January 13, 2011
Two top Federal Reserve officials have started what looks strikingly like a goodwill tour aimed at convincing weary business owners and consumers that the long-promised economic recovery is finally ready to get on track.
Federal Reserve Chairman Ben Bernanke and Governor Elizabeth Duke took a message of hope for the coming year to the meetings of a Congressional committee and a trade association to close out their first week of 2011. While admitting the pace of recovery in 2010 was "insufficient," Bernanke told the Senate Committee on the Budget that conditions appeared to be turning around.
"More recently, we have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold," Bernanke said during the Senate hearing. "In particular, real consumer spending rose at an annual rate of 2.5% in the third quarter of 2010, and the available indicators suggest that it likely expanded at a somewhat faster pace in the fourth quarter. Business investment in new equipment and software has grown robustly in recent quarters, albeit from a fairly low level, as firms replaced aging equipment and made investments that had been delayed during the downturn."
Meanwhile, Duke delivered similar optimism to members of the Maryland Bankers Association at its Economic Outlook Forum in Baltimore, where she brought more focus on the well-performing manufacturing sector.
"Recent news on production and spending offers some encouragement that the expansion may be gaining traction," said Duke. "Manufacturing production, which rebounded sharply during the first year of the recovery, has continued to expand at a solid rate in recent months. Importantly, while earlier gains in factory production were supported largely by the rebuilding of business inventories, the recent increases represent a strengthening in domestic demand for domestically produced goods." She added that the boost provided by exporting is expected to continue despite the well-documented economic stumbles of several European nations.
Both, however, admitted there were ongoing problems that needed to be addressed. Commercial and residential real estate as well as labor markets continue to struggle more than most other sectors, and they still have a long way to go. That's part of why the pair promised the Fed would continue efforts such as asset purchase programs and maintaining the low federal funds rate, especially in light of low inflationary pressure that the duo does not expect to spike during the upcoming year.
Duke said general prospects for U.S. businesses should be considered favorable despite struggles in some areas. "As the recovery continues, businesses should become more confident about expandingâ€”by both upgrading facilities and adding workers. To date, larger firms have contributed importantly to the recovery in business spending, and they seem well positioned for further investment. Over time, small businesses, which have been held back by the slow recovery in demand and greater difficulties in obtaining credit, should also become more able to increase their spending and expand their operations."
NACM Economic Advisor Chris Kuehl, PhD, managing director of Armada Corporate Intelligence, will unveil his own 2011 economic outlook during an FCIB teleconference on January 20 at 11:00am (EST). Kuehl plans to outline the three most likely storylines for the economic recovery, or lack thereof, in 2011, and notes that plenty of negative headwinds remain in play.
"We are still facing high unemployment and slow growth and, now, we have more worries about the deficit than ever and some concerns about inflation as well," said Kuehl. "The future of the euro is in debate, China is trying to decide what level of growth makes sense and inflation has become a major fear in Latin America again. These are only the highlights as far as â€˜things that make one lose sleep at night.'"
For more information about this FCIB presentation and to register, click here.
Brian Shappell, NACM staff writer
See Fed Beige Book Round Up NOW on NACM's Credit Real-Time Blog
NACM's regularly updated blog, Credit Real-Time, continues to bring readers breaking news pertinent to credit professionals at all levels. This week, NACM members can find our popular region-by-region breakdown of the Beige Book, the Federal Reserve's roundup/snapshot of economic and industry conditions in each of the 12 regions in the United States. Every six to eight weeks, NACM writers summarize every Fed region to provide information on sectors of critical importance specific to our membership. Call it cliff notes for credit professionals, if you will. See it now by visiting www.nacm.org/nacm-blog.html.
Lawmakers are ramping up their discussion about the debt ceiling as the U.S. steams toward its $14.29 trillion spending limit. Only about $335 billion stands between the nation's current spending levels and its statutory debt limit, which some believe could require an increase as early as March.
In previous Congresses, debt limit increases were often perfunctory measures that ensured that the U.S. could continue borrowing money in order to meet its many obligations, including the wars in Iraq and Afghanistan, as well as Medicare and Social Security. In the current 112th Congress, however, the House of Representatives is controlled by a Republican party that was elected on the promise of fiscal discipline and deficit reduction. A measure to increase the amount of money the government can legally borrow would be anathema to the voters who swept the GOP back into office, and the party is balking at the idea of a no-strings-attached debt ceiling increase.
"The American people will not stand for such an increase unless it is accompanied by meaningful action by the president and Congress to cut spending and end the job-killing spending binge in Washington," said new Speaker of the House John Boehner (R-OH). "While America cannot default on its debt, we also cannot continue to borrow recklessly, dig ourselves deeper into this hole, and mortgage the future of our children and grandchildren."
Boehner's comments represent a more pragmatic, moderate approach to the debt ceiling than was frequently espoused on the 2010 campaign trail, where candidates burnished their small-spending credentials by threatening to vote against debt increases and, in the case of Rep. Rand Paul (R-KY), vowing to delay the vote and practically guarantee a U.S. government default. Many have predicted that the consequences of such a default would be catastrophic.
"Never in our history has Congress failed to increase the debt limit when necessary," said Treasury Secretary Tim Geithner in a letter to Senate Majority Leader Harry Reid (D-NV). "Failure to raise the limit would precipitate a default by the United States. Default would effectively impose a significant and long-lasting tax on all Americans and all American businesses and could lead to the loss of millions of American jobs. Even a very short-term or limited default would have catastrophic economic consequences that would last for decades."
The GOP leadership, and Boehner in particular, seems to be seeking a more reasonable course of action that prevents a default on debt but ties the ceiling increase to reduced spending. "Spending cutsâ€”and reforming a broken budget processâ€”are top priorities for the American people and for the new majority in the House this year, and it is essential that the president and Democrats in Congress work with us in that effort," Boehner added.
Democrats, who still control the Senate, are seeking an early increase in the debt limit in order to avoid a last-minute battle, or worse, a short-term increase that would require dealing with the issue again later. Many have accused the Republicans of wielding the debt ceiling like a weapon and, in the words of former Senate Finance Committee Chairman Max Baucus (D-MT), "playing chicken" with American jobs and the economy. "It is time to tackle the deficit in a serious, bipartisan fashion and to do so in a manner that doesn't risk the full faith and credit of our economy and our country in the process," he noted. "Rather than waiting until the last minute, we need to work together with our colleagues on both sides of the aisle in a bipartisan, responsible mannerâ€”and begin that discussion now."
The debt ceiling received its largest increase in history last February, when it was raised by $1.9 trillion to the current $14.29 trillion limit. Republican support for debt limit increases was also much stronger during the Bush administration, which saw seven bumps in the statutory debt ceiling from June 2002, when the limit was $6.4 trillion, to October 2008, when the limit was $11.32 trillion.
Jacob Barron, NACM staff writer
Distressed Business Services
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Though times change, many credit departments operate in the same way they have for years, perhaps decades. Some others, if any change is made, simply emulate the operational setup the credit manager worked under during a stint at a previous company. Does this sound like your credit department? If so, that can be a pretty big problem.
Pamela Krank, president of The Credit Department Inc., told NACM that resources are wasted and department effectiveness is compromised when credit managers fail to give enough thought to asset needs first. And while common, the excuses that department resource needs don't match company resources allocated in a time of recession-hangover cutbacks simply don't cut it.
"Credit mangers need to take a step back and rethink the way their resources match or don't match the receivables asset," said Krank. "Consideration must be given to the type of asset managed first and then to the specific processes needed in managing the asset." Krank added that it's about a combination of the people, the process and the technological needs to determine the appropriate fit for a credit department.
Krank will detail her outlook on approaching more efficient operations in her NACM teleconference, "How to Structure a Credit Department," on January 20 at 3:00pm (EST). Key highlights of the teleconference will include:
- Alternative structures to traditional department models
- How to match personnel to the needs of the receivable asset
- Best use of process, technology and personnel to reduce costs in managing trade receivables
- How to improve effectiveness within existing department structures
- Productivity measurements to assess efficiencies and results
To learn more about this presentation, or to register, click here.
Brian Shappell, NACM staff writer
A New Start
The January print issue of NACM's Business Credit introduces your 2011 Board of Directors and features best practices from its staff of writers and other authors, as well as continued expertise from regular contributors such as Bruce Nathan, Esq. and Dr. Hans BelcsÃ¡k.
This issue also completes the wrap-up of last year's regional and CFDD conferences. Is your face among those represented?
Business Credit archives are online. Simply log in to browse electronic versions of NACM's official magazine.
Mexico, despite a recent history of drug-related border violence, remains one of America's most important trading partners. Since the 1990s, however, Mexican truckers have been banned from operating north of the border, creating a dispute that flared up most recently in 2009, as a spending bill signed by President Barack Obama pulled the plug on a pilot program that allowed a select few Mexican carriers to operate in the United States.
The Department of Transportation (DOT) recently took up the cause of resolving this long-standing dispute by releasing the framework for a long-haul, cross-border Mexican trucking program. Amid further discussion of the DOT's plan, the U.S. Chamber of Commerce announced that it will lead a trade delegation to Mexico to further boost the two countries' already important, and still improving, trade relationship.
"There is no more critical time for the relationship between the United States and Mexico than right now," said the Chamber's senior vice president for international affairs Myron Brilliant. "This exercise is about taking the next step in our economic partnership and the U.S. fulfilling its obligations under NAFTA (the North American Free Trade Agreement)."
The Chamber will wade into discussions about the DOT's suggested resolution framework, helping to mediate a mutually agreeable solution to the debate over allowing safe, carefully inspected trucks to operate across the border. "We welcome the news that the administration is taking a first step toward resolving the long-running U.S.-Mexico trucking dispute," said Brilliant. In the longer view, however, the Chamber's visit will serve as another chapter in the association's U.S.-Mexico Leadership Initiative and Vision 2020, a five-point plan for enhancing the U.S.-Mexico economic partnership. Specifically, the plan is intended to make both countries more competitive, make the U.S.-Mexico border a model for 21st century shipping, leverage the continent's energy resources, raise living standards for citizens in both countries and do so within a framework that respects each nation's sovereignty.
"Because Mexico is second only to Canada as a market for U.S. exports, millions of American jobs are at stake in the U.S.-Mexico partnership," said Brilliant, noting that a recent study by the Chamber found that more than 6 million U.S. jobs depend on trade with Mexico, and that 1.7 million of these are tied directly to NAFTA. "The Chamber is well aware of the important economic relationship between the U.S. and Mexico and we are building a program that will move the economic partnership between these two countries from a policy aspiration to a reality."
Jacob Barron, NACM staff writer
Leverage Goes a Long Way
Leverage the strength of FCIB's powerful global network by being an engaged member; we guarantee that you'll receive strong, sound and dependable guidance for your credit-related issues. As you continue to work through this tough economic climate, stay ahead of your competition by having access to the latestâ€”and most reliableâ€”information.
Stay engaged and get connected with the world of international credit and trade financeâ€”a great place to start is the FCIB Member Forum!
Although corporate bankruptcies fell in 2010, it appears many retailers are still having significant problems staying away from the bankruptcy bug.
While bankruptcy filings exceeded 1.5 million in 2010, a 14% increase and the highest number since the 2005 reform, business bankruptcies actually declined by 1% according to the Supreme Court's 2010 Year-End Report on the Federal Judiciary. Of the three most common bankruptcy filing typesâ€”Chapters 7, 11 and 13â€”only Chapter 11 filings declined, by about 4%. Chapter 7 and 13 filings more than made up for this, causing filings to increase in 73 of the 90 domestic bankruptcy courts, the report said. Still, retailers have struggled amid an economic recovery that, to date, can be characterized as underwhelming at best.
Bordersâ€”The next victim to fall to Chapter 11, if widespread speculation proves correct, could be this book retailer. Experts and publications such as the Wall Street Journal and The Street have grown increasingly loud in their predictions that the company will need to enter Chapter 11. In fact, a poll conducted by the latter found that more than 2/3 of respondents believed a Borders Chapter 11 filing was not only possible but imminent. At least one publisher reportedly stopped all shipment of books to Borders following the retailer's quiet admission last month that potential delays in vendor payments were on the horizon.
Loehmann'sâ€”Clothing retailer Loehmann's appears to be heading in a different direction. The company, which filed for bankruptcy in November, is on the brink of emerging from its Chapter 11 much healthier as a judge granted preliminary approval to its restructuring plans. Creditors must vote on the plan by February 2, and a follow-up confirmation court hearing is slated for February 7 as long as there are no snags along the way. Loehmann's has noted it plans to keep most of its remaining near-50 stores operating in a business-as-usual capacity and plans to be financially solvent during the present year.
WaMuâ€”Though a headliner, the retail sector isn't the only one still struggling in the world of bankruptcy. Financial institution Washington Mutual, Inc. appeared to be approaching a bankruptcy exit last week until a judge rejected its reorganization plan on the grounds that too many parties would be exempt from legal liability. However, the judge paved the way for approval in the near future once those problems are cleared up and noted that proposed settlements with JPMorgan Chase and the Federal Deposit Insurance Corp. were acceptable. WaMu's plan appears to leave little to nothing leftover for lower-rung investors and creditors.
Brian Shappell, NACM staff writer
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The Internal Revenue Service (IRS) recently released a fact sheet that outlined the tax incentives available to small businesses in the 2010 filing year. The aptly titled "Tax Changes for Small Businesses" includes all the cuts and incentives included in last year's Small Business Jobs Act and Patient Protection and Affordable Care Act (ACA), both of which dealt heavily in incentives for small businesses and the self-employed.
Sen. Mary Landrieu (D-LA), chair of the Senate Committee on Small Business and Entrepreneurship and a lead sponsor of the Small Business Jobs Act, noted that the tax reforms should continue to help smaller firms on their way back to prosperity and applauded the IRS for its no-nonsense approach to explaining how companies can take advantage of these incentives. "Through reforms in our nation's troubled health care system and by providing more than $12 billion in immediate, targeted tax incentives to small businesses, the last two years have been about supporting American's small businesses," said Landrieu. "As chair of the Senate Small Business and Entrepreneurship Committee, it has been my priority to find avenues to improve our nation's economy and put dollars back into the pockets of America's entrepreneurs. With tax season upon us, the IRS is making sure taxpayers are aware of these important deductions available to them."
Among the notable portions of the Small Business Jobs Act and the ACA outlined by the IRS are a self-employed health insurance deduction, which allows self-employed individuals to deduct their health care costs for payroll tax purposes, and the Small Business Health Care Tax Credit and General Business Credit for Employers.
The document also elaborates on higher expensing and depreciating limits for small businesses filing their 2010 taxes. For years beginning in 2010 or 2011, small businesses can expense up to $500,000 of the first $2 million of certain business property placed in service during the year. Full details on other changes can be found here.
Jacob Barron, NACM staff writer
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