July 7, 2011
The overall economic narrative in the country for the last month has been a question as to whether the latest run of bad economic news is a temporary phenomenon or is the harbinger of much worse to come. As many analysts have asserted that this is all attributable to the earthquake and "Arab Spring" as those who assert a double-dip recession is setting up for as early as the third quarter. Most of the economic community is somewhere in between, but much of the interpretation lies within the latest run of data, and the National Association of Credit Management's (NACM) Credit Managers' Index (CMI) for June suggests the temporary impact position has some validity.
The dramatic collapse reflected in the May CMI eased up a little in June. The index numbers bounced around, but these variations were obscured somewhat by the fact that the index as a whole was flat. Considering this month, it is very apparent that the devil is in the details. The overall index number was exactly the same as it was in May—54.2—but there were significant changes in the combined sub-indices for favorable and unfavorable factors.
"The most distressing news comes from the number of credit applications received and the amount of credit extended," said Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and NACM economic advisor. Many businesses seemed more cautious in the last month or so. Part of this is still related to the issues in Japan and the fear of higher commodity prices, but there is also some growing unease regarding political games. "Few really believe that the United States would put $100 billion at risk in its securities market by not raising the debt limit, but there is intense fear that Congress will take the game too far and provoke a reaction in the markets before it reaches an agreement," Kuehl said. "It appears this trepidation is affecting the willingness of businesses to expand and seek additional credit. The good news is that sales have risen during this period; in the past, expanded sales usually beget more credit requests and more credit extended."
The bad news in favorable factors has been balanced out by good news in some of the unfavorable factors. Many signs of distress weakened a little. There were fewer disputes and fewer dollars beyond terms. While there were also fewer bankruptcies, there were still concerns about the number of credit applications rejected and the number of accounts placed for collection. "The overall impression is that there is some separation taking place between those companies that have weathered the last few years and those that had been counting on an economic breakthrough to help salvage their financial position. This is a development we've referenced before and the pattern is still evident," said Kuehl.
"Right now the economic recovery is waiting for the market followers to make their move. This is the biggest category of business—and the most cautious," said Kuehl. The CMI data suggest that this sector is starting to have more active sales activity, which generally provokes more credit demand. The majority of credit requests have been coming from either the most important customers with the best credit or from those struggling on the bottom tier. "When the middle levels start to get earnestly engaged is when there is potential for more general overall economic growth."
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More than half of the respondents to NACM's June monthly survey expected their company's travel budget to remain steady in the coming year.
When asked if they thought their company would expand, cut or maintain its current travel expenses, 58% of participants said "maintain it," while a not insignificant 22% of respondents said that they expected their company to make cuts. Only 14% of respondents expected an expansion in their travel budget, and the remaining 6% weren't sure.
Business travel and travel budgets are often viewed as off-beat economic indicators. As things expand in the economy and companies become more optimistic, travel budgets tend to expand. This most recent survey, however, suggests some lingering uncertainty, if not outright pessimism, at the future of the market, potentially limiting the ability of credit professionals and other employees to attend valuable educational events (like NACM's Credit Congress, which concluded last month) and participate in industry credit groups and make important customer visits.
Many survey respondents noted that while they expected their travel budget to stay the same, it was already quite low to begin with, as many companies were forced to take an axe to travel expenses during the recession. "Our travel budget was cut severely over the last couple of years. I see the same low travel budget being maintained for at least the rest of this year," said one participant. "We have cut travel to near zero since 2009," said another.
Some, however, had reason for optimism, having "already seen an increase in travel throughout the company compared to the last couple of years," as one respondent put it. Others noted that they had seen a bump in travel, but only expected it to be temporary. "We just purchased another company and are in the process of consolidating home offices, so additional travel in inevitable," said one participant. "We're about to acquire another company, so travel will be increased in the short term," said another.
Of those companies that expected to see their travel budgets cut, many noted that they had begun to lean on technology to conduct business without having to worry about gas and fuel prices. "With the gas cost going up, and the economy unstable, there are more and more phone and video conferences scheduled," said one respondent, as another noted that they expected their company to "use more web technology" while cutting their overall travel expenses.
A number of participants noted that their companies were still operating in a cost-reduction mindset, and that travel was regularly and thoroughly scrutinized. "We continue to try to keep costs down. Meetings in exotic locations are not favored well," said one respondent. "We continue to seek ways to cut overhead, as sales have not rebounded since the recession began," said another.
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Jacob Barron, NACM staff writer
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When NACM's 2011 Credit Congress rolled around in mid-May, exporting stood out as one of the buzz issues on which U.S. businesses and credit departments were fixated. Little has changed in that regard during the intervening six weeks, as the continued sputtering pace of domestic economic rebound remains a significant hurdle to growth for U.S.-based business.
Perhaps that's why attendees at Credit Congress in Nashville flocked by the dozens to the first in a series of five "Doing Business in..." sessions hosted by FCIB, which will also be offered in a teleconference format this month, in the first place. Some other tidbits from the May sessions included the following:
John Du of Jun He Law Offices noted during the Doing Business in China session that China will continue to be a destination for businesses keen on international trade because of its massive population and emerging consumer culture. However, he warned that exporters need to better understand the dynamic of what has been arguably the most consistent heavy-growth economy on the planet. For example, most are expecting some type of slowdown/backlash coming off years of unprecedented growth. In addition, problems could arise from the lack of balance in its population demographics. "Most of the people are concentrated on the east coast. The majority is Han, which makes up 92% of the population, and China now, at least to some people, is worried about not having enough population growth [in some areas]."
Christian Laborda Mora of Laborda Abogados & Asociados LTDA said during Doing Business in Chile that businesses engaging in trade in Chile certainly have opportunities. However, when things go bad in a business relationship, the wait time for resolution can be lengthy; think a minimum of one year, he said. Bankruptcy proceedings can be a complex, convoluted process in Chilean courts, and getting a judgment in a court outside of the country, such as the United States, really has no enforceability until such a ruling is recognized there. That's why arrangements such as insurance, letters of credit and even personal guarantees are used so frequently there, Laborda said.
Meanwhile, from the sounds of Doing Business in South Korea, the small Asian nation is becoming the new belle of the ball from an international economic growth standpoint according to Kyle Choi, Esq. of Bluestone Law Ltd. However, Choi warned it is critical to pay attention to the importance of relationship-building and cultural sensitivities so as not to sabotage what can be a bright trade or venture partnership with a company based there. Choi stressed the importance of such concepts as flexibility (showing a desire to compromise early on goes a long way), personal contact between employees of similar ilk (CEO to CEO conversations, secretary to secretary emails, etc.) and what seem like little formalities that are desired by business people there (not using first names in emails, starting of correspondence with "Dear Mr.", etc.).
Much more will be covered in the upcoming teleconference version of "Doing Business in...," which includes the following:
• China: July 11-12
• Chile: July 13-14
• South Korea: July 20-21
Brian Shappell, NACM staff writer
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A World Trade Organization (WTO) panel found earlier this week that China's restraints on certain raw material exports violate WTO rules.
Essentially, the Chinese trade restraints raise costs for U.S. businesses in the steel, aluminum and chemical industries, and thus aroused the ire of many prominent lawmakers. The WTO report was conducted and released at the behest of these U.S. officials, who had originally challenged China on its use of export quotas, price controls and other restrictions on various ores back in 2009.
"This market manipulation costs American jobs and economic growth, and it is time for China to drop these restraints immediately," said Sen. Max Baucus (D-MT), a frequent critic of Chinese economic policy and chairman of the Senate Finance Committee. "These WTO findings are crystal clear—China is manipulating the raw materials market at the expense of American businesses. As a WTO member, China has a responsibility to play by the rules and respect the rights of its international partners."
The WTO panel ruling determined that China's use of export quotas, export duties, minimum export prices, export licensing and administration requirements were inconsistent with WTO rules. According to Baucus, these restraints can increase the prices of raw materials around the world while artificially lowering them for domestic Chinese companies, once again giving them an edge in the market. The WTO also noted that the restraints also pressure businesses to relocate to China in order to remain competitive.
When requesting the WTO consultation in 2009, the U.S was also joined by the European Union (EU) and Mexico. Thirteen other nations later joined as third parties.
The ruling is yet another entry in the saga of America's tenuous economic relationship with China. Over the last few years, officials have slammed China for its anti-competitive practices, and urged the still booming country to allow its currency to appreciate, protect and enforce U.S intellectual property rights (IPR), to eliminate discriminatory policies favoring its own domestic production or "indigenous" innovation, and to reduce barriers to U.S. agricultural exports.
An International Trade Commission (ITC) report issued earlier this year found that China's IPR violations cost the U.S. economy 2.1 million jobs and nearly $50 billion in 2009.
Jacob Barron, NACM staff writer
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Positive manufacturing statistics released this holiday week appear to indicate that the supply line disruptions caused by Japan's triple disaster earlier this year are becoming less of an issue.
The U.S. Department of Commerce's latest report on manufacturers' shipments, inventories and orders for May 2011 found net orders up by 0.8% in May after a similar-sized decrease just one month prior. New orders for manufactured durable goods rose 2.1%, as transportation equipment manufacturing set the pace with a categorical 2.9% increase. Faring particularly well were orders for cars/trucks, oil drilling equipment and, especially, surging demand for airplanes/parts. These were among the worst hit areas after a massive earthquake off Japan's northeastern coast caused chaos in the business world and beyond, not to mention severe human tragedy.
Granted, there is still a backlog to contend with domestically, particularly in transportation manufacturing, as Commerce reported a 0.9% increase in unfilled durable goods orders in May. Shipments did, however, swing from a deficit in April (-1.4%) to an increase in May (0.4%), which is expected to continue, Commerce statistics indicate.
Meanwhile, Commerce noted that its International Trade Administration report on exporting showed that 9.2 million jobs were created as a direct result from exporting in 2010, up from 8.7 million in 2009. The report contends 21 states each claimed at least 100,000 jobs were supported by manufactured exports in 2009. In addition, two states registered more than a half-million jobs: California (616,500 jobs) and Texas (538,500).
"The International Trade Administration is committed to helping U.S. firms find lucrative exporting opportunities around the globe and ensuring access to these markets," said Francisco Sánchez, under secretary of commerce for international trade. "Our efforts improve the global business environment and help U.S. companies compete abroad, creating jobs at home."
The report comes about a week after top Republicans and Democrats struck a deal to move three free-trade agreements to the House and Senate floors for formal votes this summer. Still, there could be a potential hold-up from passage in the form of a GOP protest over a late Obama Administration inclusion extending a workers' aid program.
Brian Shappell, NACM staff writer
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In what is being greeted as a major capitulation to financial institutions and the lobby representing outfits like Visa and MasterCard, the Federal Reserve Board issued a final rule establishing debit card interchange fee caps that are almost double what the independent agency pushed for originally.
The Fed's rule is setting the cap for electronic debit transaction interchange fees, also known as swipe fees, at 21 cents per transaction with the possibility for multipliers of about 5 basis points. It appears the maximum interchange fee, per the mandate, could be as high as 24 cents on the average debit card transaction with add-ons related to areas such as fraud-prevention measures. That's double what the Fed had proposed throughout the process that followed sweeping financial reform ushered in by the Dodd-Frank Act. The new swipe-fee cap goes into effect on Oct. 1
The Fed estimated that merchants were charged, on average, 44 cents per transaction, and that revenue from those fees comprised somewhere between $12 and $16 billion for the financial industry in 2009 alone. The Fed noted the proposed regulations would establish standards that are more "reasonable and proportional to the cost incurred by the issuer for the transaction." But amid pressure from lawmakers and the powerful banking lobby, the Fed buckled, opting to postpone the original late April deadline to have the final swipe fee proposal written and eventually doubling the amount companies like Visa and MasterCard could charge merchants when customers use debit fees at their establishments.
The 12-cent cap would have created uncertainty at corporations such as Visa, MasterCard and backing financial institutions and likely would have severely affected their revenue streams.
Following an intense lobbying effort funded by the banking sector that flipped several senators who voted for the swipe fee caps initially, legislation by Sens. Jon Tester (D-MT) and Bob Corker (R-TN) this spring sought to scuttle the planned implementation of interchange fee caps, as well as require a minimum six-month economic study to weigh issues such as unintended consequences on smaller banks and credit unions. The Senate eventually voted 54-45 to defeat the effort, clearing the way for the caps to go into effect, but the close vote sent a message to a Fed still working out its final rule.
Sen. Richard Durbin (D-IL), who spearheaded the swipe fee cap legislation as an amendment to the Dodd-Frank Act last year before it was passed and inked into law, characterized the attempt to derail implementation of swipe fee caps as capitulation to the mega-banks and credit card companies on the backs of smaller business and financial institutions as well as consumers.
The Fed's full statement is available here.
Brian Shappell, NACM staff writer
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