March 31, 2011
March Credit Managers' Index Bowed by World Events and Lurking Inflation
This month's news is not so positive as recent world events are rippling through the U.S. economy. For the past several months there had been a consistent feeling of optimism—despite some struggling in the manufacturing sector based on solid sales—and the seeming willingness to increase trade credit. That optimism took a hit this month. There were sharp declines in sales, new credit applications, dollar collections and the amount of credit extended—all the positive factors. The overall index dropped from 64.1 to 62.2. "This is not exactly catastrophic as the index remains in the 60s," said Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and economic advisor for the National Association of Credit Management, "but the pace has dramatically slowed and that is hardly what had been anticipated or hoped for."
There were continued signs of distress in the unfavorable factors, but the decline slowed and that is somewhat better news. The overall sense of the March data is that the U.S. economy is struggling to keep pace with the events in the world that have drastically altered everything from commodity price expectations to sourcing decisions and credit allocation. "It is important to note that the ripple effects of the events in the Middle East and Japan have only started to manifest and will be factors for months to come," said Kuehl. "The Japanese catastrophe has affected supply chains all over the U.S. and Europe and that has added considerable expense to manufacturers being forced to find new suppliers or wait for weeks to get what they need from the affected region." The price per barrel of oil has jumped by almost $15 since December and that is now filtering into all sectors of the economy.
The most dramatic change in the CMI data is in the category of dollar collections. The combined index slipped back to levels not seen since November of last year, falling -0.7 from 56.4 to 55.7. Kuehl noted that the real damage here is not that the index numbers are drastically reduced—they are still holding fast in the 60s and upper 50s. The real problem is that expectations had been high and it was anticipated that these numbers would be well into the mid-60 level by now. There had been some expectation that gains would be placing these index numbers into the 70s by mid-summer, but that is no longer the most likely scenario. The gains seem to have stalled for the moment, and it is not likely they will start up again as long as the global situation remains fundamentally unpredictable.
When one looks at the unfavorable factors there is still cause to worry and there will be more concerns as prices start to escalate. The rise in oil prices has been sharp, but this is not the only sector seeing increases. The radical price hikes of all industrial metals and food inflation are as bad as they have been since the debacle in 2008 and are now moving through the economy: high oil prices have prompted higher airfares and freight rates. As businesses face these hikes, they are forced to spend more than anticipated and that puts a strain on their ability to keep pace with the other debts they owe. Many of the companies reporting on their creditors suggest that a key reason for the slowdown in payment has been the spike in operating costs.
If there is any good news in the data for this month it is that the index of unfavorable factors has not changed much as compared to the favorable factors. The negative news is the same as last month, suggesting that some concerns about credit collapse have been reduced. There were fewer bankruptcies in this period and that is good news. The other factors worsened a little, but not dramatically. "The anecdotal evidence suggests that most creditors are reacting to some short-term shocks but expect to be back to normal in the months to come—providing that the situation in the Middle East does not worsen appreciably," said Kuehl.
Click here to view the full report, complete with tables and graphs, along with CMI archives.
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Debate continued this week on the repeal of a new 1099 requirement, with the end appearing to be in sight.
Senate Democratic leaders were eyeing a shortcut to pass the House's version of a 1099 repeal provision, which exists in the Senate only as an amendment to a larger bill. Using the "deem and pass" maneuver, the Senate could quickly pass just the repeal without affecting any other portions of the larger bill to which it's attached, making a vote on the amendment essentially a vote on H.R. 4, which is the House's already-passed repeal bill.
The 1099 requirement, if allowed to go into effect, would require 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 next year. The most recent amendment was proposed by Sen. Mike Johanns (R-NE) and would pay for the repeal using the House-preferred offset method which involves requiring taxpayers who receive federal health insurance subsidies to repay them if they end up earning more than 400% over the poverty line.
A different pay-for measure that involved the rescission of funds appropriated but unspent was originally proposed in the Senate's earlier attempts to repeal the 1099, but has now largely faded away.
President Barack Obama has voiced his support for the 1099 repeal, but would prefer to pay for it using the Senate's previously suggested rescission method. He is still expected to sign the bill with the House's pay-for measure, however, should it reach his desk. Other Senate Democrats have also opposed the House's approach for funding the repeal, viewing it as a swipe at the Affordable Care Act (ACA), which is also known as the health care reform bill and the party's signature legislative achievement.
A "deem-and-pass" vote could happen as early as today. Stay tuned to NACM's Credit Real-Time blog for more updates.
Jacob Barron, NACM staff writer
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President Barack Obama's key trip to Brazil to discuss business and trade matters may have been a success had anyone actually paid attention to it. However, fallout from the Japanese triple disaster and escalating violence in oil-rich Libya seemed to overshadow the entire effort, as well as other recent developments eminating from Brazil.
Obama's March trip to Brazil, one of the hottest growth economies in the world, appeared to have accomplished getting the United States and the new administration in Brazil on the same page on a number of issues. Chief among them is China's widely alleged currency manipulation that, assuming it's true, provides a significant trade advantage over both the United States and Brazil, among other nations. The pair signed agreements on scientific collaboration and patents, while also advancing talks for a potentially significant aerospace partnership.
However, in what can be seen as a bit of a mixed message, new President Dilma Rousseff did appear to note some concerns about encouraging foreign investment and the overbuying of products made in other nations. Rousseff also raised taxes on corporate international bond sales and loans last week to combat damage to the exchange rate caused by the aforementioned currency manipulation occurring in other parts of the globe.
Meanwhile, in a move designed to increase opportunities for U.S.-based exporters, the Export-Import Bank (Ex-Im) of the United States is investing in a series of infrastructure projects in new economic hotbed Brazil.
Ex-Im, the United State's official export credit agency, authorized $1 billion this week to help grease the wheels, so to speak, for the exporting of goods and services to be used in a series of infrastructure projects around Rio de Janeiro. Among them will be stadiums and other venues related to Brazil's sought-after status as host to both the FIFA World Cup and the Olympics within the next decade. The $1 billion in financing will be available for the state of Rio de Janeiro to borrow to finance purchasing supplies from U.S.-based companies to complete the work.
"Brazil is an emerging economy with extensive infrastructure needs, and this authorization will provide further opportunities for American exporters and small business owners...it is important that we encourage our businesses to compete globally," said Ex-Im Chairman/President Fred Hochberg.
Brian Shappell, NACM staff writer
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Senate Finance Committee Ranking Member Orrin Hatch (R-UT) recently proposed a reduction in the maximum size of the Small Business Lending Fund (SBLF).
The currently $30 billion fund was the centerpiece of last year's Small Business Jobs Act and was designed to encourage lending to small businesses by providing capital to qualified banks with less than $10 billion in assets. Congress originally authorized the full $30 billion for the fund, but President Barack Obama's fiscal year 2012 budget only requested $18 billion for loans under the fund. Hatch's proposed amendment would reduce the maximum purchase limit under the SBLF to the president's requested level, and put the remaining $12 billion back on the books.
"Over the past two years, we have witnessed a colossal spending binge out of this White House, with federal spending now standing at 25% of our nation's economic output," said Hatch. "By eliminating a $12 billion blank check for this so-called lending fund that the administration hasn't even used, we are taking a concrete step to rein in Washington's run-away spending and ensure hard-earned taxpayer dollars are not being used to bail out financial institutions."
Republicans have sought to frame the SBLF as "another bailout" since its inception, arguing that banks will use money from the SBLF to pay down money they've received from other government programs, specifically the Troubled Asset Relief Program (TARP). Such repayments, they argue, would replace one form of government subsidy with another, which is contrary to the fund's stated purpose. "The Treasury Department has an obligation to put the brakes on any tricky bookkeeping that misleads the American taxpayer and subverts what this program was supposed to do," said Sen. Chuck Grassley (R-IA), a member of the Finance Committee.
Hatch offered his amendment to S. 493, the SBIR/STTR Reauthorization Bill, which is still under consideration.
The SBLF has a list of eligibility requirements and is designed to facilitate small business lending by penalizing banks that choose to use SBLF funds for things other than small business loans with higher dividend rates. Banks that have received TARP funds and are hoping to participate in the SBLF need to convert all their TARP funds into SBLF investments, which means institutions with TARP funds that exceed the amount of SBLF capital for which they are eligible will essentially be barred from participating in the program.
Jacob Barron, NACM staff writer
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Bloated spending and government deficits among the PIIGS nations (Portugal, Ireland, Italy, Greece Spain) continue to draw exactly the kind of attention the group does not want from U.S.-based ratings agencies. The latest cuts, on the part of Standard & Poor's (S&P), found familiar targets in Greece and Portugal.
Tied directly to last week's European Council meetings, S&P on March 29 dropped the sovereign credit ratings of both Portugal (to "BBB-/A-3") and Greece (to "BB-"). Both continue to carry negative outlooks with S&P as well. The agency's analysts noted it was revealed during the meetings that the European Stability Mechanism (ESM) holds that restructuring of debt was a possible, if not likely, pre-condition to debtor nations borrowing from the ESM, and that senior unsecured government debt will be subordinated to ESM loans.
"Both features are, in our view, detrimental to commercial creditors of EU sovereign ESM borrowers," said S&P Credit Analyst Marko Mrsnik. S&P quoted the European Council on the matter, noting its statement that "if, on the basis of a sustainability analysis, it is concluded that a macroeconomic program cannot realistically restore the public debt to a sustainable path, the beneficiary member state will be required to engage in active negotiations in good faith with its creditors to secure their direct involvement in restoring debt sustainability." In such a scenario, the ESM will maintain preferred creditor status along with other bailout benefactors like the International Monetary Fund (IMF).
Greece has already agreed to bailout terms even though its large public workers population, which is opposed to austerity measures attached to the EU-IMF package, continues to incite protests of varying levels. Portugal, on the other hand, has yet to accept a bailout package though a growing majority of analysts predict it is inevitable. Recently predicted figures for the bailout top $100 billion. For its part, S&P peer Fitch Ratings intimated it too would slash Portugal's credit rating if it does not agree to some type of bailout. Meanwhile, as has been the case in Greece and Ireland, some Portuguese officials have taken to blaming ratings agencies for deteriorating confidence in the nation, not to mention attacking the agencies' well-documented lackluster records in the run-up to the global economy downturn, as well as denying that Portugal needs a bailout to reign in its debt programs.
Brian Shappell, NACM staff writer
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Consumer confidence continues to plummet as do housing prices in the United States, according to two studies unveiled this week. Does that mean the Federal Reserve's repeated assertion of late that the economy continues to improve is false? That's not necessarily the case.
The latest Consumer Confidence Index for March, tracked by the Conference Board, declined dramatically to a level of 63.4 from February's reading of 72.0. A corresponding, forward-looking "Expectations Index" experienced an even bigger slide, from a level of 97.5 to March's 81.1.
"The sharp decline in confidence was prompted by a sharp decline in inflation [and wage] expectations," said the Conference Board's Director of the Consumer Research Center Lynn Franco. "On the other hand, consumers assessment of [overall] current conditions improved."
Granted, that was just hours before the Standard & Poor's/Case-Shiller Home Price Indices were released. Median home prices fell by a total of 1% among a grouping of the nation's 20 largest housing markets. Moreover, 19 of the 20 markets (excluding Washington, DC) experienced losses between December and January, with the worst declines found in Minneapolis, Seattle and, perhaps unsurprisingly, Detroit. Four cities actually reported median home prices in January 2011 below those of January 2000.
"The housing market recession is not yet over, and none of the statistics are indicating any form of sustained recovery," said S&P's David Blitzer. Still, the Fed and numerous experts are sticking to their proclamations that a continued, albeit muted or mild, economic recovery period is still on. In fact, Economist Ken Goldstein, also with the Conference Board, told NACM the Fed indeed "is on target."
"Consumers are less worried about how high the cost of filling up the gas tank or grocery cart has gotten; they are worried about how much more it will go up," said Goldstein. "The second half of that worry is the very real fear that wage gains won't match it. So the household budget is getting squeezed again, but energy (utilities and gas) costs account for only about 5% of the household budget and food is perhaps twice that. In other words, the tail is wagging the dog here. These are more ‘nuisance taxes' than a real hindrance for consumers."
Goldstein admits the home price "mess" remains a bigger issue but not enough to derail the economy, especially since the Fed seems rigid on keeping rates at historic lows for the near future.
Mike Mitchell, president/CEO of affiliate Credit Management Association, said there appears to be proof of an improving economy just in the level of activity on the part of companies, credit departments and, notably, in credit groups of late.
"Companies are getting a lot more credit applications in, and they need more information about the companies they're trying to approve," said Mitchell of his anecdotal observances. "The improving economy is a factor; there's just more of an improved business environment."
Brian Shappell, NACM staff writer
The Small Business Administration (SBA) recently lifted the date limitation on its small business mortgage refinancing program.
In February, the agency implemented a temporary refinancing program, enacted under the Small Business Jobs Act last year, which allowed small businesses facing maturing commercial real estate mortgages or balloon payments before December 31, 2012 to refinance with an SBA 504 loan. This week, however, the administration expanded the program to include small businesses with commercial real estate mortgages maturing after December 31, 2012. This allows more small businesses mired in difficult mortgages to secure stable, long-term financing and, in theory, avert potential foreclosures on mortgages approved before and during the recession.
"With the collapse of the real estate bubble, many small business owners have found themselves unable to refinance as a result of inflated real estate values at the time they took out their mortgage," said SBA Administrator Karen Mills. "SBA's temporary 504 refinancing program was first made available to those small businesses with the most immediate need. Today's step opens this critical assistance to more small businesses, giving them the opportunity to restructure their debt and free up capital that will be essential to keeping their doors open and also their future ability to grow and create jobs."
To be eligible for temporary 504 refinancing, a business must have been in operation for at least two years, the debt refinanced must be for owner-occupied real estate and have been incurred no less than two years prior to the date of application and the proceeds used for 504-eligible business expense payments on that debt must be current for the last 12 months. Borrowers will be able to refinance up to 90% of the current appraised property value or 100% of the outstanding mortgage, whichever is lower, plus certain eligible refinancing costs. Loan proceeds are strictly meant for refinancing, and may not be used for other business expenses.
While the expanded program includes mortgages maturing after the end of 2012, it will only be in effect through September 27, 2012. The SBA is expected to begin accepting applications next week, after the program is published in the Federal Register.
Jacob Barron, NACM staff writer
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