NACM’s Credit Managers’ Index Returns to a Negative Trend

November’s economic report from the NACM continued its roller coaster ride, as both the manufacturing and service sectors declined this month, according to the November report of the Credit Managers’ Index (CMI). The combined CMI index dropped more than a point, from 53.9 in October to 52.6 in November.

“This month, the trend has returned to the stress of the last few, and the timing is not as it should be,” explained NACM Economist Chris Kuehl, Ph.D. “This is the time of year that the consumer comes to the rescue, but it doesn’t appear that will happen this time.”

The respective favorable and unfavorable index factors in NACM’s combined CMI both dropped from the previous month. Every subcategory within these indexes also lost ground, with four out of six unfavorable categories now in contraction territory (below a level of 50).

“Given all the data that has been emerging as far as the economy’s overall strength, this is not a big surprise, but still a disappointment,” Kuehl noted. “It seems that companies are struggling at this point in the year and that is not a good sign given that this is the time when these companies are expected to make the bulk of their money for the year. This really applies mostly to retail, but the manufacturers respond to that retail drive.”

For a full breakdown of the manufacturing and service sector data and graphics, view the complete November 2015 report at

Ethiopian GDP Growing Strong

Ethiopia’s gross domestic product grew on average 10.9% from 2004-14. The growth spurt—attributed mostly to agriculture and services sectors—moved it from being the world’s second-poorest nation to becoming a middle-income country by 2025, according to a new World Bank Group report, Ethiopia’s Great Run: The Growth Acceleration and How to Pace It. The country’s “growth strategy stands out for its uniqueness in focusing on promoting agriculture and industrial development with a strong public infrastructure drive,” the bank said.

“Ethiopia began to see accelerated economic progress in 1992, and it shifted to an even higher gear in 2004, pulling millions of people out of poverty and leading to improvements in other areas like improved life expectancy and reduced child and maternal mortality,” said Lars Christian Moller, the firm’s lead economist for Ethiopia and lead author of the report. “To continue the impressive run, Ethiopia needs to modernize the policy framework to further strengthen the foundations of its economy.”

A decline in military spending as a part of a restraint on government consumption facilitated high public infrastructure investment. “A strong rise in exports, greater trade openness and an expansion of secondary education were some of the additional enabling factors that supported the economic boom and facilitated a substantial decrease in poverty from 44% in 2000 to 30% in 2011, measured by the national poverty line,” World Bank stated.

The report highlights three policy recommendations:
  • Continued infrastructure investment, sustainably financed through new ways such as raising tax revenues, encouraging private sector involvement or improving public investment management and less dependence on debt financing.
  • Supporting and sustaining the private sector through credit markets and private investments. (“Ethiopian firms are more credit constrained than peers and exhibit poorer performance as a result,” the bank said.)
  • Tapping into the growth potential of structural reforms. Ethiopia has liberalized its merchandise trade and “can make further progress by gradually reforming the services sector, including domestic finance,” the bank stated. “In doing so, it can benefit from the lessons of early reformers and tailor reforms to its own circumstances.”

Argentina Gets a Center-Right President

It is the end of an era; one that most in Argentina will not look back on fondly. The current president’s handpicked Peronist candidate—chosen to carry on the legacy of the Kirchners—was defeated despite having a solid lead just a few months ago. The new leader, Mauricio Macri, the mayor of Buenos Aires, is the son of an Italian immigrant who built a substantial construction empire. He has been a consistent thorn in the side of Cristina Fernandez as he used his position as mayor of the nation’s largest city to thwart some of her plans. The man he defeated, Daniel Scioli, is head of the province of Buenos Aires and a close confidante of Fernandez.

Macri may soon regret winning this election as he faces a host of issues that will test this new government severely. For the last 12 years, the populists of the Peronists—Nestor Kirchner and subsequently his wife when he died unexpectedly—have governed Argentina. Kirchner came to power when the country was on the verge of collapse after the economic meltdown in the early 1990s. The currency fell; creditors were closing in; and the governments couldn’t find a way to stay in power longer than a year. Confrontations with the international community punctuated his rule, and soon Argentina became something of a pariah state. The country defaulted on its debt obligations to bondholders and has been in the courts ever since. Under Fernandez, populism expanded; there were endless confrontations between the business community and the government. Laws that were supposed to ensure cheap food for the urban poor by restricting food exports backfired as farmers refused to produce it for prices less than it cost to plant and harvest. The second-largest economy in Latin America is now a shadow of what it once was and much of the investment that once flocked to Buenos Aires has fled.

Macri will still have to deal with a legislature that is chock full of Peronists, and they will be in no mood to assist him. Massive economic issues are not going to be dealt with easily. The good news is that he may get some breathing room from institutions that have been battling the Fernandez government, as they may finally see some progress on debt repayment.

Among the issues he faces right away include a widening deficit, double-digit inflation and a severe currency crisis. The country has had no access to speak of when it comes to foreign currency and especially dollars. This was the impact of the default in 2003. The central bank just ordered the banks in the country to sell two-thirds of their foreign currency reserves to support the grossly overvalued Argentine peso. Macri declared during his campaign that he would lift currency controls as soon as he took office and that would be part of a very steep devaluation of the currency. Such a move would affect inflation as well, but it will hammer the population hard—the majority of the population will see the value of their money collapse. The reality is that much of the population is already poor and essentially living a hand-to-mouth existence so it may not make all that much difference to the bulk of the population.

There will be opposition to this move and that could challenge his government almost from the start. The expectation is Macri will start talks with the banks that Argentina owes as well as the International Monetary Fund (IMF) and the bondholders that were stiffed at the start of the Kirchner regime. The country is in no position to pay these obligations right away, but Macri needs to unlock support and aid from the IMF and others so he is expected to make some promises and issue assurances to those that were burned over 10 years ago.

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence 

More Evidence of Consumer Caution

The housing sector has always been a vital part of economic growth and for a variety of reasons. There is the obvious impact of buying a home—the largest investment that most people make in their lifetime. Then there is the process of furnishing and landscaping it. We all know the costs of maintaining a home and that supports a great many people and businesses.

Additionally, people accumulate value in their home through the equity they build over time. That equity is what has traditionally allowed people to borrow and spend money on everything from projects to vacations or some other acquisition. At the very least, the equity in the home makes owners feel wealthier than they were before and thus more likely to spend.

Data show that people now have more equity in their homes than at any time since the recession. There are fewer underwater mortgages than there have been in more than 20 years. In many communities, home values have reached pre-recession levels and beyond. There has been 45% more access to equity than last year, but this is still less than a quarter of the access that took place prior to the recession starting in 2008. Today’s homeowner is far more cautious and that affects the impact of that accumulated home equity.

This is yet another example of the paradox of economics—what is good for the individual is not necessarily good for the economy as a whole. People are saving and guarding their financial position, which is a good move for the majority of the population. Nobody seeks a return to the days of being leveraged to the hilt and then suddenly plunged into crisis by some kind of financial reversal. All of this caution, however, robs the economy of much of the vitality needed to avoid that financial reversal in the first place.

Analysts assert that many homeowners are now becoming aware of how much equity they actually have and that they are starting to relax about the state of the economy. In many cities, the price of homes has risen substantially from the lows of just a few years ago. It is now far easier to sell at a profit and that equity is beckoning. The expectation is that many will start to use that equity again, and when that takes place, the economy will get a substantial boost. The trick will be for consumers to access that equity without putting themselves in the position they were in a few years ago.

It seems there is always a pendulum swing between overly cautious behavior and the recklessness that characterized the period prior to the recession. The mood of the consumer thus far remains careful, and there doesn’t seem to be a desire to become profligate again, but conditions can change rapidly. Right now, the consumer is still wary about job growth, and generally speaking, election years depress the overall population.

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence

BPO: New Payment Method of Future?

Bank Payment Obligation (BPO) is a relatively new financial instrument that falls somewhere between a letter of credit and an open account.

“A BPO is sometimes referred to as the ‘Goldilocks’ solution,” said David Hennah, global head of trade and supply chain finance for Misys, during an Oct. 27 FCIB webinar. “A letter of credit in some cases can be regarded as too hard [and] an open account too soft. BPO sits in the middle and is just right.”

A BPO is a legally binding undertaking given by one bank to another bank. It confirms a payment will occur on a specified date after electronic data submitted by the seller and the buyer is successfully matched. “When that’s the case, shipments will be made and documents will be sent directly to the buyers and the sellers, remaining outside of the banking system,” Hennah said.

Buzz surrounding BPOs has indicated they could become the preferred method of payment in the future for business-to-business transactions. Typically, new instruments such as BPO follow a trend of relatively low adoption in the beginning that picks up, Hennah explained. “I think at this point in time, the BPO has not yet crossed the chasm, and it is at that kind of tipping point now where it is dependent on wider market adoption in Europe and in the Americas.”

For more information on BPOs, check out FCIB’s Week In Review on Nov. 27, or download the complete webinar here.

- Jennifer Lehman, NACM marketing and communications associate

Individual Surety Bond Control Awaits President’s Signature

Subcontractors and suppliers on federal construction projects are closer to having their payments protected. Legislation that sets minimum standards for individual surety bonds currently awaits President Barack Obama’s signature.

Obama, who vetoed an earlier version of the bill due to a dispute over funding, is expected to sign the revised legislation.

Section 874 of S. 1356, the National Defense Authorization Act for Fiscal Year 2016, stipulates what assets are acceptable and requires that the individual surety deposits those assets with the federal government. The federal Miller Act requires a prime contractor on federal construction to provide performance and payment bonds on contracts more than $150,000. “Most such bonds are provided by corporate sureties, which are required to submit detailed financial information to the U.S. Department of Treasury, which verifies that information and monitors the performance of the sureties,” the American Subcontractors Association (ASA) said in a weekly news bulletin. “However, the Federal Acquisition Regulation also allows the use of individual sureties, which are not as heavily regulated.”

An individual surety pledges to make good on the contract if the prime contractor fails to perform or fails to pay its subcontractors or suppliers. “These new requirements, when enacted and implemented, will improve payment assurances for subcontractors and suppliers on federal construction,” said ASA Chief Advocacy Officer E. Colette Nelson.

The law is expected to take effect one year after enactment so that the Federal Acquisition Regulatory Council and the U.S. Small Business Administration time to develop and publish a regulation. “ASA will participate in the rulemaking process,” the association said.

Builders Start to Lose Confidence Again

The decline is not all that significant—at least not yet. The level of confidence as measured by the National Association of Home Builders fell three points from the high registered last month. It is now sitting at 62, which is pretty close to historical highs. As with most of the surveys of this type, any reading over 50 is considered expansionary and numbers below 50 indicate contraction.

The levels are still clearly confident, but the trend is a bit worrying. One of the major issues weighing on the minds of builders is the potential Fed rate hike. A quarter-point hike in the federal funds rate is not likely to send mortgage rates soaring, but they already have risen a bit and will likely go up a little more when, and if, the Federal Reserve pulls the trigger.

There are good and bad aspects as far as the impact of the hike. Mortgage rates will be impacted, and that could push some out of the market. Banks, however, will likely make more loans as their profit margin improves a little. The problem is that nobody really knows how this will affect buyers. Those seeking bigger homes will not be put off that much, but the first-time buyer may struggle.

The long-term worry remains as far as new homebuilders are concerned. They are still seeing far more demand for the multi-family unit than for the single-family home within the Millennial generation. It has become evident that this generation is starting to take an interest in home buying but not until they have reached their 30s. Those who are still in the ranks of the twenty-somethings are not yet ready to settle into the patterns of their predecessors and that can be a long term challenge.

The old pattern was for people to buy a starter home in their twenties and then progressively move up to bigger quarters as they had families. The pattern now seems to be to wait on most of these decisions—they have been slow to leave school and that has generally meant they are leaving with more debt. They are then slow to start families and thus slow to buy homes. They are even slow to settle on a career and a location to settle in. That translates to fewer home purchases in the course of their adult lives.

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence

Low Oil Prices, Sanctions Hinder Economy in Russia

In the third quarter, real gross domestic product (GDP) in Russia contracted 4.1% from a year earlier and is largely attributed to the recent collapse in oil prices, according to a Nov. 12 report from Wells Fargo.

Falling crude oil prices led to a decline in the Russian ruble compared with the U.S. dollar, which increased Consumer Price Index (CPI) inflation into the double digits. The central bank’s policy rate also remains elevated at 11%. “The combination of relatively tight monetary policy and soaring inflation has weighed significantly on domestic demand,” the report reads.

Real wages fell by nearly 10% year-over-year, which Wells Fargo says is “a key contributor to the weakness in real retail spending.” The sanctions imposed by Western nations have also impacted the country’s economy, negatively weighing on foreign investment and trade flows.

Economists at Wells Fargo say that while the near-term outlook for Russia is dim, they anticipate real GDP to improve in 2016. “However, with oil prices projected to remain at or near current levels for the foreseeable future, the recovery in Russian [economic] activity is likely to be relatively modest,” the report states. “Moreover, with Western sanctions unlikely to be lifted in the near term, a return to the supercharged growth rates of the prior decade is likely out of reach for the Russian economy.”

- Jennifer Lehman, NACM marketing and communications associate

Eurozone News Far from Inspiring

News from European economic analysts is not very uplifting. Data show growth is as anemic as it has been for the last few years. It is somewhat encouraging that things are not worse than this, as some had expected the eurozone to sink into recession by this time. Instead, it has experienced some slight growth—about 0.3%.

That Europe has not entered a formal recession is cold comfort as the pace of growth is far too slow for any real recovery in the majority of the region. Germany’s struggles are the most distressing part of the data. If the engine of Europe falters, there is faint hope for the rest of the region.

The expectation had been growth of 0.4%—the same rate as had been registered last month. That growth, being even more anemic than had been expected, comes as a blow to those who have been looking to see European recovery at some point in the coming year. At this point, three reasons are cited for this reduction in activity.

The first and likely the most direct is that China has slowed; and with that retreat, Germany and some of the other markets have lost an important destination for their exports. Germany has been especially active as far as selling to China and has taken its slowdown harder than most. Not only does Germany have a significant stake in the Chinese economy, it also does a great deal of business with the Asian states, which used to sell a lot to China. If the Chinese aren’t buying their output, they are not buying much from German or any of the other eurozone economies.

The second issue for the reduction in growth has been the wave of migration from the Middle East and North Africa. There have been obvious and not so obvious impacts. There is the sheer cost of taking care of the refugees—an expense that has only just started to build. It is estimated that Europe will host close to one million refugees this year and as many as three million in the next two years. That assumes that nothing happens to stem the rush. This is straining budgets and will continue to affect the poorest states in Europe as they are the first point of arrival for the majority of those seeking to come to Europe. The less obvious impact has been on business. Travel is now very hard, and that has interrupted tourism as well as business trips. There is real confusion as to what happens next, and that has the consumer in Europe more than a little nervous.

The third issue is lack of internal demand, which tracks back to the major economies in the eurozone—Germany and France. The U.K. is not part of the eurozone, but it plays a big part in the European economy. These are the states that provide demand for the other states in Europe. Without the Germans and the French, the other nations have little or no domestic opportunities for growth.

It is likely these bad numbers will provoke a response from the European Central Bank (ECB). The thinking at this stage is that Mario Draghi will announce an expansion of the quantitative easing program launched earlier this year. It is also possible that the very low interest rates will be lowered even further. Frankly, the ECB has just about run out of ammunition. At some point the legislatures of the region are going to have to consider reversing their position on austerity. This is not going to be an easy switch to accomplish, and right now it seems exceedingly unlikely despite the intense pressure.

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence

Credit Manager Offers View on Catalonia Vote

For now, it's business as usual in Spain, said Madrid-based credit manager Joaquin Rodriguez Cazalla, of Holcim, S.A., who shared his thoughts about the country's Catalonia region's potential succession

Catalonia sits in the northeastern part of Spain and its parliament adopted a resolution Monday supporting its independence. “Clearly, the origin of the problem is linked to the sharp crisis suffered in Spain, intensified since 2010,” Cazalla explained. “The weakness of governments in the Mediterranean area has brought about different kinds of responses and radicalization processes of alternatives.”

Through this recent declaration, the Catalan party hopes it can break away within 18 months; however, Spain’s prime minster has said the Spanish government will appeal the motion.

While the move has not yet affected business transactions in Spain, it could in the future. “Some movements of companies from Barcelona to the center of the country, delays in payments to suppliers from the regional government in Catalonia or some Catalan blockade campaign products have been some of the effects of this dispute, but not relevant [until] now,” he said. “Probably the worst effect (we cannot evaluate it) is the stop of new investments.”

Even though it has mostly been business as usual in Spain, Cazalla said many people are dealing with the social ramifications of the crisis. “While this induced problem of social psychoanalysis is being solved, fortunately business goes on,” Cazalla added.

- Jennifer Lehman, NACM marketing and communications associate

Check out NACM's eNews article, Catalan Resolution Unlikely to Impact Business in Spain