October 6, 2011

News Briefs

  1. Economy Shows Signs of Life on Manufacturing Rebound
  2. House to Vote on 3% Withholding Repeal This Month
  3. Chinese Revaluation Bill Gaining Steam in Congress at What Economists See as the Worst Possible Time
  4. FTAs Submitted to Congress
  5. Italy Credit Rating Slashed Despite Performing Better than PIIGS Counterparts
  6. Treasury Disburses Final Wave of SBLF Funding
  7. Lights Flickering on Another Solar Company


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Economy Shows Signs of Life on Manufacturing Rebound

Are there rays of hope coming from the Credit Managers' Index (CMI)? It would certainly seem that way after looking at the September performance. It is also a good time to look at why the CMI has been such a good tool for assessing the economy from one month to the next. It all comes down to the nature of the credit manager's world. For all intents and purposes, the credit manager lives in the future. They may be pleased that their customer had a good month, but what they are really interested in is whether that customer will have a good month when it is time to pay that invoice. Much of what the credit function focuses on remains in the realm of 30, 60, 90 and 120 days from now. When credit professionals answer the monthly survey questions for the index, they are forecasting in many respects and that is the prime reason that the CMI as a whole tends to predict future economic behavior.

Over the past eight years, the CMI has repeatedly projected the overall performance of the U.S. economy by at least a month. In the early part of 2008, the CMI started to show weakness and was in decline well before the economy as a whole tumbled. Likewise, there were signs of recovery in the CMI earlier in 2009 than other economic data showed. "This pattern makes the data for September all the more interesting," said Chris Kuehl, PhD, economist for the National Association of Credit Management (NACM). "For the past few months, there was a slow deterioration of key credit conditions and many were expecting to see more declines this month. Instead, the combined index returned to the levels set in July. Granted, the index had been higher than recent readings since October of last year, but moving from 52.7 to 53.8 is not insignificant and it brings the combined index back to levels seen in the spring months."

The better news is in the breakdown of favorable and unfavorable factors. The recovery in favorable factors takes the index back to May's levels and the lift was impressive—improving from 58.1 to 59.9. The index was last at 60 this past April. That gain was driven in no small part by additional sales, which moved solidly past 60 to 61.4 and is at its highest point since April. There were corresponding solid index numbers in new credit applications, dollar collections and the amount of credit extended. These are all very good signs for future development and suggest that in the midst of all the gloom and doom provoked by political wrangling, there is business taking place and growth manifesting itself.

There were encouraging signs in unfavorable factors as well. The majority of the readings remain below 50, still signaling weakness, but the combined score moved up slightly from 49.1 to 49.6. This is not cause for celebration, but at least the pattern has started to reverse and the expectation is that these readings will be back above 50 before too long. The category that continues to show decline is rejections of credit applications, which is not all that shocking as more than a few companies are still trying desperately to get additional credit to hold on a little longer. The number of bankruptcies declined at the same time signaling that perhaps somewhat fewer companies are struggling. It may also signal that the companies walking that financial tightrope have finally given up. The fact that more credit applications have been submitted at the same time that more are being rejected would seem to suggest experimentation is taking place. The companies almost seem to be testing the waters to see what their options might be. Sales are up and that is good news, and now there may be attempts underway to judge the enthusiasm of supplier companies to expand market presence.

"The overall sense at this stage is that there is some life left in the economy. If one only looks at the numbers from July and August, it would be a very depressing story indeed," said Kuehl. "There is still not enough evidence to be convincing, but the most chronically optimistic could say that a recovery is at hand. The data is sufficient enough to make the case that the precipitous plunge predicted for the end of the year may not be taking place after all. Not that there is no threat of sinking back into recession, but a deep plunge seems more and more distant."

The online CMI report for September 2011 contains the full commentary, complete with tables and graphs. CMI archives may also be viewed online. If you are a credit professional and would like to participate in the survey, click here.

Source: NACM

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House to Vote on 3% Withholding Repeal This Month

Majority Leader Eric Cantor (R-VA) announced this week that the House of Representatives would vote on a bill repealing the 3% withholding requirement before the end of the month.

"The President has my word that over the next month we will make permanent the [repeal of the] 3% withholding provision from his American Jobs Act," said Cantor in a press briefing. "This is a new policy that has continued to be extended and extended and will go into effect a year from January, something that is harmful to businesses conducting business with anybody on any city, state, or federal level."

Cantor did not reveal which specific bill the House would consider, nor how the repeal would be paid for, which has been the sticking point for the almost six-year-old effort to eliminate the provision completely. Nonetheless, with bipartisan agreement that the provision is harmful to small businesses, and Congress searching for common ground with President Barack Obama, the success of the repeal effort seems likely.

"I applaud Majority Leader Cantor for continuing his commitment to removing barriers to job creation by announcing that a 3% withholding repeal bill would be voted on this month," said Rep. Sam Graves (R-MO), chairman of the House Small Business Committee. "Even though this burdensome withholding requirement isn't scheduled to go into effect for another 15 months, it has an impact on small businesses' operations and hiring decisions now because many contracts have a five-year requirement schedule. Implementation of this tax would significantly affect small business cash flow, especially in sectors such as construction, where pre-tax profit margins rarely meet or exceed 3%, and businesses will lose vital funds needed to finance day-to-day activities and new jobs."

"To provide more certainty for small companies that do business with the government, this withholding requirement must be repealed right away," he added.

A provision in the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) stipulated that federal, state and local governments were to withhold 3% from all payments for goods and services, including from small businesses. Originally, the withholding requirement was set to take effect in 2011, but has been delayed by legislation and Internal Revenue Service (IRS) actions to 2013. The president's American Jobs Act, currently being considered in the House, would delay the requirement by another year.

NACM has lobbied for a full repeal of the 3% withholding tax since its enactment. Stay tuned to NACM's blog and NACM's eNews for future updates.

Jacob Barron, CICP, NACM staff writer

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Chinese Revaluation Bill Gaining Steam in Congress at What Economists See as the Worst Possible Time

Despite the widely held belief that China will allow its currency to be valued at a more accurate, higher level when it is not made a public issue, U.S. lawmakers appear ready to turn up the rhetoric with a legislative proposal that takes thinly veiled shots at the Asian powerhouse. Meanwhile, the political voice of reason may be coming from an unlikely source.

A proposed bill is winding its way through Congress and, though the prospects of it passing still seem unlikely, is quite obviously accusing China of undervaluing its currency. The legislation would essentially demand, though almost entirely in gesture, that nations with undervalued currencies let said values rise. This, as it has in the past, triggered hints of a "trade war" from the Chinese and allegations that it's mainly an effort by U.S. supporters to pander to their voter base.

A bevy of top experts including FCIA Economist Byron Shoulton and NACM Economist Chris Kuehl. PhD as well as Federal Reserve Bank of New York Vice President Matthew Higgins have warned that publicly pushing the Chinese on the issue only causes them to dig in further. In September, Higgins told a crowd at FCIB's New York International Round Table that the Chinese had shown signs of letting their currency valuation rise to more accurate, appropriate levels, but warned that might not continue if policymakers from the United States or other nations got atop the proverbial soapbox again about revaluation.

"The direction is a foregone conclusion," said Higgins. "But China goes especially slow on currency when the international environment looks troubled."

Even House Speaker John Boehner (R-OH), who has been associated with the atmosphere of highly-partisan politicking amid a near-gridlocked Congress, came out in recent days to criticize the bill—one of a few with member support from both sides—calling it "dangerous" to push a bill telling another nation what to do with its currency. Boehner has been far from pro-China on its perceived misgivings on the true value of its currency, which provides perceived massive advantages in areas such as trade, but he intimated there are far better approaches than the present, ultra-public effort.

Brian Shappell, NACM staff writer

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FTAs Submitted to Congress

President Barack Obama submitted the nation's three pending free trade agreements (FTAs) to Congress earlier this week. Approval of the FTAs with South Korea, Panama and Colombia is almost assured, as the pacts enjoy widespread bipartisan support in both chambers of Congress.

"The series of trade agreements I am submitting to Congress today will make it easier for American companies to sell their products in South Korea, Colombia and Panama and provide a major boost to our exports," said Obama. "These agreements will support tens of thousands of jobs across the country for workers making products stamped with three proud words: Made in America."

Congressional leaders were quick to laud the FTAs while lamenting the lengthy delay between their creation and their submission for approval. "The American people have waited a long time for these job-creating trade agreements...and I am pleased that the president is submitting them to Congress," said House Ways and Means Committee Chairman Dave Camp (R-MI). "These agreements will increase U.S. exports of goods and services and support much-needed jobs—up to 250,000 U.S. jobs using the president's own metric. Best of all, they do not require any new government spending." Camp's committee has already taken action on the FTAs, holding a markup of all three of them yesterday in order to clear the way for consideration by the full House.

"The agreements enjoy broad bipartisan, bicameral support and have been delayed for too long. Further delay will only postpone the economic benefits of these agreements and cost Americans jobs as we continue to lose ground to foreign competitors who have already implemented their trade agreements with our partners," he added.

Passing the pending FTAs would expand U.S. exports, help small businesses and lower tariffs on American goods.

"These trade agreements will create tens of thousands of much-needed jobs here at home and boost our economy by billions of dollars," said Sen. Max Baucus (D-MT), chairman of the Senate Finance Committee. "Our ranchers, farmers and businesses have waited long enough for these deals to be enacted, and this is a critical step forward."

Submission of the FTAs by the president was previously contingent on Congress' renewal of the Trade Adjustment Assistance (TAA) program. After a pared-down version of the TAA was approved in the Senate, however, the president submitted the agreements to the House, which is expected to begrudgingly follow through on the TAA renewal in addition to the FTAs. "Now that the trade deals have been submitted to Congress, the next step is to approve them and for the House to extend critical worker aid by renewing TAA at the same time," said Baucus. "By enacting the agreements and renewing TAA, we help ensure that American workers and businesses are fully equipped to take advantage of new, lucrative export opportunities."

While the agreements must first be considered in the House, the bill for approval was introduced in the Senate the night of their submission, ensuring that the FTAs can be fast-tracked to the president's desk.

Jacob Barron, CICP, NACM staff writer

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Italy Credit Rating Slashed Despite Performing Better than PIIGS Counterparts

In what will surely draw the ire of member nations in the European Union, Moody's Investment Services has moved to cut Italy's credit rating, a first in nearly two decades.

Moody's downgraded Italy's government bond ratings by three notches Wednesday and issued the nation a negative outlook. This took some market-watchers by surprise since, unlike several other EU members this year, Italy has handled its debt problems well enough to where talk of needing any kind of bailout has yielded. It's now the last of the PIIGS (Spain, Ireland, Italy, Greece and Spain) to receive a downgrade from at least one of the highly criticized U.S.-based ratings agencies this year.

Moody's, largely citing the Greek and other PIIGS-caused problems, explained the conditions behind the downgrade as follows:

  1. "The material increase in long-term funding risks for euro area sovereigns with high levels of public debt, such as Italy, as a result of the sustained and non-cyclical erosion of confidence in the wholesale finance environment for euro sovereigns, due to the current sovereign debt crisis."
  2. "The increased downside risks to economic growth due to macroeconomic structural weaknesses and a weakening global outlook."
  3. "The implementation risks and time needed to achieve the government's fiscal consolidation targets to reverse the adverse trend observed in the public debt, due to economic and political uncertainties."

Moody's went out of its way to note that the size of the downgrade was driven by "increased susceptibility to financial shocks due to a structural shift in market sentiment regarding euro-area countries with high debt burdens," more so than Italy's own issues.

Italy had drawn some praise for sidestepping some of the debt landmines that hurt other, albeit smaller and less important, EU economies. To wit, Italy's estimated outstanding debt load of about $2.2 trillion (USD) is nearly five times the size of Greece's debt and more than 10 times that of the respective commitments of Ireland and Portugal, making the importance of stability there more critical. Over the summer, analysts believed Italy needed to take quick and sharp austerity actions to stave off problems. Since, they seem to have hit some important targets. However, scandals and the increased petulance of Italian Prime Minister Silvio Berlusconi that have led investors, citizens, opposing politicos and even former high-level supporters to unilaterally question his competence likely will remain an issue and could serve as a drag on all-important market confidence.

Brian Shappell, NACM staff writer

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Treasury Disburses Final Wave of SBLF Funding

Last week the U.S. Treasury distributed $1.6 billion to 141 community banks in the seventh, and final, wave of funding provided through the Small Business Lending Fund (SBLF).

The Treasury lost its authority to make disbursements under the fund at the end of September.

All told, and including this last wave of funding, the Treasury has given more than $4 billion to 332 banks across the country, encouraging them to increase their lending to small businesses in order to help companies expand their operations and create new jobs. "Billions of dollars in SBLF funds are now being put to use in communities all across the nation, spurring small business growth and job creation," said Deputy Secretary of the Treasury Neal Wolin. "This $4 billion investment, which will help propel lending by Main Street banks in many multiples of that amount, is good for our economy and good for America's small businesses."

Banks receiving funding under the SBLF must hold under $10 billion in assets. The dividend rate they pay on the given funds is reduced as the bank increases its lending to small businesses, incentivizing new business with smaller firms. Receiving the largest portions of the most recent disbursement were Western Alliance Bancorporation in Phoenix, AZ ($141 million), PlainsCapital Corporation in Dallas, TX ($114 million) and First Merchants Corporation in Muncie, IN ($91 million).

Disbursements such as these have given the president a chance to burnish his small business credentials, as campaign season ramps up and the 2012 elections loom large in the distance. The SBLF was enacted last year as part of the Small Business Jobs Act, which also created the State Small Business Credit Initiative (SSBCI), a program that allocates $1.5 billion to new and existing state programs that will leverage private financing to spur $15 billion in new lending to small businesses and manufacturers. Treasury was also keen to point out in their announcement that the Obama Administration has supported 17 direct tax breaks that provide relief of over $50 billion to small businesses, in addition to expanding existing Small Business Administration (SBA) loan programs that put more than $42 billion into the hands of smaller companies.

Jacob Barron, CICP, NACM staff writer

Lights Flickering on Another Solar Company

The body count of U.S.-based solar product manufacturers rose as yet another western-based firm filed for bankruptcy. However, perhaps illustrating how tough times have gotten for the industry from the standpoint of domestic interest, this one has moved straight to the liquidation phase.

Arizona-based Stirling Energy Systems Inc. has filed for Chapter 7 in U.S. Bankruptcy Court in Delaware. At least four such companies have now filed some form of bankruptcy since August. Like the others, Stirling is blaming the lack of demand amid the stumbling economy and under-cutting on pricing and cost by Asia-based competitors. Also in play are massive problems with saturation and over-investment during the boom years, relative to demand, which was highlighted earlier this year in NACM's eNews and Business Credit Magazine.

That's not to say there isn't a push to keep solar front of mind domestically. About one week ago, the board of directors of the Export-Import Bank of the United States (Ex-Im Bank) approved a sixth solar-energy project this year pairing U.S. solar product providers and customers in India. A $19 million direct loan is being made by Ex-Im to support the sales of solar photovoltaic panels from SolarWorld Industries America Inc. in Hillsboro, OR and construction services from various U.S. suppliers to India's Tatith Energies Gujarat Private Ltd. The panels will be used in a five-megawatt (MW) solar photovoltaic crystalline power project in the state of Gujarat, one of the areas of the nation that are part of a growing interest in solar power.

Among solar companies that haven't been so lucky and filed for bankruptcy protection under Chapter 11 are California-based SpectraWatt Inc. and Solyndra as well as Massachusetts-based Evergreen Solar. Months before the late summer/early fall slew of filings, BP's solar operation halted its Maryland-based solar operations in favor of relocation abroad to save costs.

Solyndra notably has been in the spotlight, more so than the others, because of the large federal grants it received, its ties to the Obama administration, an FBI raid of their offices on the days following their Chapter 11 filing and a current congressional investigation into its principals' business practices.

Brian Shappell, NACM staff writer

To view past eNews issues or to visit the NACM Archives, click here.



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