Global Economy's Progress 'Solid' in August, But Consistency Hard to Find

The JPMorgan Global All-Industry Output Index (aka: the Manufacturing & Services PMI), produced along with Markit Economics, showed another increase in August to 55.5, up from the 55.1 registered in July. It is the third-highest reading since early 2011. But it would not be accurate to characterize things as anything near consistent regarding various industries and regions.

Gains were found both in manufacturing and services, but the latter provided a noticeably bigger boost to the global economy. A deeper dive into the data shows big differences between regions doing well, including the United States and United Kingdom, and those with "muted performance," like much of Asia and Europe.

"The national data still point to widening diverges between the regions," said JPMorgan Director of Global Economics Coordination David Hensley. He added that "steady progress" in overall growth is expected heading into the fall and "solid gains in new business alongside an increase in backlogs of work also suggest that pipelines are sufficient to at least partly offset any increase in demand headwinds in the short term."

A global sector breakdown showed the biggest one-month PMI gains occurring in commercial and professional services, technology equipment and construction materials. The biggest declines, by sector, between July and August were in the categories of real estate, software and services as well as household and personal use products. Notable, by region, were the steep declines in areas like forest and paper products and construction materials in Asia, while the EU sectors having the worst one-month charge were in banking and finance, tourism and recreation as well as household and personal use products. Both continents are finding rough going in the metals and mining sector as well.

The recovery in the United States, despite the various political wrangling and finger-pointing going into a big election year, appears to be continuing well, according to data. The Markit US Manufacturing PMI reached its highest level since April 2010 (57.9). Though the Markit Services PMI slid slightly to a still very high 59.5 from a red hot July number (60.8), the outlook for services is as strong in the US as it has been at perhaps anytime this decade.

The following are other interesting notes from data released this month from Markit Economics:
  • The Markit Eurozone Composite PMI remained in expansion territory, but dipped in August. The impressive all-sector output growth rebounds in Ireland (a 168-month high) and Spain (an 89-month high) could not counter disappointment in Germany and Italy, both tracking at their lowest points since late last year, or France, which remains in contraction territory despite being Europe’s second biggest economy. Tensions in the Ukraine are putting a major drag on a rebound with which people were just starting to finally trust.
  • The Markit/JMMA Japan Manufacturing PMI reached a five-month high, in part because of strong exporting activity. But the service sector PMI fell slightly and resides just below the index mark that divides contraction and expansion (50).  
As for emerging markets:
  • The HSBC Brazil Manufacturing PMI saw operating conditions improve for the first time in five months, though little optimism is being reported for continued improvements. Its service-side PMI also fell for the fifth consecutive month. 
  • The HSBC China Manufacturing PMI saw operating conditions improve at the slowest pace in the last quarter, with weaker expansion of both output and new orders as well as intensified staffing cuts.
  • The HSBC Manufacturing PMI for India in August fell only slightly short of matching July’s 17-month high on robust growth in new business from abroad and a noticeable easing of inflationary pressures, which have been an ongoing issue there.
  • The HSBC Mexico Manufacturing PMI saw solid improvement for Mexico on the best output growth and staffing increases in about three months. The short-lived drop in manufacturing activity in July is thought to be a blip, and confidence remains high on strong incoming new orders. 
  • The HSBC Turkey Manufacturing PMI finally started to stabilize in August and reentered expansion territory, with output growth and orders from export markets rising. Analysts, however, believe that subdued growth in the EU and growing unrest in the Middle East will stymie any kind of rapid improvement in foreign demand into early 2015.

Brazil on Downgrade Watch

The view on Brazil from economic growth and creditworthiness perspectives has continued to take hits throughout this month, and prospects for improvement appear somewhat dim.

US-based credit ratings agency Moody’s Investors Service changed Brazil’s rating outlook to “negative” from “stable,” though it affirmed the nation’s “Baa2” bond rating for now. The three main factors cited by analysts at Moody’s were as follows: a sustained reduction in economic growth with few signs of a “return to potential” in the coming months, a marked deterioration in investor confidence and its effect on capital formation, and new fiscal challenges that are making government debt reductions increasingly difficult.

Brazil, only a couple of years ago still an economic success story on the global stage, is now considered much more vulnerable than other major nations to “sudden changes in global risk appetite.” Moody’s did compliment Brazil’s resilience to financial shocks through its reserve buffers and the underlying credit benefits that are part-and-parcel with an economy of its size and diversity. Of help, if predictions by the ratings agency and others analysts are true, is that a coming change in political regimes could usher in a more market-friendly business environment, boosting growth potential over its current realistic capabilities.

The Moody’s outlook downgrade came about a week after the HSBC Brazil Services Purchasing Managers’ Index fell to a two-year low of 49.2, in what is become a less rare dip into contraction territory (below 50). “The business expectations index slumped back to the lows of April and May after registering much more favorable levels during the FIFA World Cup, said HSBC Chief Economist for Brazil Andre Loes. And despite an sizable increase in the HSBC Brazil Manufacturing PMI to 50.2 in August, “new orders remain flat relative to the last month, suggesting that the outlook for the sector remains weak,” Loes noted.

- Brian Shappell, CBA, CICP, NACM staff writer

Ex-Im (Temporary) Reprise on the Way

The Export-Import Bank of the United States may be getting a long-awaited reauthorization, albeit a short-term one, in the coming days or weeks.

House Speaker John Boehner (R-OH) said publicly this week that some of Ex-Im’s key GOP critics appear willing to allow a temporary reauthorization of the Bank, though he gave no indication exactly how long that would last. The extension is most likely to be included in a spending measure aimed at preventing a government shutdown in just over three weeks.

Critical to a reauthorization of any period for Ex-Im is flipping some ardent opponents in the House, like Reps. Kevin McCarthy (R-CA) and Jeb Hensarling (R-TX). Boehner singled out Hensarling when noting a newfound, yet tepid, support for reauthorization, but only if it is short term. Other Republicans hinted at supporting an extension of the charter through early in 2015. Democrats want a multiyear reauthorization, according to widespread reports, and have criticized the GOP for blocking votes on the matter.

A number of conservatives have argued that it isn't the government's place to offer Ex-Im what in their view amounts to a form of corporate welfare for the nation’s largest companies to do business abroad. Ex-Im supporters have noted that its closure would actually benefit foreign producers overseas and would result in the loss of domestic exports and, thus, manufacturing activity and jobs at home. Ex-Im, through fees it charges those who use the service, typically generates a surplus and has not relied on taxpayer money to cover its activity in more than five years. The last time there were regularly occurring losses of significance at Ex-Im were a couple of stretches in the 1980s and 1990s.

- Brian Shappell, CBA, CICP, NACM staff writer

Nevada Rules on ‘Work of Improvement,’ Delivery Location in Pair of Lien Cases

A pair of Nevada Supreme Court decisions clarifying lien laws could be of help to suppliers, subcontractors and materialmen. In Byrd Underground, LLC v. Angaur LLC, the Nevada Supreme Court clarified that some pre-construction work, such as clearing and grading, work on a structure could be considered a "work of improvement" under existing state mechanic’s lien statutes. The Court deemed it a fact question for another court, a bankruptcy court, to consider what rises to “work of improvement” in this specific case.  Much of that comes down to whether the work is visible, said Nathan Kanute, an associate at Snell & Wilmer LLP.

Some previous rulings reviewing lien claims over work like erecting an architect’s sign stated the opposite about clearing and grading. However, “nothing in these provisions excludes preconstruction activities from the definition of ‘work of improvement,’” the Byrd ruling read. The Court also found that construction contract and permit issue dates “are irrelevant” when evaluating delivery of materials, performance of work and/or visible commencement of construction, though judges noted the dates may be helpful in assisting the determination of the scope of the work performed.

The Court also ruled in Simmons Self-Storage Partners, LLC v. Rib Roof Inc. that a materialman's lien can be established by showing evidence that the materials were supplied for use on or incorporated into improvements to the property. The materialman “does not need to prove the materials that he supplied were used or incorporated into the property or improvements.” That impetus of proof therein, rather, is on the owner or general contractor. The court also deemed delivery to a "specific location" unnecessary. The reasoning is that claimants must be protected from others trying to circumvent their lien rights by having materials for a contracted job sent to a secondary location, “such as preparation or storage sites.” 

The Simmons ruling, particularly, may have “lowered the burden of proof that should make it easier for suppliers and materialmen to establish a lien,” Kanute said. 

- Brian Shappell, CBA, CICP, NACM staff writer

Report from the Steel Industry

The most interesting aspect of the steel business is the close relationship it has with the overall economy—it would be nearly impossible for there to be economic growth without corresponding growth in this sector. This is an industry that is at the very center of the economy, not only for the US, but also for many nations in the world. What happens in the steel sector drives much of what happens in many other industries, and there is a lot of flux in the steel market these days.

There were perhaps three major takeaways during the annual Steel Summit put on this week by the group at Steel Market Update. The first is that steel consumption is, as noted, remains a great proxy for the overall status of the economy. Right now, there is solid demand for steel used in the production of cars and other vehicles as well as for appliances. The drought in demand is for steel used in construction, the single biggest sector for the steel industry. The construction gains that have been noted in the residential community have not had much impact on steel, as this is not the building material of choice.

The second takeaway is that the steel industry worldwide continues to be heavily influenced by politics. Today, past government subsidies and protections are nearly all gone, but the US competes against countries that invest heavily in making certain their steel output continues to accelerate. That leads to dumping of steel on the market and other measures that create a very uneven playing field.

The third takeaway is that there is not a great deal of sympathy for the producers among those who consume it. Manufacturers want that steel as cheap as they can get it and don’t shed many tears if producers’ profits are meager.

- Armada Corporate Intelligence

Fed Beige Book: Economic Growth Rate Continues

Pending on one’s optimistic or pessimistic disposition, one could say the latest economic data unveiled by the Federal Reserve shows growth staying consistent with statistics collected earlier this summer or, instead, becoming stagnant and underwhelming at a time when a surge was expected.

The Federal Reserve’s Beige Book economic roundup of conditions in its 12 districts noted that data collected through August 22 found growth continuing throughout the country with no distinctive shift in the pace, overall. The tone coming in from reports in the district still carries strong hints of optimism of future growth through the end of 2014 and beyond. This is especially so in the Atlanta, Kansas City and Philadelphia districts. The latter, along with several other markets including Dallas noted record-levels in auto sales, which has become manufacturing’s pace-setter in recent times.  Manufacturing, overall, did stand out as one of the most mixed sectors during the mid-summer weeks, with positive news relegated almost entirely to those in the East Coast.

Also failing to show a consensus was credit, according to the Beige Book. Though credit standards were largely unchanged, credit quality improved while delinquencies fell in only half of the districts.

There were consistent, solid improvements throughout the country in the nonfinancial service, tourism and agricultural sectors. The latter included forecasts of improved crop turnouts and increased domestic energy production (oil and gas, but not coal).

- Brian Shappell, CBA, CICP, NACM staff writer


To view the Federal Reserve’s most recent Beige Book in its entirety, visit http://www.federalreserve.gov/monetarypolicy/beigebook/beigebook201409.htm.  

Fitch: EU Dependent on Russian Gas for Decade(s)

To say the economic ramifications and diplomacy around Russian force’s apparent violation of the Ukraine border/sovereignty is complicated may be the understatement of this decade. The behavior of Russia has become a sanction-worthy concern, at least in the minds of European leaders, there are reasons much of the EU is in such a precarious position. It all spells bad news for Ukraine and could impact the confidence of adjacent states.

A Fitch Ratings Report, “Living Without Russian Gas - Part 2: Replacing Russian Supplies in the Long Term,” argues Europe likely will be unable to significantly reduce its reliance on Russian natural gas for at least the next decade. Just as unlikely is a major reduction in demand because of a (hoped) European economic recovery will require more energy resources, not less.

As far as energy alternatives go, Fitch paints a bleak picture. Russia supplies more than one-quarter of all coal used in the EU and is the sole supplier of fuel rods used in nuclear-power generation, according to Fitch. Fitch analysts believe that green energy options, while held in high theoretical regard in many EU nations, are not near-sufficient enough to pull away from Russian gas. And, unlike the recent boom in the United States that is making it more independent and even a destination for manufacturing for the first time in decades as a result of cheaper energy, shale isn’t in line to be a saving grace for the EU either.

“European shale gas remains in its infancy, and we believe it will take at least a decade for production to reach meaningful volumes,” Fitch noted. “By that point, it would probably only offset the decline in production form Europe’s conventional gas well.”

In short, Russia will continue to be the power broker of energy in that part of the world. EU countries, notably Germany, taking a hard-line stance against Russian separatists or even Putin-led aggression in Ukraine face the real possibility of retaliation or worse, significant restrictions on the supply Russia releases to Europe. This obviously will play on the minds of European leaders should Russia continue to push its weight around in Eastern Europe.

- Brian Shappell, CBA, CICP, NACM staff writer

NACM’s Credit Managers’ Index for August Shows Consistency

The August Credit Managers’ Index (CMI) from the National Association of Credit Management provides reason to be optimistic about conditions for the rest of the year and should help quell fears of inflation.

Consistency is generally a positive development when the overall readings have been positive, and this is the case for the August report of the (CMI) “The August CMI reflects a more optimistic future, but not an economy that is likely to surge,” said NACM Economist Chris Kuehl, PhD. “In comparing this month’s reading to that reported by the Federal Reserve, it is easier to understand the optimism about the last half of the year, as well as the worry about the impact of inflation fueled by some of this growth.”

Many of the CMI’s categorical readings showed no significant change.  Areas like capital utilization and capital expenditure stand in stark contrast to the wild gyrations in the overall growth rate as first quarter numbers were in recession territory at -2.1%, while the second quarter boasted a gain of over 4%,” Kuehl said.

Consistency in the unfavorable factors, especially, suggests that none of the economic concerns that started the year have been sufficiently serious to drag the economy down. “The financial distress at the start of the year has not triggered a wave of business failure, and now that seems even less likely,” Kuehl said.

Concerning the manufacturing and service sectors, neither saw significant change in the overall index reading, though individual factors fluctuated more widely.

- NACM


For a full breakdown of the manufacturing and service sector data and graphics, view the complete August 2014 report at http://web.nacm.org/CMI/PDF/CMIcurrent.pdf. CMI archives may also be viewed on NACM’s website at http://web.nacm.org/cmi/cmi.asp.

Credit Ratings Agencies Face Tough Regulation amid Rules Release

The Securities and Exchange Commission has unveiled mandates designed to increase transparency and accountability in the credit ratings process.

An SEC release noted the new requirements will address areas like conflicts of interest, disclosure of credit rating performance statistics, standards from training/experience/competence of credit analysts and procedures to protect integrity at agencies, most notably Moody’s Investors Service, Fitch Ratings and Standard & Poor’s (S&P). The various new rules will become effective during the 2015 calendar year, some as early as January 1.

The rules are part of the ongoing implementation of the Dodd-Frank Act, passed in response to various problems (quick ending of industry bubbles, widespread risk-taking, insufficient regulatory oversight) that led to last decade’s massive recession. Congress has often scapegoated the so-called “Big Three” ratings agencies, particularly S&P (which once reduced the US’s “AAA” credit rating and publicly chided Congress for partisan gridlock while doing it), for poor performance in the run-up to the crash.

Agency officials, while noting they are still reviewing and analyzing some of the new mandates, said they will comply in full and, in theory, support the idea of a facelift/update on rules of the road governing raters.  

- Brian Shappell, CBA, CICP, NACM staff writer


For a detailed information release and fact sheet released by the SEC, click here.
 

2014Q2 Small-Business Credit Conditions Improve to Record

The weather-related retreat in small business credit quality earlier this year is firmly in the review mirror, according to newly released quarterly statistics.

The Experian/Moody’s Analytics Small Business Credit Index, which tracks credit conditions at firms with fewer than 100 staffers, increased by 2.4 points to a level of 112.2 for the second quarter of 2014. Outstanding credit balances saw a 4.8% quarterly uptick, and delinquency rates fell to 9.3 % (previously 9.7%), said Experian/Moody’s analysts. The picture going forward also tends to be brighter than would have been thought even weeks ago, as tensions in the Middle East and Eastern Europe began to mount.

“Risk to the outlook have shifted to events overseas and have become less threatening,” the index’s executive summary noted. “The positives outweigh the negatives, and the blossoming economic recovery will benefit small business’ finances and, hence, credit quality in the second half of 2014 and beyond.”

Among the biggest positive movers in credit quality by industry from the first quarter of the year to the second were construction and transportation. The latter of which may still dubiously boast one of the highest industry delinquency rates, but its quarterly improvement was considered notable and promising by Experian/Moody’s.

Worth watching, however, is the sometimes massive difference in credit quality between various US regions, as some areas are showing major struggles.

- Brian Shappell, CBA, CICP, NACM staff writer