April 21, 2011
Keynote speaker Kevin Hebner, foreign exchange strategist at JPMorgan Chase & Co., sounded positive about the economy from a macro standpoint at least.
"We're looking at about 3.3% global growth this year" and 3.6% global growth in 2012, said Hebner, addressing a room packed with credit professionals at this week's FCIB International Credit Executives (I.C.E.) conference. Held annually at the Drake Hotel in Chicago, the event offers executive-level insights into the global economy, as well as detailed trends and strategies to help attendees from all industries improve their credit and risk management practices.
While plus-3% global growth for the next two years sounds great coming out of the stagnant post-recession environment, Hebner warned that many issues remain, specifically with regard to anticipated austerity measures, oblivious central banks, and problems in one of the world's only new, non-Chinese, leading economies.
The austerity measures are expected to eventually take hold in the U.S., although perhaps not soon enough. The most recent development on this front has been the budget blueprint proposed by Rep. Paul Ryan (R-WI), chairman of the House Budget Committee. "Paul Ryan came through with a framework and did something that would alienate many of his voters," said Hebner. "However, with growth at 3% this year, next year and the year after that, there may not be the urgency that Paul Ryan has."
Delays, which appear likely in a sharply divided Congress, could hurt U.S. chances for long-term fiscal health, as they become distracted with regular economic growth. When an austerity plan is proposed and agreed on, Hebner noted that it would most likely follow the model already used by the British, which relies on 70% in spending cuts and 30% in tax increases. Hebner sung the praises of the British method, calling it "a text-book perfect plan" and the 70/30 split "empirically, the best balance."
Another issue facing global economies is the reluctance of central banks to take bold steps to fight inflation by raising rates. "Global central banks are behind the curve," said Hebner, noting that of all the world's central banks, only about three are taking action. "Everybody is behind the curve on fighting inflation. Across the board, rates are too low."
This leads to potential problems in Brazil, a hot market if ever there was one, and a country well covered in this year's I.C.E. program. "The poster child" for lax inflation enforcement, said Hebner, "is Brazil. They're throwing everything but the kitchen sink at the foreign exchange (FX) markets to keep the real from appreciating." Ultimately this could harm Brazil's newly-minted elite status by a creating a soon-to-burst credit bubble. "Growth is going to be too strong and ultimately this ends the way it always does," said Hebner. "It ends in tears."
Check out the upcoming June 2011 issue of Business Credit magazine for comprehensive coverage of this year's I.C.E. Conference. To learn more about FCIB's educational programs, visit their website at www.fcibglobal.com.
Jacob Barron, NACM staff writer
FCIB at Credit Congress
Don't miss the five-part International Track at NACM's 115th Credit Congress. Learn the essentials of Doing Business in Brazil, Canada, Chile, China and Venezuela. . Designed specially by FCIB for Credit Congress, these sessions will also explore the due diligence efforts required to conduct in-country business successfully.
Plus, don't miss networking with global practitioners from various industries at FCIB's International Luncheon on Monday, May 23.
The Panama Free Trade Agreement (FTA) took another step toward approval earlier this week.
By ratifying a Tax Information Exchange Agreement (TIEA), Panama resolved what was largely seen as one of the final remaining issues preventing American approval of the FTA. This means that the administration will soon begin work on an implementation bill, which should finally result in the approval of the U.S.-Panama FTA, which has been pending since its 2007 signature.
"With today's announcement, the U.S. and Panama have cleared the final hurdle before the Free Trade Agreement can be approved," said Sen. Max Baucus (D-MT), chairman of the Senate Finance Committee, whose jurisdiction includes international trade. "The next step is to agree on an implementing bill so we can get the agreement before Congress. The sooner we enact the Free Trade Agreement with Panama, the sooner our ranchers, farmers and manufacturers in Montana and across the country will start to see the benefits."
In addition to tax transparency, the Panama FTA also suffered delays due to labor rights issues, which were addressed in other recently ratified legislation. The TIEA brought Panama into compliance with the Organization for Economic Cooperation and Development (OECD) standards that require certain steps be taken to prevent a country from becoming a tax haven in which taxpayers can hide profits to dodge U.S. tax obligations.
The news drew cheers from officials in the House as well, with both Ways and Means Committee Chairman Dave Camp (R-MI) and Trade Subcommittee Chairman Kevin Brady (R-TX) offering their congratulations. "In ratifying the U.S.-Panama TIEA, Panama has now addressed each and every issue considered outstanding by the Obama Administration and cleared the path for immediate consideration of the U.S.-Panama Trade Promotion Agreement," said Camp. "I applaud Panamanian President [Ricardo] Martinelli for moving the TIEA forward and for his strong commitment to U.S.-Panama relations."
"Panama is an important strategic ally in our hemisphere, and the U.S.-Panama Trade Promotion Agreement will provide new markets and opportunities for U.S. exporters," Brady added. "We are in the home stretch, and I welcome the opportunity to show the world that we once again have a market-opening trade agenda that creates U.S. jobs."
Once fully implemented, the FTA will give U.S. agricultural and manufactured goods duty-free access to the Panamanian market.
Jacob Barron, NACM staff writer
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Last week's eNews reported the overall picture of the Federal Reserve's latest Beige Book, which stated regional conditions have only seen moderate improvement to the economy, but it was an improvement characterized as "widespread across sectors." Here are highlights of the 12 districts:
First District - Boston: Manufacturing contacts noted business was good overall with particularly strong returns for the chemical business and great expectations for the first quarter on the part of technology-related producers. Estimated employment gains for most business services range from 3% to 12% this year.
Second District - New York: Strong consumer spending has helped optimism in the district, but no change has been reported in credit standards or demand for loans on the part of commercial and industrial firms.
Third District - Philadelphia: Manufacturing rebounded in March with more than half of the district's manufacturers noting increases in shipments and new orders. Demand for loans from that sector and most small businesses in general seems to have picked up in March.
Fourth District - Cleveland: New orders and production were steady despite some fears of seasonal declines. Still, production was generally higher in the district at this point last year than at present.
Fifth District - Richmond: Manufacturing demonstrated more expansion in March, though not as robust as other districts. However, those in the automobile industry as well as others relying on raw materials have noticed delays and fretted they could worsen and slow production considerably.
Sixth District - Atlanta: Demand for credit in the region has not rebounded like some other regions, especially those to the north. There were, however, some gradual labor market recoveries of note. Rainfall totals have helped agricultural producers, but there are lingering levels of drought in much of the region.
Seventh District - Chicago: Capital expenditures are occurring as planned, with several major manufacturers purchasing key equipment. Small improvements were noted in vacancy rates, though not in commercial real estate rent prices. More expansion was found in manufacturing, led by the steel, automotive and heavy equipment sub-sectors.
Eighth District - St. Louis: Manufacturing showed some growth, but it's a tale of two groupings with firms in silicone products, rubber products and military vehicle manufacturing, among others, planning for expansion amid good returns, while firms in surgical equipment, packaging and weapons manufacturing seeing layoffs and decreases in operations.
Ninth District - Minneapolis: Manufacturing output again surged. Commercial construction activity increased, with office permits seeing an uptick in markets such as Sioux Falls, SD. Office and industrial vacancy rates were also down in areas including Minneapolis/St. Paul and Fargo, ND.
Tenth District - Kansas City: Manufacturing showed rapid expansion, led by high-tech service and transportation firms as well as factories. New orders surged and expectations for coming orders remained strong. Ag growing conditions were tested mightily, with much of the winter wheat crop threatened by intensifying drought issues.
Eleventh District - Dallas: High-tech manufacturing and the previously-struggling construction product business changed shoes for this period. High-tech firms are feeling the impact of Japanese factory shutdowns, while those in construction enjoyed a surge as pent-up demand following poor weather conditions brought people back to the market in droves.
Twelfth District - San Francisco: Manufacturing showed strong gains, again with commercial aircraft/parts and semiconductor producers doing well. Businesses in several sectors have been showing more interest in garnering credit, mostly for capital spending projects, Fed contacts said.
For the full, region-by-region breakdown, visit NACM's Credit Real-Time blog.
Brian Shappell, NACM staff writer
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If you were looking for a silver lining in Standard & Poor's recent "negative outlook" on the U.S.' fiscal future, look no further than the U.S. Treasury.
In a release following the S&P downgrade, the Treasury issued a release welcoming S&P's affirmation of the U.S.' AAA rating, which it offered along with its aforementioned negative outlook. The agency was in no way ignorant of the negative outlook, but sought to downplay S&P's concerns by throwing its weight behind the hope for a bipartisan deal on the nation's debt problems.
"This morning, S&P affirmed the AAA rating of the U.S., but emphasized the importance of timely bipartisan cooperation and action on fiscal reform," said Assistant Secretary for Financial Markets Mary Miller, who also referred to separate comments made by fellow ratings agency Moody's. "In addition, Moody's commented today that ‘we view the changed parameters of the debate, with broadly similar goals as to government debt levels, as a turning point that is positive for the long-term fiscal position of the U.S. federal government.'"
The Moody's comments are far more openly positive than the S&P downgrade, but the important things in each of these announcements, according to Miller, are the varying degrees of hope that a viciously divided Congress can come together to enact a budget blueprint before time runs out. "As the president said last week, addressing the current fiscal situation is well within our capacity as a country. He has initiated a bipartisan process that will allow us to make progress on a balanced approach to restoring fiscal responsibility," said Miller, who then optimistically rebuffed S&P's outlook. "S&P assumes that the U.S. will enact ‘a comprehensive budgetary consolidation program-combined with meaningful steps toward implementation by 2013,' but we believe S&P's negative outlook underestimates the ability of America's leaders to come together to address the difficult fiscal challenges facing the nation."
Among the most pressing of the "fiscal challenges" mentioned by Miller is the debate over the country's statutory debt limit or debt ceiling. Currently, the U.S. can only legally borrow $14.3 trillion, a limit that is expected to be reached no later than the middle of next month. To address this issue, at least in previous Congresses, the debt ceiling was raised by a perfunctory vote on a bill that does just that; raises the borrowing limit and prevents a default. However, many in a young, energized class of Republican lawmakers have threatened opposition to this year's necessary debt ceiling increase unless there are major spending concessions made by President Barack Obama and his party.
A default on U.S. debt would have major consequences and, in all likelihood, end in another global recession.
So, Treasury and the White House are hoping that bipartisanship can save the day by preventing a short-term catastrophe while setting the U.S. on a path to long-term fiscal responsibility. "The U.S. economy is strengthening as it emerges from the recent recession," said Miller. "Both political parties now agree that it is time to begin bringing down deficits as a share of GDP."
Stay tuned to NACM's eNews and Credit Real-Time Blog for future updates on the debate surrounding the debt ceiling.
Jacob Barron, NACM staff writer
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Deloitte CFO Signals™ Survey: Companies Shifting from Recovery to Growth, but Domestic Hiring Will Likely Continue to Lag
Chief financial officers are markedly shifting their focus from cost cutting to revenue growth, but they remain wary of increased hiring at home, according to the results of the Deloitte CFO Signals quarterly survey for the first quarter of 2011. Specifically, the CFOs surveyed said nearly half of their companies' strategic focus is on revenue growth—substantially ahead of their 30%t focus on cost reduction.
Despite the focus on growth, the survey, which tracks the thinking and actions of CFOs representing many of North America's largest and most influential companies, also indicates that growth may not translate into jobs in the near term. Year-over-year domestic hiring growth projections for the first quarter of 2011 remained low at 1.8%, similar to projections from the previous three quarters. Only after a 20% revenue gain did a majority of CFOs say they would increase domestic hiring substantially. Also, a 5% increase in revenue would have little or no impact for 70% of the surveyed companies, and a 10% revenue increase would substantially increase hiring for only 11% of companies.
"With cash on their balance sheets and cost efficiency gains largely accounted for, many companies are now heavily focused on top-line growth," said Sanford Cockrell III, national managing partner, CFO Program, Deloitte LLP. "Having ridden a wave of recovery-related improvements for the past few quarters, companies are seeking growth on their own terms."
Overall, optimism among CFOs rebounded during the quarter with 62% of respondents indicating a more positive outlook regarding their companies' prospects, up from 53% in the fourth quarter of 2010. Furthermore, CFOs are upbeat about performance, projecting average year-over-year gains of 8.2% for sales (compared to 6.5% last quarter), 12.6% for earnings (compared to 12% in the fourth quarter 2010), and 11.8% for capital spending (compared to 8.7% last quarter). The projections for both revenues and earnings, however, are substantially lower than estimates from the second and third quarters of 2010—possibly indicating that many of the strongest recovery gains have already been achieved.
The obstacles to growth that CFOs cite are mainly external. Survey results revealed that 52% of respondents view regulation as their industry's top concern.
"As CFOs and their companies turn their focus toward growth investments, they indicate heightened concerns about the specific provisions of regulation they see coming, and also about unanticipated future regulation not accounted for in their current plans," explained Greg Dickinson, who leads the Deloitte CFO Signals survey. "This uncertainty is making many potential investments appear risky and unattractive."
In its discussion on hiring, the above survey echoes NACM's own March survey, which asked "Is your company hiring, or planning on hiring, new credit staff?" Seventy-six percent of respondents to NACM's survey said their companies were not planning to hire. To read the reasons why, read the full results of the survey, as it appeared in the April 7 edition of eNews.
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More than One-Third of Companies Report that Less Business Travel Has Adversely Affected Their Business
As companies carefully watched their budgets in 2010, many were reluctant to send their employees on planes, trains and automobiles. A new CareerBuilder survey reports that three-in-ten (30%) companies said they cut back on business travel last year, and of those companies, more than one-third (37%) said it negatively affected their business. The nationwide survey was conducted among more than 2,400 U.S. employers and more than 3,900 U.S. workers between November 15 and December 2, 2010.
When asked how fewer business trips affected their bottom lines, companies reported the following:
• Less effective internal communication - 12%
• Fewer sales - 11%
• Less effective execution on internal business initiatives - 10%
• Less customer loyalty - 8%
When it comes to business travel in 2011, the majority of companies (77%) report that business travel levels will stay the same as last year. Eleven percent said their companies will take more business trips this year, while 13% said business travel will decrease.
"Business travel is an important part of many companies' operations as it lets them stay connected with clients and employees across the globe," said Rosemary Haefner, vice president of human resources for CareerBuilder. "Some companies are revisiting their policies, though, to ensure they're maximizing the effectiveness of their business travel initiatives."
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