that at some point all the efforts to dig out of the downturn would come back to haunt the economy. That was before the price of oil started to accelerate at a rate not seen since the 2008 debacle. Now the inflation threat has become a clear and present danger and one that is affecting the business and credit community.
In March the manufacturing sector held its own and provided the sole piece of good news for the Credit Managers' Index (CMI) as a whole, but in April the sector stumbled and exchanged positions with the service sector. In March the news for the service side was not so good, but in April it staged a bit of a recovery and much of this appears to be related to the hike in inflation as well as the reactions from the business community most affected by price shifts. The changes from month to month have been subtle and the CMI itself barely moved from the position it marked in March, up just 0.1% from 55.7 to 55.8. "The devil is in the details," said Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and economic advisor for the National Association of Credit Management. "Overall sales stayed at almost the same rate from month to month but that obscures the fact that there was a real reversal of fortune with the two sectors." Sales fell in the manufacturing sector while they rose in the service sector-the exact opposite of what happened in March. Some of this can be accounted for by the fact that inflated pricing in some parts of the economy causes a rise in sales that benefits one group, but punishes another, Kuehl said. Sales from gas station outlets were up so much that the nation's overall retail numbers rose 0.8%, but when gasoline and food costs are stripped out of that number, the growth falls to 0.3%, a solid indication of how much inflation has had an effect.
Looking at some of the other favorable factors for both sectors there was more evidence of divergence. The number of new credit applications in manufacturing fell to levels not seen since the start of the year, but in the service categories the fall was even more dramatic-numbers not seen since October of last year. The evidence is pretty strong that business has returned to a more cautious position than they had started to adopt earlier in the year. There is now much more concern about the future of the economy through 2011 and that has caused many businesses to pull back on credit. Given that it was the expansion of credit that had been fueling enthusiasm at the start of this year, one can expect further slowdowns in expansion for the next few months.
Yet another sign of divergence is the rate of dollar collections between the two sectors. Overall, the number improved from 60 to 61.3 but that obscures a shift. Dollar collections were actually down in the manufacturing sector while recovering nicely in the service sector. Commodity inflation is taking a much bigger bite in manufacturing and is affecting cash flow. The bulk of the impact of inflation is being felt in the basic industries at the moment, although the consumer is seeing more of that rise every day. Manufacturers are paying those high fuel costs along with everybody else, but they are also paying record prices for everything from steel to copper to resins and chemicals. It is not just gasoline that goes up when the price of oil rises. The price of feedstock for the fertilizer industry rises and so do the prices of petrochemicals. Transportation costs have risen as well and that affects the manufacturer first as they are paying for the transportation of the raw materials they need.
"The overall news from the CMI is that conditions have stabilized, but the fact is that there is considerable volatility just under the surface," Kuehl noted. The expectation is that inflation issues will affect the service sector in short order and the advantage held by that category will diminish in future index readings.
Click here to view the full report, complete with tables and graphs, along with CMI archives.
FCIB at Credit Congress
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Plus, don't miss networking with global practitioners from various industries at FCIB's International Luncheon on Monday, May 23.
The repeal of a widely unpopular reporting requirement for businesses championed by federal lawmakers unaware of the unintended consequences appears to be the clearest sign in seven years that lawmakers are becoming less interested in sounding off against or over-regulating U.S. companies.
For the last couple of years, businesses, large and small, have been a favorite target for Congressional lawmakers seeking the attention and adulation of the voting populace reeling from the effects of the deep recession. Partly because of the public perception that manipulations, risks and other wrongdoing on the part of some businesses in some industries, notably finance and residential real estate, caused the downturn that left so many hurting, federal legislation aimed at reeling in business activity became en vogue on Capitol Hill. This was the case even with some purportedly pro-business lawmakers. That sentiment seems to have reversed course, and that may be illustrated most clearly by the Senate's passage of a 1099 repeal bill, H.R. 4, this month amid bipartisan support and its subsequent signing by President Barack Obama. The 1099 provisions, included in last year's health care reform bill, would have required all businesses to file an Internal Revenue Service (IRS) Form 1099 for every vendor from which they annually buy $600 worth of goods or services, beginning in 2012.
Jim Glassman, managing director and senior economist for JPMorgan Chase & Co., told NACM he strongly believes the appetite for heaping more burdens onto U.S. businesses in a time of an already slow or stagnant recovery has faded for the most part. Among other things, the needs to clean up unintended consequences from recent financial reform and/or health care reform efforts, not to mention those still left over from Sarbanes-Oxley, have become increasingly harder to ignore, said Glassman. Even the voters themselves appear to be taking a stand against attempts by lawmakers to grab the proverbial soapbox by parading "culprits" around Capitol Hill rather than focusing the most energy on fixing the actual problems holding back growth.
"You're starting to see some pushback on financial reform," said Glassman. "When you pass sweeping legislation, it's hard not to create unintended consequences. I've got a feeling that what's changing the dynamic in Washington is the election outcome. I think the message was folks are pretty angry about the state of the economy and at those sitting around and blaming people instead of finding ways to work with business and get things moving. Politicians are starting to realize it's going to be very hard for anyone running for office without a robust economy. I think they're more focused on helping the economy grow."
For what it's worth, the aforementioned 1099 repeal will be funded by requiring taxpayers who receive federal health insurance subsidies to repay them if they end up earning more than 400% over the poverty line. While some Senate Democrats had reservations about this pay-for method, which takes a swipe at another part of the health care reform bill, the final 1099 repeal vote was firmly bipartisan, with only 12 Senators voting against. Additional details of the now law are available in our April 7 eNews story.
Brian Shappell, NACM staff writer
Industry Credit Groups
Credit groups are an effective management tool. They permit credit professionals of different companies servicing the same customer, regardless of industry or trade, to compare information on collection history and provide a forum for the exchange of data as to the most recent payment practices. The purpose of exchanging information is to help group members segregate fiction from fact, so competent and realistic credit decisions about a customer can be made.
Managed and operated by NACM Affiliates nationwide, and NACM-Canada and FCIB internationally, credit groups:
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In the wake of one of the busiest periods for corporate bankruptcy in U.S. history, the Federal Reserve is looking into whether or not the rules of the road for Chapter 7 and Chapter 11 filings need to be changed.
Late last week, the Fed announced that it would begin two bankruptcy studies as part of requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The law mandates that the Fed investigate the effectiveness of Chapter 7 and 11 bankruptcy reorganizations, whether a special financial resolution court or panel of special masters/judges needs to be established to oversee bankruptcy cases, the implications of potentially creating a new Bankruptcy Code chapter and what amendments should be made to existing Bankruptcy Code amid the latest wave of filings/reorganizations. A particular focus of the study appears to be on moral hazard and the fairness of recent bankruptcy reorganizations, particularly those that left many creditors with nothing or pennies on the dollar.
"This is interesting as far what spin the Federal Reserve would put on the bankruptcy process," said Dave Beckel, CCE, director of sales service and credit at MiTek Industries and former NACM chairman. "I would presume they would review the Lehman Brothers bankruptcy and it's affect on the overall financial health of institutions and the general economy among others that we have experienced over the past three years. I think we definitely will need to monitor to insure the unsecured creditors' position in the bankruptcy process is not compromised from the current standards." Beckel did intimate concern and a need for heightened awareness because of the pro-Wall Street leanings of many powerful Fed members.
In the May 2010 issue of Business Credit, the trend of rapid bankruptcy filings, usually in the form of some already worked out or "pre-pack" filings, was explored. The article, titled "The Need for Speed," included the analysis of a 2010 Standard & Poor's study that noted the fast pace of some bankruptcies had some success, but showed plenty of cases where lower-level creditors to the filing company fared particularly poorly due to pre-arranged deals among larger stakeholders. The study also raised the possibility that some reorganized companies rushed through the process too quickly without actually fixing existing problems and exposed themselves to the potential need for another reorganization just a couple of years down the line. While attorneys contacted by NACM said they believe it's too early to predict a wave of serial refilings by such companies, some did urge those in the credit game to adopt a "wait-and-see" approach and to monitor it closely in the coming years.
As for the new Fed study, it has opened a 30-day public comment period and wants feedback on how to best address the issue. Comments may be made at www.regulations.gov. Unedited public comments will be made available at www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm. Additional information is available at 202-452-3565.
Brian Shappell, NACM staff writer
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The International Accounting Standards Board (IASB) and its U.S.-counterpart, the Financial Accounting Standards Board (FASB), recently announced a delay in their accounting standards convergence schedule. While the original plan was to complete convergence work by June, the boards voted to delay the target for completion to the second half of 2011, although the U.S. insurance standard is targeted for even later, in the first half of 2012.
The two boards have been hard at work, erasing the boundaries between International Financial Reporting Standards (IFRS) and U.S. generally accepted accounting principles (GAAP). However, in their most recent progress report, the boards announced their decision to allot more time to complete the work of converging the two standards into one, cohesive global version.
"Today we are reporting further substantial progress on our work to improve and align international and U.S. accounting standards, while providing additional time to finalize the remaining convergence projects," said Sir David Tweedie, chairman of the IASB. "The convergence program continues to raise the standard of financial reporting worldwide, delivering much-needed improvements in key areas and providing a solid platform for global high quality standards."
In their report, the IASB and FASB also announced that they had completed five other projects which would yield new standards in the next few weeks. They will also jointly issue new requirements in relation to fair value measurement and put three remaining memorandum of understanding (MoU) projects on priority. These MoUs cover financial instruments accounting, leasing and revenue recognition, while aiding the boards' joint mission to converge IFRS and GAAP.
"The progress report highlights the many areas where we have already improved and converged our standards, and our plans for completion of the priority projects," said Leslie Seidman, FASB chairman. "We have also clarified our plan to continue to engage stakeholders in the remaining steps of the process, and give them an opportunity to review the draft standards before they are finalized."
The process of merging IFRS and GAAP could have ramifications on how commercial creditors use financial statements for public companies.
A day before IASB and FASB issued their most recent progress report, the U.S. Securities and Exchange Commission (SEC) announced an upcoming roundtable on IFRS to be held in July. The program will focus specifically on the benefits or challenges that could occur as a result of incorporating IFRS into the U.S. financial reporting system. "We must carefully consider and deliberate whether incorporating IFRS into our financial reporting system is in the best interest of U.S. investors and markets," said SEC Chief Accountant James Kroeker. "This roundtable will provide an excellent opportunity for investors, preparers and regulators to provide the SEC staff with valuable information that will help the Commission in its ongoing consideration of incorporating IFRS."
Jacob Barron, NACM staff writer
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Conservative lawmakers took up arms recently against a proposed executive order that would require federal contractors to disclose their donations to groups with which they are politically active.
White House Press Secretary Jay Carney mentioned the proposal in a briefing last week, but was mum on the specifics of the order being considered by President Barack Obama. "There's a draft, and the particular specifics of that executive order could change over time, so I can't talk about the specifics," he said. "What I can tell you is the president is committed to improving our federal contracting system, making it more transparent and more accountable. He believes that American taxpayers deserve that, and that's what he intends to pursue through this executive order."
Prominent Republican lawmakers jumped on Carney's statement, railing against what they alleged was an assault on free speech and an attempt to politicize the contracting process. "Even though Congress and the judicial branch have weighed in on this issue, the Obama Administration is attempting to abuse its executive power by forcing its will on America. Ordering businesses to disclose political records will allow this administration to intimidate the business community and reward political allies," said Rep. Sam Graves (R-MO), chairman of the House Small Business Committee. "This is the wrong thing to do, especially at a time when federal procurement can be an effective method for helping small businesses grow and create jobs."
Graves' comments noting that the issue has already been addressed by Congress and the judicial branch refer to the DISCLOSE Act, which would've made changes similar to those included in the proposed executive order and was defeated in Congress last year, and the Supreme Court's landmark ruling in Citizens United v. Federal Elections Commission, which affirmed the rights of private citizens and companies to exercise their right to free speech through political donations.
Other Republican lawmakers echoed Graves' concerns, noting that a company's political contributions shouldn't be required to determine how federal contracts are awarded. "I have been a longtime supporter of full disclosure and transparency in campaign advertising, but any proposal that would undermine the First Amendment rights of our citizens to free speech should be dropped," said Sen. Olympia Snowe (R-ME), ranking member on the Senate Committee on Small Business and Entrepreneurship. "Congress has spoken on this issue and such an order appears to circumvent the will of Congress and should be reconsidered. Political contributions should not dictate the winners of federal contracts nor limit the access of any American to their federal government."
Carney denied that the proposal had anything to do with politics, saying that the president "believes very strongly that taxpayers deserve to know...how they're spending their money, and...how they're spending in terms of political campaigns. And his goal is transparency and accountability. That's the responsible thing to do when you're handling taxpayer dollars."
Jacob Barron, NACM staff writer
Leading officials in the Senate Finance Committee, whose jurisdiction includes international trade, requested a study this week from the International Trade Commission (ITC) focusing on Brazil and its competitive effect on U.S. agricultural exports.
Committee Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT) sent a joint letter asking the ITC to look at how the market has changed in order to ensure the U.S. provides the optimal resources and trade policies to keep U.S. ranchers and farmers competitive. The resulting report will include specific details pertaining to Brazil's agriculture market, as well as the effect that Brazil's free trade agreements (FTAs) with other countries will have on U.S. agricultural exports.
Essentially, Baucus and Hatch hope the ITC will give Congress the information it needs to maintain the country's competitive edge over Brazil, which has become one of the world's hottest economies in recent years.
"In 2010, one-third of all sales from our ranchers and farmers came from exportsâ€”that's $116 billion worth of business supporting jobs and communities across the country," said Baucus. "It is critical that we continue to increase our exports and understanding in order to stay competitive as countries like Brazil grow."
"With its significant growth in agricultural exports in recent years, Brazil has emerged as a major competitor for U.S. agricultural producers in the international market," said Hatch. "This investigation will help us better understand this dynamic by giving us a more complete picture of Brazil's agricultural export sector and assist us in developing strategies to maintain our competitive edge in the international market."
Brazil isn't the first country to be targeted for this type of investigative treatment: Baucus, Hatch and former Finance Committee Ranking Member Chuck Grassley (R-IA) previously requested and obtained similar reports on the Chinese and Indian agricultural sectors.
Jacob Barron, NACM staff writer
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