Trade Deficit Grows in June

The United States’ international trade deficit grew month-over-month in June by $2.2 billion to $63.3 billion as exports grew by $1.1 billion to $120.2 billion, but remained overshadowed by imports, which jumped $3.3 billion to $183.5 billion.

In its latest monthly Advance Economic Indicators report, released this morning, the U.S. Census Bureau also saw wholesale inventories essentially unchanged in June from May at $589.3 billion, while retail inventories increased 0.5% to $604.2 billion—year-over-year, retail inventories in June were up 5.6%.

Meanwhile, inventories of durable goods fell 0.4% in June to $353.7 billion as inventories of nondurable goods ticked up 0.8% to $235.6 billion, Census said. This decline follows yesterday’s report from the Commerce Department of a 4%, or $9.3 billion, drop to $219.8 billion in new orders for manufactured durable goods in June.

“It is the biggest one-month fall since the recession,” said NACM Economist Chris Kuehl, Ph.D. “There is little mystery as far as why. The sectors that saw the biggest erosion are those that rely on foreign markets. They have been affected by the sharp hike in the value of the dollar. This is the question that has been answered: Will the Brexit affect the U.S.? It seems so. The aircraft sector saw a bad month as Boeing watched several sales discussions fail and most of the other sectors that rely on exports had a similarly bad month. The overall pace of manufacturing outside overseas sales was not too bad, but this growth was not enough to offset the overseas issues.”

The biggest seasonally adjusted export gainer from May to June was consumer goods, which climbed 5.6% to $16.4 billion, Census said. Industrial supplies followed closely behind, with a 5.4% gain to $32.4 billion in June. Exports of other goods declined 3.4% $5.2 billion, while automotive vehicles dipped 3.3% to $12.1 billion.

Imports of industrial supplies also jumped in June by 5.7% to $38.2 billion, while 3.2% more consumer goods were brought into the country, amounting to a total of $49.5 billion, Census said. Imports of foods, feeds and beverages declined by 3.4% in June to $10.4 billion, and automotive vehicle imports dropped 1.9% to $28.4 billion.

- Nicholas Stern, editorial associate

Homebuilders’ Revenue Growth Expected in 2016, 2017

U.S. homebuilders are in a good place right now. They’re reaping the benefits of wage and employment growth, tight inventories and attractive mortgage rates, according to Joseph A. Snider, Moody’s Investors Service vice president– senior credit officer.

As housing starts rise and new home sales grow, publicly rate homebuilders should see their revenues rise by more than 10% this year and next, Moody’s said. That’s despite the fact that while housing affordability is on the decline, it remains stable in most of the country. "Household formation is increasing and adding to the deficit in available housing supply," Snider said.

Also, Moody’s expects to see publicly rate homebuilders continue to outperform the private sector—an ongoing trend seen last year also when total housing starts and new home sales saw gains of 10.9% and 14.6%, respectively. But publicly rate homebuilders did even better, tallying 17% and 14% growth in revenues and pretax income, respectively, last year.

The industry forecast is not all cloudless skies, however. Strict mortgage lending underwriting standards, for example, are at the top of risks for the sector. “The risk of increasing interest rates also creates a potential headwind for the housing industry, as a near-term rate rise seems likely after the Federal Reserve has kept interest rates low for more than seven years,” Moody’s economists said.

- Nicholas Stern, editorial associate

G-20 Pledges an 'All-Out' Effort

The G-20 is the organization that brings together the 20 largest economies in the world and theoretically allows them to coordinate their efforts to have an impact on the global economy. It often doesn’t quite work out that way as these states are not all that similar to one another in terms of the domestic economic issues they face, and there are deep differences as far as policy is concerned.

The members of the G-20 include Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, Great Britain, the U.S. and the EU as a whole. Just a cursory look at this list is enough to prove the point. These states are in various stages of development, and some are facing imminent crisis. It would be hard to find a way to get all these leaders to agree on what day it is much less on some grand economic plan.

The great divide as far as the G-20 is concerned is whether or not austerity is still a viable option. Once upon a time, there was pretty solid support for getting budgets in order and reducing the impact of debt and deficit. The majority of the European states, the U.S., Japan and Canada all seemed thoroughly on board with the notion. Today, there is really only Germany as the true believer. The U.S. has been pressuring the Germans to loosen up and start spending as the U.S. has also stepped up its spending. The British under Cameron were committed to austerity and debt reduction, but the Brexit stunner has made it clear the public is not supportive. The new May government is already showing signs of weakening that commitment. The Canadians made it clear they were ready to start spending and running a deficit as they try to cope with the decline in commodity revenue.

The official position of the G-20 is that austerity be scrapped or at the very least be placed on the back burner for now. The desire is for growth. This means dipping into the debt markets more aggressively. To some degree the timing is good for this as rates on loans are historically low. If ever there was a moment for the governments of the world to sell bonds as a means by which to raise funds, this would be it. The yields are impossibly low, and there are even those that are buying bonds with negative yields as at least these are seen as secure.

On the other hand, the debt and deficit issues that so preoccupied people a few years ago are now of seemingly less concern despite the fact these debts are higher than ever for many countries. For all of the talk, there has been precious little progress. Now it would appear that caution will be thrown to the wind in an attempt to bolster the economies of these countries. This is where the other big question comes in—what exactly should these states do to get growth started again? There are as many opinions as there are countries. Some are pushing infrastructure, others are counting on exports and others focused on making more jobs. The majority of the members of the G-20 need the U.S. to get its economic affairs in order so that it can buy more of their output, but at the same time most of these states have been sliding fast into more protectionist positions and the U.S. is at the top of that list.

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

ASA Seeks to Overturn Pay-If-Paid Contract Court Case

The American Subcontractors Association (ASA) is asking the Supreme Court of Kentucky to overturn a January 2015 Kentucky Court of Appeals’ ruling the ASA says precluded steel subcontractors from recovering payment for extra-contractual work amounting to more than $400,000 under a “pay-if-paid” contract clause.

“The appeals court decision, if left standing, could have a profound impact across Kentucky, where billions of dollars of construction work is either in planning or in progress,” the ASA wrote.

The case is Superior Steel, Inc. and Ben Hur Construction Company, Inc. vs. the Ascent at Roebling’s Bridge, LLC, Corporex Development & Construction Management, LLC, Dugan & Meyers Construction Company and Westchester Fire Insurance Company.

The ASA claims in its amicus brief filed with the Supreme Court of Kentucky last week the Court of Appeals’ erred when, in 2011, it reversed two lower courts’ judgments and effectively precluded steel subcontractors in the case from recovering payment for extra-contractual work under a “pay-if-paid” contract clause, and “… permitted the project owner to benefit from valuable extra-contractual work provided by subcontractors without payment, known as ‘unjust enrichment.’”

“The equitable doctrine of unjust enrichment against an owner applies to subcontractors who do not have contracts with the owner, even where a contract exists between the subcontractor and the general contractor,” the ASA writes. “Further, the pay-if-paid clause cannot preclude appellants’ recovery since it is either void or has been waived.”

In the case, the owner, Ascent at Roebling’s Bridge, LLC, entered in 2006 a contract with Corporex Development and Construction Management to design a 21-story, 72-unit condominium and garage project in Covington, KY, according to court documents. Corporex, in turn, entered into a contract with Ohio-based Dugans & Meyers Construction Company to provide management services for the project. This latter contract included furnishing materials, labor, services and tools, etc. to complete the work. Dugans then entered into various contracts with subcontractors, including for structural steel supply and fabrication with Superior Steel Inc. The steel subcontracts contained written change order requirements to have all change orders in writing, and a “pay-if-paid” provision that stated the owner’s payment to the construction management firm was a condition precedent to the firm’s obligation to pay the steel subcontractors on the job.

Ultimately, Dugans & Meyers refused to pay for extra materials and work completed by the steel subcontractors, which filed mechanics’ liens in the Kenton County Clerk’s office in December 2007, thus precipitating the lawsuit, court documents state.

The ASA told the Supreme Court that pay-if-paid clauses effectively strip subcontractors and others of their mechanic’s lien rights and should be considered void under Kentucky’s Fairness in Construction Act. “It has been the policy of Kentucky law to construe mechanic’s liens liberally to protect those who furnish labor and materials,” ASA wrote.

- Nicholas Stern, editorial associate








Insolvencies in European Nations to Decline Overall in 2016

Insolvencies for businesses in Northern, Central and Eastern Europe are forecast to decline this year overall following an improved insolvency environment in 2015. But the nation-by-nation insolvency picture is more mixed with some nations expected to see deterioration going forward this year, according to a recent report by credit insurer Coface.

In Northern Europe, insolvencies dropped an average of 14% in 2015, and the rate should continue to decline this year, though at a slower pace due to weaker average GDP growth in the region, Coface said. Germany, for instance, saw a 4% decline in insolvencies in 2015 and should see a 2.5% decline this year. The region’s exception, Denmark, had a 0.5% decline in insolvencies last year and should see as much as a 60% increase in insolvencies this year. “Denmark’s very bad start to the year will lead to the number of business failures showing a marked increase for 2016 as a whole,” Coface economists stated. In particular, insolvencies for “freelance” businesses and in unspecified categories, such as “other businesses” and “activity not stated,” have accounted for a significant share thus far this year of the nation’s insolvencies. Also, smaller firms with a turnover of less than about $150,000, as well as inactive firms, are set to contain the lion’s share of the insolvencies in Denmark.

Countries in Central and Eastern Europe generally benefited from an improved economic environment in 2015, with exports to the Eurozone leading the charge, along with a boost from private consumption aided by falling unemployment rates, rising wages, low inflation, subdued commodity prices and low interest rates, Coface noted. Overall, about 1% of active businesses in this region became insolvent. In Romania, which benefited from a ramp up in fiscal stimuli, insolvencies dropped some 50% in 2015, while Ukraine saw a 20.8% rise in insolvencies brought on by an economy in recession and ongoing conflict with neighboring Russia.

“Business conditions will remain supportive but less so than last year,” said Grzegorz Sielewicz, region economist for Central Eastern Europe with Coface. “We forecast that insolvencies will decline by -5.3% for the full year of 2016.” Growing consumer confidence brought on by ongoing improvement in the labor market is set to be the main driver of growth in the region this year.

- Nicholas Stern, editorial associate

Commercial Filings Climb 29% During First Half of 2016

Total commercial filings for the first half of 2016 grew 29% to 19,470, compared with 15,071 during the same period in 2015, according to Epiq Systems, Inc., data. Commercial Chapter 11 filings increased 25%, totaling 3,220 filings, the American Bankruptcy Institute (ABI) reported.

Overall, however, bankruptcy filings fell to 398,495, down 6% from the 422,914 total filings during the same period a year ago.

Commercial filings for June equaled 3,294—a 35% increase year-on-year. Commercial Chapter 11 filings rose 36%, going from 366 to 499 year-on-year.

“The average nationwide per capita bankruptcy filing rate for the first six calendar months of 2016 (Jan. 1-June 30) remained at 2.56 (total filings per 1,000 population), and the average total filings per day in June 2016 were 2,210, a 5% decrease from the 2,326 total daily filings in June 2015,” ABI said. States with the highest per capita filing rate (total filings per 1,000 population) through the first six months of 2016 were Tennessee (5.63); Alabama (5.37); Georgia (4.65); Illinois (4.29); and Utah (4.15).

- Diana Mota, associate editor

Credit Conditions in the U.S. Skid in Second Quarter

Weakening U.S. credit quality, primarily in corporate finance, has led Fitch Ratings to downgrade its U.S. Fitch Fundamentals Index to -3 in the second quarter from -2 the prior quarter, placing the reading at its lowest level since the third quarter of 2009.

Indeed, six of the index’s 10 components had negative readings, while corporate defaults, high yield recoveries and the Credit Default Swap (CDS) outlook stayed at -10 in the second quarter this year, the lowest reading possible. The index scores range from +10 to -10 and attempt to gauge drivers or constraints on economic growth or decline.

"A key driver has been pressure in certain corners of the corporates area, leading to subdued growth expectations, higher defaults, and sharply lower recoveries, which at $0.20 on the dollar, are among the lowest that Fitch has seen,” said James Batterman, group credit officer, Fitch Ratings.

Worries about lackluster global growth and fizzling commodity prices have had staying power, dragging down the corporate capex forecast indicator into negative territory and dropping the corporate Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) forecast in half to a reading of 5 in the second quarter, Fitch Ratings said. “Average corporate capex growth stands at just 2%, as companies weigh the costs and benefits of new investment,” William Warlick, senior analyst with Fitch Ratings wrote. The index’s ratings actions and outlooks component improved this quarter from a -10 reading to a -5 reading, still remaining in negative territory.

The only component of the index to remain strongly positive was the mortgage performance score’s of 10, as prime mortgage delinquencies stay low.

- Nicholas Stern, editorial associate

Protectionism Increasingly Stunting Trade Growth, U.S. Tops List

Trade is traditionally a target or “go-to whipping boy” for politicians, particularly those facing a near-term election, NACM Economist Chris Kuehl, Ph.D. notes in the upcoming edition of Business Credit magazine. “It is always an easy target when the goal is to sound like a champion of the constituent,” Kuehl wrote. “Winners in terms of foreign trade are often rather diffuse, and losers are easy to identify.” A new study suggests this is an ongoing, if not a worsening trend, and along with other factors has hampered trade growth even more than predicted.

World export volumes have reached a plateau since January 2015, a situation “practically unheard of since the Berlin Wall fell,” and the situation is deteriorating, according to the new Global Trade Plateaus released by the United Kingdom-based Centre for Economic Policy Research. The researchers note the primary factor responsible for stagnant trade growth and threats of contraction, other than much-discussed, oversupply-caused freefall of energy commodity prices, is protectionism. Tactics such as tailoring import licensing procedures to encourage domestic purchases, conditioning contracts and financing on “local sourcing,” and requiring data to be stored and analyzed locally as well as requiring products to be tested locally are among those most frequently implemented by government, especially in G-20 nations, since 2014.

“One of our biggest concerns about a world in which trade is no longer growing is that governments will be more tempted to ‘steal’ market share by resorting to beggar-thy-neighbour [sic] activity. … Overall, the evidence is mounting as to the adverse trade-, investment-, and welfare-related costs of the spread of localisation [sic] measures during the crisis era,” the trade alert notes. “Given the prevalence and likely effects, it is not so surprising that firms have begun to react to the growing fragmentation of world markets.” General Electric is an example of a large corporation that has addressed the trend by moving some operations to other parts of the world and increasing direct foreign investment instead of trade—however, small- and medium-sized enterprises may struggle significantly more so than larger counterparts in attempting this.

The United States topped, by far, those nations that either used existing or new protectionist policies or are doing the most to “distort commerce” by unilaterally altering access to its markets, according to Centre data. It was followed by Russia and India. Such practices were not a one-way street. For example, the United States also faced the greatest number of protectionist policies against it since January 2015, with the majority coming from the four emerging economies of the BRIC (Brazil, Russia, India and China) block. Japan and Argentina were among the few nations overall that have reduced protectionist or other access-distorting measures during that period.

The industries affected most by protectionism since January 2015, per Centre data, are as follows:

· Basic metals

· Transport equipment

· Agricultural products

· Fabricated metal products

· Special purpose machinery

· Basic chemicals

- Brian Shappell, CBA, CICP, managing editor


Small Business Optimism Sees Slight Rise

The NFIB Small Business Optimism Index rose 0.7 points to 94.5 in June—still below the 40-year average of 98, but the third-consecutive gain. “A negligible increase showing no real enthusiasm for making capital outlays, increasing inventories or expanding,” the National Federation of Independent Business said.

“Small business optimism did not go down, which is good, but small businesses are in maintenance mode experiencing little growth,” said NFIB Chief Economist Bill Dunkelberg. “Uncertainty is high, expectations for better business conditions are low and future business investments look weak. Our data indicate that there will be no surge from the small business sector anytime soon and prospects for economic growth are cloudy at best.”

The index remains below its 42-year average of 98. Four of its 10 components gained, three declined and three held. Expected Business Conditions had the highest gain, jumping four points. More owners, however, expect conditions to be worse than better.

About 5% of owners reported their borrowing needs were not satisfied and 32% percent reported that they were. “Only 2% reported that financing was their top business problem,” NFIB said. The percentage that reported borrowing regularly held (29%), and the percent of owners expecting credit conditions to ease remained unchanged month-to-month, 29% and -6%, respectively.

- Diana Mota, associate editor

Ten Emerging Markets of the Future, Five Key Industry Trends

BMI Research has identified 10 countries and five key industry sector trends set to drive economic growth over the next 10 years. Collectively, the 10 emerging markets are expected to add $4.3 trillion to global GDP by 2025. The countries include the following:

· Bangladesh

· Egypt

· Ethiopia

· Indonesia

· Kenya

· Myanmar

· Nigeria

· Pakistan

· Philippines

· Vietnam

“Extractive industries will play a far smaller role in driving growth compared to the past 15 years,” BMI said. It expects a “lost decade” for commodity prices out to 2020 with prices remaining “comfortably” below 2008-2011 peaks, and mining, oil and gas sectors having slower growth than over 2000-2011.

Secondary and tertiary industries such as construction and manufacturing, and retail, consumer and business services, respectively, will be key drivers of emerging market growth. New manufacturing hubs will emerge in Bangladesh, Myanmar and Pakistan. Widespread growth in the construction industry growth will focus on facilitating vast increases in urban populations and supporting the development of new manufacturing zones. “The service sector will be a key growth driver across the countries in question, particularly financial services and retail,” it added. In the largest of the economies—Indonesia, Philippines, Vietnam and Nigeria—growth will occur across many sectors.

- Diana Mota, associate editor