Late Business Payments Rising Again, Foreshadow GDP Growth Hit

Payment habits for US businesses worsened in the third quarter, but the performance differed markedly between various industries, according to a report unveiled this week by Euler Hermes.

Global trade credit insurer Euler Hermes released its latest “Economic Insight” showing a 2% increase in the average dollar amount of past due payments to US businesses through the first three quarters of 2014, as compared to the same period one year prior. Although Euler noted its Severity Index, that tracks long-run averages of payment behavior, remained in positive territory overall, the latest data suggested a drag on the horizon for overall economic growth in 2014’s final quarter.

“While the dollar amount of past due payments has improved by 60% since 2008, the current figures suggest that we can expect to see slower GDP growth for the balance of the year,” said Dan North, chief economist for Euler Hermes North America. “We have found a strong correlation between payment behavior and GDP, including an increase in past due payments in 2007, as the recession approached and a decrease before the recovery began in 2009.”

The best performing industries according to Euler’s Receivables at Risk (RAR) metric of late have been the automotive and energy industries, though the latter is often subject to greater unpredictability than most other segments. Both are expected to post positive fourth quarter results. Retail, to a lesser extent, also looked strong heading into the fourth quarter, though that is almost a given considering the expected annual holiday shopping boost.

Those with the worst RAR rating changes between this year’s second and third quarters were the commodities and electronics industries. Euler analysts characterized the commodities payment behavior change (a 71% decrease in performance) as particularly worrisome because of the unexpected and low frequency of delinquencies coupled with the high value of the losses. The industry encountered problems such as over-capacity and weakening global demand, which are unlikely to improve drastically before 2015. Reasons behind the slowdown in electronics payment behavior proved difficult to identify, Euler admitted. The agriculture and chemical industries also skewed weaker in predictions for the fourth quarter, but not nearly to the disappointing levels of those previously mentioned.

- Brian Shappell, CBA, CICP, NACM staff writer

Japan Slides Back into Recession

The Japanese economy has now contracted for two consecutive quarters and that is the classic definition of a recession. This should not come as a shock, but there is still apparent consternation in the planning rooms.

For many observers this slide seemed inevitable the moment the decision was made to push the national sales tax from 5% to 8%. The commentary at the time of the tax hike was that this looked like trying to floor the accelerator while jamming one’s foot on the brake. At the same time that people were being asked to spend Japan out of the doldrums as part of “Abenomics,” they were being smacked with higher sales taxes. One has to ask what the government thought would happen.

There was a rush to buy things prior to the arrival of the tax at the start of the year and, after the sales tax hike went into effect, that spending stopped almost entirely. The impact was worsened by the promise of another tax hike later in the year.

The tax was expected to be a minor thing. What policy makers seem to consistently forget is the impact on the psychology of the consumer. They look at an item and see the price and the retailer then shows them the price with tax, which adds quite a bit. The extra fee reduces desire, especially if the tax is unrelated to the quality of the product. Retailers have been jolted by the tax and had been pleading with officials not to add the next tax, to no avail.

- Armada Corporate Intelligence

Industries to Watch: Defense Coming Around Amid Turmoil

Less than two years ago, product and service providers in the defense industry were facing headwinds that looked to present huge obstacles to growth, or even continued solvency, for some companies. That seems to have changed pretty dramatically, as tensions in the Middle East and Eastern Europe appear unlikely to fade or even remain at current levels into 2015. Thus, like aerospace earlier this fall, the changed outlook on defense has landed the industry on NACM’s Industries to Watch list for positive reasons.

Z-Score bankruptcy prediction model creator Ed Altman, the Max L. Heine Professor of Finance at the New York University (NYU) Stern School of Business and director of research in credit and debt markets at the NYU Salomon Center for the Study of Financial Institutions, told NACM that defense contractors and their suppliers have not been affected as much as he predicted in a May 2013 edition of Industries to Watch. Then, the industry and suppliers downstream were threatened by the government spending sequester and overreaction from investors who saw government cuts coming for other reasons like military troop withdrawals. But with the Islamic State waging war in Iraq and Syria, instability remaining in other Middle Eastern nations like Egypt and the ongoing Ukraine-Russia border standoff, buzz words like “drawing down” are no longer bandied about as much as last year. 

“There are always new places in the world where wars break out that we (United States) are involved with,” said Altman. “We’re bringing troops home at the same time we are escalating other activities. So, defense has not suffered much even with last year’s cuts in Congress.”

Trade creditors were concerned, and with good reason, that mid-market defense players would have to lean much more heavily on B2B credit. That and potential insolvency isn’t as big an issue in the current landscape, according to Altman. Also less likely is potential for a spike in mergers within the defense contracting industry, which would have been apparent if a number of mid-market companies began to exhaust their cash positions. While due diligence continues to rule the day for granting credit to those tied to defense activity and spending, there is reason for credit managers to be more at ease heading into 2015 than there was in mid-2013.

- Brian Shappell, CBA, CICP, NACM staff writer

Bankruptcy Plan in Largest Chapter 9 in US History Approved

The bankruptcy plan for long-beleaguered Detroit to emerge from the largest municipal bankruptcy case ever filed was approved Friday, about 16 months after its initial filing, by US Bankruptcy Judge Steven Rhodes.

Detroit’s exit from Chapter 9 protection will be completed within 180 days, according to reports. The plan included the city ridding itself of nearly three-fourths of all debt it owed to unsecured creditors. Larger financial creditors took haircuts in deals struck earlier in the process as did most labor unions and representatives of retirees seeking to keep their benefits as in tact as possible. Those that continued to voice objections to Rhodes were unable to sway the judge’s belief that the city was indeed insolvent and in desperate need of the restructuring to function going forward.

The complexity of the case, as well as a mountain of objections and court actions from unions and creditors trying to maximize returns rendered Rhodes’ original timetable of a summer conclusion impossible. Still, the case came to resolution in a relatively quicker and much more decisive manner than several Chapter 9 cases filed by California municipalities prior to the Detroit declaration. Now, attorneys, municipal leaders and perhaps some creditors begin the deep-dive analysis on the case, especially in municipalities rumored to be heading toward insolvency. The outcome could have a significant impact nationally because of potential implications for many cities struggling with escalating debt problems tied primarily to retiree benefits such as pensions and health insurance, which were among the core issues in play in the Motor City. Of course, decades of perceived government corruption and an expanding blight that forced well-to-do residents from the city in droves also played significant roles in Detroit’s financial deterioration.

- Brian Shappell, CBA, CICP, NACM staff writer

Trade Gap Widens

Unlike many of its European counterparts, the United States has enjoyed enough of a rebound in domestic demand that the export decline in September just outlined by the Department of Commerce is not necessarily a growth-killer.

The Commerce Department announced that the US trade deficit surged to $43 billion in September, up $3 billion from the previous month. With notable economic problems returning to parts of Europe as well as newer concerns in Asian and Latin America, export demand dried up as the summer came to a close. It was notable in decreases in industries like capital goods and automotive. Export numbers were still higher in September 2014 than the previous year, however, according to Commerce data. Imports fell in large part due to a continuing reduction in demand for foreign petroleum and energy products. There was, however,  also a noticeable surge in imports of consumer products, particularly electronics,  with Apple being a winner in that regard.

Still, the widening gap and the reduced exporting activity haven’t seemed to emerge as major concerns yet. But as has become almost customary, problems at the Port of Los Angeles seem to be again percolating at a time when retailers and the suddenly export-deficient economy can ill afford them. And it could have an impact on retailers at a time when they can least afford problems.

- Brian Shappell, CBA, CICP, NACM staff writer
For more on this story, including a look at the brewing problems at the critically important Port of Los Angeles, check out this week's edition of eNews, available late Thursday afternoon via email and at 

Midterm Election Results: Where is the Business Community in All This?

The business position on politics is that most vote pragmatically, with an eye towards what the next Congress would do to make doing business easier. The comments from Mitch McConnell, likely the next Senate Majority Leader, included a commitment to expanding trade—that may be an area of common ground between the White House and Congress. He also focused on tax reform plans that would make the US more competitive, infrastructure plans that would both serve as an economic stimulus as well as bring the US system back to world standards and plans to develop the energy opportunities in the US. All are considered urgent needs by business community and the hope is that attention starts to focus on these areas.

The first area of compromise is the trade issue that the president has publicly supported. Now there may be more pointed interest in salvaging the Trans-Pacific Partnership multilateral free trade agreement as well as the stalled pact with Europe.

The issue of tax reform may be another place for some compromise and cooperation. The corporate tax rate in the US is among the highest in the world, but the tax take is often offset by a welter of complex tax breaks and incentives. These tend to distort the system and favor the bigger companies at the expense of the small and mid‐sized operations. There is nothing to suggest that reform will be easy, but there seems to be support for a serious attempt and one that elements of both parties could get behind.

A third area of compromise might be immigration. The business community generally supports some rationalization of the immigration system, as there is a need for the workers who are already in the US and those who would like to come to work. The labor shortage in the US is acute and grows worse as the population grows older.

One of the more interesting areas of potential compromise has been infrastructure development. For the last few years, there has been no money for these projects amid constant budget battles. There is hope that the need to boost the economy and provide jobs will trump the concerns about debt and deficit to a degree and that both sides will be able to get behind some additional projects to bolster the nation’s infrastructure.

The majority of those who have been elected to office are experienced legislators from the US House of Representatives or state legislatures. There is hope, though possibly faint, of renewed cooperation and an end to gridlock.

- Armada Corporate Intelligence

October Credit Managers’ Index Returns to Better Level

The October report of NACM’s Credit Managers’ Index (CMI) is highlighted by a return to a respectable status.  The readings, now available at the NACM website, are back to highs seen at the start of the year.

Though off the pace set in the summer, the index of favorable factors is trending in the right direction again. The index of unfavorable also rose impressively from September’s disappointing level, the lowest point reached in almost two years. This means that the concerns about the state of creditors have eased a little.

“The rebound in the data this month could be referred to as stunning were it not that last month felt like an anomaly,” said NACM Economist Chris Kuehl, PhD. “Given the progress made through the course of the year, many were shocked at the low numbers registered in September and theories abounded to explain the slump—everything from reaction to politics to the impact of the weather…The global slowdown is still a factor and will likely put something of a damper on the US economy through the rest of the year and into next, but the domestic economy is showing some resilience and that is reflected in the numbers for October’s CMI.”

Within the favorable factors, look for particularly positive movement in sales and dollar collections. On the unfavorable factors side, of note were improvements in rejection of credit applications and accounts placed for collection.

“The sense overall is that much of the crisis atmosphere has dissipated and most creditors are staying current as far as their obligations are concerned,” Kuehl said. “The rapid rebound this month is support for the notion that last month was an anomaly and perhaps a reaction to some of the issues that emerged globally toward the end of summer.”


For a full breakdown of the manufacturing and service sector data and graphics, view the complete October 2014 report at CMI archives may also be viewed on NACM’s website at

Fed Ends Asset Purchase Program Amid Improving Economy, Rates Unchanged

Information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee's longer-run objective. Market-based measures of inflation compensation have declined somewhat; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2% has diminished somewhat since early this year.

The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its asset purchase program this month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4% target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations and readings on financial developments. The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4% target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee's 2% longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Loretta J. Mester; Charles I. Plosser; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Narayana Kocherlakota, who believed that, in light of continued sluggishness in the inflation outlook and the recent slide in market-based measures of longer-term inflation expectations, the Committee should commit to keeping the current target range for the federal funds rate at least until the one-to-two-year ahead inflation outlook has returned to 2% and should continue the asset purchase program at its current level.

- Federal Reserve

Real Estate Backslide Continues

The significant deceleration of US housing activity continued in August, according to the latest data from S&P Dow Jones Indices. Some other metrics, however, point to at least slight hope of a turnaround by year’s end.

The S&P/Case-Shiller Home Price Indices showed 5.5% and 5.6% year-over-year gains in the 10-City and 20-City Composite Indices in August. Figures for both categories tracked at 6.7% just one month before, and even that was viewed as a disappointing drop from June. All 20 of the largest US metropolitan markets saw slower growth rates in the latest round of research, with early 2014 rebound story Las Vegas reporting the sharpest decreases in the pace of home price growth even though its 10.1% growth rate is second highest. Granted, Las Vegas continues to try to dig out of one of the worst single-market holes left after the dramatic real estate crash last decade and continues to be a big boom-and-bust. However, David Blitzer, chairman of the index committee at S&P Dow Jones Indices, noted all of those markets at least continued to grow, not contract, though Cleveland came dangerously close to the line (0.8% annual growth in August 2014).

Monthly statistics showed a 0.2% monthly increase between July and August. Notable were the three markets posing price declines (San Francisco, San Diego, Charlotte). There were gains of 0.5% or better in Detroit, Dallas and Denver, however. Despite the wave of negative data, Blitzer appeared more upbeat this month than in previous ones.

“Despite softer price data, other housing data perked up,” he said. “September figures for housing starts, permits and sales of existing homes were all up…Continued labor market gains, low interest rates and slower increases in home prices should support further improvements in housing.”

- Brian Shappell, CBA, CICP, NACM staff writer

Preliminary Markit Numbers Show Slight Improvement in Global Growth

There is some good news that the flash (preliminary) estimate of the Markit Economics version of the Purchasing Managers’ Index beat the expectations of the analysts, even though the gain was hardly striking. The previous month saw the reading at 52 and this month it is at 52.2. Ordinarily this would be dismissed as essentially flat performance but, right now, Europe is grasping at straws.

Three aspects of this performance can be viewed as welcomed. The first is that, against all odds and expectations, there is growth in the euro zone. None of the prior estimates signaled that gains were imminent. The consensus opinion was that the Markit reading would perhaps be as low as 50 or even slip into contraction territory soon. That there was growth was a welcome shock, albeit one with reservations. The second piece of good news is that much of this rebound was due to improved performance in Germany. The fact is that euro zone recovery is impossible without German strength. The third issue of note is that some of the more stressed nations saw minor improvements. Although France fell deeper into contraction territory, Italy and Spain stabilized a little.

The discouraging news from the Markit report comes from the various sub-index activity, as this is often where the real detail lies. The performance of the new order index was as poor as expected and that reinforces the notion that most of these nations are nervous, cautious and, thus, unwilling to take risks of any substance.

Other sub-index concerns focus on the employment side of things. Layoffs became a concern again and there are more businesses suggesting that they will be reducing the size of their workforce. At this point, it doesn’t appear that mass layoffs are on the way, but even an extended trickle of lost jobs will further hamper the recovery as people become very concerned that they will be next on the chopping block. This makes the business community even more uneasy and leads to more firing. It’s all a very unhealthy cycle.

- Armada Corporate Intelligence