Materials a Bargain as Construction Struggles for a Foothold?

As the nation tentatively continues forward with recovery—whether it be a full turnaround or the first part of an unwanted “W” trend—the construction sector continues to try and rid itself of a laundry list of laments. Building permits ticked upwards in August at a seasonally adjusted rate of 579,000, a 2.7% increase over July, but was still more than 32% below the same period in 2008. Housing starts also increased slightly in August over July by 1.5%, but completions were again down 5.5% and both figures were more than 25% below the numbers seen at this time last year.

From the federal government’s perspective, the industry is heading in the right direction as housing permits are up 16% from a low in April, which is good news after a near fatal plummet of 78% between September 2005 and April 2009.

“Housing permits and starts have risen substantially above their earlier lows this year,” said U.S. Commerce Secretary Gary Locke. “The upturn in housing activity and the recent gains in retail sales and industrial production demonstrate considerable progress toward recovery. More stimulus spending in the coming months should help spread growth to other sectors of the economy.”

Unfortunately, many local governments are anticipating further declines in property values and commercial construction, further pilfering the already barren pantries of their budgets.

With construction sector unemployment more than twice the national average, it also worth noting that construction costs increased in August as the price for materials used in all type of construction inched upward a combined 1.1%. Fortunately, costs are still light years away from those seen just a year ago. Ken Simonson, chief economist for the Associated General Contractors of America (AGC), stated that the increases were in large part due to a significant 17% leap in the price of diesel during the month of August, as well as a rebound in steel prices of 6.8% and in an 11% increase in the price of copper. After hitting peaks in 2008, prices for materials like diesel, asphalt, steel and copper have tumbled for much of 2009 as commodity markets and demand tanked. For example, according to the AGC’s product price index (PPI), the price for diesel is still 41% below August 2008 while the price for most metal materials are down between 10% and 35%. And despite the increases in material prices seen during the month of August, the price for major material components like diesel, copper and steel have already receded since the end of month.

Though construction is searching for solid footing in its effort toward rebound, faced with the challenge that commercially available credit has been vaporized in the sector as real estate loan delinquencies are at record highs, the overall trend for construction costs remains negative. Compared to the high costs of August 2008, the cost of construction is down nearly 7.5%, which Simonson believes makes for an attractive bargain.

“Prices haven’t been this competitive for construction services in a long time, but once the domestic and global economy heats up, they are likely to rise again,” advised Simonson. “Public officials and private developers should act now to cash in on what is clearly a limited-time sale for construction.”

Matthew Carr, NACM staff writer

SEC Strengthens Oversight of Credit Rating Agencies

After several discussions, roundtables, debates and proposals, the U.S. Securities and Exchange Commission (SEC) recently voted unanimously to issue several rules aimed at more harshly regulating U.S. credit rating agencies. Specifically, the proposals will bolster oversight of Nationally Recognized Statistical Rating Organizations (NRSROs) by enhancing disclosure and improving the quality of issued credit ratings.

Among the many blamed for the subprime mortgage crisis and financial meltdown of the last year or so, none have been more ripe for increased regulation than NRSROs, whose failure to properly identify risks and propensity to create harmful conflicts of interest led to inflated ratings of financial products that eventually had to be downgraded, causing hundreds of billions of losses at banks and investment firms. In its quest to ensure that such misdeeds never occur in the future, the SEC's rules and proposals require greater disclosure among NRSROs, aim to increase competition in the industry, which is dominated by only three different firms, and help to address conflicts of interest by illuminating the practice of rating shopping, whereby a firm will seek ratings from multiple agencies in order to get the highest grade.

"These proposals are needed because investors often consider ratings when evaluating whether to purchase or sell a particular security," said SEC Chairman Mary Schapiro. "That reliance did not serve them well over the last several years and it is incumbent upon us to do all that we can to improve the reliability and integrity of the ratings process and give investors the appropriate context for evaluating whether ratings deserve their trust."

Certain items were approved by the SEC while several others were simultaneously proposed and made available for public comment. Among the adopted elements were rules that will provide greater information on ratings histories and grant competing agencies access to the underlying data necessary to provide unsolicited ratings on structured finance products, as well as an amendment to the SEC's rules and forms that will remove certain references to credit ratings by NRSROs. Among the proposed elements were amendments to strengthen compliance programs by requiring annual compliance reports and enhancing disclosure of potential revenue-related conflicts of interest and new rules that would require firms to disclose the practice of rating shopping.

While 10 credit rating agencies are listed with the SEC as NRSROs, the three dominant raters are Moody's Investor Service, Standard & Poor's and Fitch Ratings, whose business is expected to be largely affected by the new proposals. Parties interested in commenting on the new rules or proposals can visit the SEC's website (www.sec.gov) for more details.

Jacob Barron, NACM staff writer. Follow us on Twitter at http://twitter.com/NACM_National.

Economy's Engine Continues to Build Steam

The country might be hard-pressed to find someone who isn’t tired of the recession and the downturn in the economy. Americans’ need to have a return to “normalcy” was seen a couple weeks ago as the back-to-school retail numbers were not perfect, but were at least positive for the fact that major mall retailers saw the smallest sales declines in months. Consumers are beginning to show that they are weary of frugalness and want to spend, even though unemployment and bankruptcies continue to rise. And as NACM reported, the nation can expect an early kick-off of the winter holiday shopping season as retailers try to lure tentative consumers back to stores to spend those dollars they have so doggedly guarded.

Taking the economy as a whole, the U.S. Commerce Department’s Census Bureau reported this week that retail and food service sales for August rose 2.7%, which was much better than the 2.0% increase private analysts had anticipated. The numbers were heavily boosted by the federal government’s “Cash for Clunkers” program, as motor vehicle sales leapt up 10.6%. When taking that program out of the equation, sales excluding motor vehicles increased 1.1%, while sales excluding motor vehicles and gasoline rose a more modest 0.6%. Looking at just retail trade sales, the U.S. saw an increase of 3%, which is an encouraging sign as it fights in the opposite direction after four straight quarterly declines in retail sales.

For President Barack Obama, it reiterates his Administration’s mantra over the last couple months that the efforts set in motion by the American Recovery and Reinvestment Act (ARRA) have averted disaster and are beginning to show returns.

“Even excluding the strong growth in motor vehicle sales, which was a result of the successful ‘cash for clunkers’ program, this significant increase in consumer spending shows that the Recovery Act and President Obama’s other economic initiatives are succeeding in putting the brakes on the recession,” said U.S. Commerce Under Secretary for Economic Affairs Rebecca Blank. “Accelerated stimulus spending in the second half of this year will create jobs and further stimulate our economic recovery.”

The $351.4 billion in retail and food service sales in August provides momentum to the ongoing optimism about the economy, though it is still 5.3% below August 2008 and total sales from June to August are 7.6% below the same period last year.

Further brightening the mood is the fact that the U.S. current-account deficit decreased to $98.8 billion in the second quarter, which is the smallest deficit seen since the fourth quarter of 2001. The goods and services deficit fell from $92.4 billion in the first quarter to $83 billion in the second, while the deficit on goods slid down from $124 billion to $115 billion. U.S. international services trade continued to see a surplus, which increased from $31.6 billion in the first quarter to $32.5 billion in the second.

Meanwhile, the residential housing figures for August also moved in the right direction.

There are lingering fears from some economists that recovery will be “W”-shaped, with another downturn awaiting the nation on the horizon, and the economic situation in general is not without its critics.

“Since President Obama took office, over 3 million Americans have lost their jobs, including 2.5 million people since his stimulus took effect,” stated House Republican Whip Eric Cantor (R-VA). “At the time of its passage, the Administration argued that the stimulus would not only halt job loss, but create jobs and get the economy back on track in the short term.” Cantor pointed out that either has yet to occur.

Matthew Carr, NACM staff writer

Treasury Continues Fight Against Offshore Tax Evaders

In its ongoing quest to increase tax compliance, the U.S. Department of the Treasury recently signed an agreement with Monaco to allow for the exchange of information on tax matters between the two nations. The move will allow the U.S. to access the information it needs to investigate and prosecute violations of tax laws and hopefully further reduce the nation's tax gap, which represents the $345 billion in annual taxes that are legally owed but never collected.

"This Administration is wholeheartedly committed to combating offshore tax evasion," said Deputy Secretary Neal Wolin, who signed the agreement with Monaco Minister Franck Biancheri in Washington. "We are working with countries like Monaco to ensure that the Internal Revenue Service (IRS) has access to the information that it needs to enforce U.S. tax law. Today's agreement serves as an example for other financial centers around the world and reflects our continued efforts to end the use of offshore accounts as a tool for tax evasion."

This most recent Tax Information Exchange Agreement (TIEA) with Monaco falls into an ever-lengthening list of actions taken by the administration to increase enforcement of tax laws worldwide. At the Group of 20 (G20) Leaders' Summit, held in London last April, the U.S. voiced its support for efforts to ensure that all countries adhere to international standards for the exchange of tax information. Since then, the Treasury has also reached agreements with Gibraltar and Luxembourg to allow for a smoother exchange of information. In June, the Treasury also amended its income tax treaty with Switzerland to provide for more tax information exchange and just last month the IRS reached a settlement with global Swiss financial services giant, UBS AG, which required the firm to turn over information on 4,450 accounts suspected of evading U.S. tax laws.

As is the case with most TIEAs, only specific tax authorities will be permitted to receive and send sensitive tax information and the data exchanged can only be used for tax purposes. U.S. authorities will be able to begin seeking information from Monaco, beginning in 2010, on all types of taxes in both civil and criminal matters regarding tax years from 2009 onward.

Jacob Barron, NACM staff writer. Follow us on Twitter at http://twitter.com/NACM_National.

Cap and Trade’s Potential Impact to Farmers Probed

Almost as divisive as healthcare, the proposed legislation on climate change and carbon cap-and-trade has stirred its own war of words. Entities on both sides of the issue have funded reports detailing destruction and salvation, not only on the national economic level but the industry-specific as well. One of the industries weighing in on the subject is agriculture, which is already suffering through a dairy industry collapse and farm incomes that have fallen nearly 40% from last year and is reticent to succumb to any further potential financial woe.

A study released by Texas A&M University’s Agricultural and Food Policy Center (AFPC) is now submitting its findings of proposed cap-and-trade legislation’s impact on American farms to the ever-broadening library of evidence. The report was released just days before the Senate Committee on Agriculture, Nutrition and Forestry held hearings on the proposed cap-and-trade system of “The American Clean Energy and Security Act of 2009” (ACES), which passed the House of Representatives in June. The bill requires a 17% reduction from 2005 levels in greenhouse gas emissions by 2020, striving for an 83% reduction by 2050.

According to the AFPC study “Economic Implications of the EPA Analysis of the CAP and Trade Provisions of H.R. 2454 for U.S. Representative Farms” —which was conducted at the request of Senate Agriculture Committee Ranking Member Senator Saxby Chambliss (R-GA) — passage of ACES would largely have negative impacts for the 98 simulated representative farms in AFPC’s database.

“The ground-truth that this study shows is very serious,” said Chambliss. “The study says that 71 of the 98 farms will be worse off under the House cap and trade plan, even in the early years of the program.”

The AFPC concluded that dairy, cotton and rice farms, as well as ranches, would experience lower cash receipts during the years projected in the study, from 2010 to 2016. Rice farms and cattle ranches would carry the biggest burden since they would not likely participate in carbon sequestration activities, but would have to cope with higher input costs that would outpace increases in their product prices. For example, the 14 rice farms in the model would experience lower net income between $30,000 to $170,000 from 2010 to 2016 under ACES. The pain of these declines would be further felt as annual costs would increase between $20,000 to $120,000, depending on the farm.
According to AFPC’s estimates, not all farms would suffer, particularly feedgrain and oilseed farms located in the Corn Belt in the Great Plains. But the success of those farms in the simulation was double-edged.

“Most concerning, the 27 farms that benefit do so only because other producers go out of business,” stated Chambliss. “Not one rice farm or cattle ranch benefits, while only one cotton operation and one dairy benefit mainly due to the fact that they both grow a significant amount of feed grains.”
A similar study conducted by the Nicholas Institute for Environmental Policy Solutions differed from the AFPC one, and actually found that farms would benefit from cap-and-trade legislation, with revenues generated from carbon trade outpacing increases in operating costs.

“The study also forecast some losses in economic welfare to consumers and agricultural processors,” admitted Timothy Profeta, director, Nicholas Institute, in testimony before the Senate Agriculture Committee. “However, benefits to crop and livestock producers far outweigh these economic losses, signaling gains to the sector as a whole. If done the right way, agriculture can be made a winner in climate legislation.”

He added, “But no matter what the models show, no one would dispute that we should adopt the policy that achieves our goals at the lowest possible cost.”

Much like healthcare, climate change legislation is an emotional topic, and some associations have seen members sever ties because of conflicts of opinion. On a whole, it is another issue that demonstrates partisanship is far from dead in the United States as the two sides are divided along party lines. ACES squeaked out a victory in the House and the campaigns against the legislation have picked up speed during the Congressional hiatus in August. The agriculture industry finds itself in the middle of the debate because the Environmental Protection Agency (EPA) has estimated that agricultural and forestry lands can sequester at least 20% of all annual greenhouse gas emissions in the U.S., while livestock and agricultural conservation practices are some of the easiest to implement to immediately reduce emissions.

It is also the industry in the United States that will be the most impacted by changes in the Earth’s climate and global warming. As to that, Utah’s Republican Governor Gary Herbert famously promised last month that he will host the first legitimate debate later this year on whether the actions of humans even contribute to climate change.

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

U.S. Chamber: Exporting A Means to Recession’s End

While indicators continue to edge slowly upward and the U.S. looks to Washington for a solution to the employment problem, the U.S. Chamber of Commerce has recently suggested reliance on alternate sources of economic prosperity, most notably exporting and trade expansion. "We could try to dig ourselves out of this hole by inflating the currency, or we can fuel recovery, jobs, and deficit reduction through a massive surge in exports," said U.S. Chamber President and CEO Tom Donohue at an event marking the 50th anniversary of the Michigan Chamber of Commerce. "The question is whether we will have the policies and the leadership to make vigorous trade expansion our choice. On that score, we have reason to be concerned."

In his keynote address, Donohue argued that despite his and his association's belief that a major surge in exports is the best path out of recession, an air of isolationism now permeates the halls of Congress and the White House and threatens to stall meaningful reforms as the rest of the world's economies pass America's by. "At a time when our global competitors are making preferential deals that give their workers and companies a competitive advantage over ours, America is sitting on the sidelines. At a time when we should be looking outward to attract talent, welcome tourists and lure capital and investors, many Americans and policymakers want to turn inward," he said. "And at a time when we must stand up to the new isolationists who apparently don't believe that Americans can successfully compete in the world, many of our leaders seem stuck somewhere between vacillation and silenc

Specifically, Donohue advocated establishing a national goal of doubling U.S. exports within the next five years. "That means passing the trade agreements with Colombia, Korea, and Panama. It means successfully concluding the Doha Round, which could boost the worldwide economy by $700 billion," he said. "These agreements are the best way to level the playing field-to make trade fair for Americans." Additionally, Donohue noted that existing trade agreements should be rigorously enforced by the current administration and new firms should be more openly invited to participate in the exporting process. "More than a quarter-million small and medium-sized companies already export-and they account for nearly one-third of all U.S. sales abroad. With advances in global logistics, Internet communications and service providers...smaller companies now have tremendous opportunities to sell to foreign markets," he said. "Government has a role to play in helping these companies get the tools, training, financing, and partners that they need to sell overseas-and we support robust federal trade promotion programs.

"By improving trade facilitation regimes and the global supply chain, we can help address the increased cost in trade financing by reducing the cost of moving goods and services," he added.

A full copy of Donohue's speech can be found here.

Jacob Barron, NACM staff writer. Follow us on Twitter at http://twitter.com/NACM_National.

The Future of Doha Looms Over WTO Meeting

As ministers of the World Trade Organization (WTO) were meeting last week, the lure of India’s massive market again came to the forefront as an appetizing venture. Right now, India is the United States’ 18th largest trading partner with $43.4 billion in bilateral goods trade in 2008. Though trade has increased over the last decade, the U.S. currently finds itself running an $8 billion goods trade deficit with the Asian powerhouse. A deficit that is 23.7% more than what it was in 2007.

The relationship between the United States and India has expanded exponentially since the signing of the Uruguay Round in 1995. Since 1994, U.S. exports to India have increased 671%, though only account for just 1.4% of the United States’ export portfolio. During that same time frame, U.S. imports of Indian goods has risen 385%. In 2007, goods and services trade with India topped $61 billion, with exports making up $27 billion of that total. U.S. foreign direct investment (FDI) in India has also continued to tick upwards. In 2007, U.S. FDI was at $13.6 billion, a 47.8% increase over 2006.

Right now is a critical time for India. Prime Minister Manmoham Singh is at the reigns of the second most populous country in the world and it is facing a devastating drought. The situation has strained the economy and growth for the year has been adjusted from 7.5% to 6%. Even more dire is that food prices are rapidly climbing as the price for sugar has already hit a 30-year high and other food items aren’t that far behind. The government has had to start cracking down on individuals that have begun to horde important commodities.

Last week, the United States’ Trade Representative Ron Kirk was in New Delhi trying to forge ahead on the Doha Development Agenda, which has been in a near-constant stall since 2001. “I came to New Delhi with the message that the United States is ready to do the real work it will take to move the Doha Round toward a balanced and ambitious conclusion,” stated Ambassador Kirk. “We came here in the hopes that our trading partners are ready to do the same.”
The United States and India stand as two key opponents in the talks.

“India is a lot more flexible right now than it has been in the past,” said Dr. Chris Kuehl, managing director, Armada Corporate Intelligence and NACM economic analyst. “Part of the problem previously had been that the government of Manmoham Singh always had to be cognizant of the fact that it had a hard-left part of its coalition that was prepared to defect if there were any concessions made in terms of trade.” But after this summer’s elections, Singh’s party came across much stronger and is no longer dependent on that left-wing coalition, so the government has been more aggressive exploring trade.

Currently, the United States’ top export items to India include fertilizers, which amounted to $2.8 billion last year, followed by precious stones and machinery, approximately another $2.5 billion a piece. In the Doha Round talks last year, an inability to come to terms on agriculture import rules was what crumbled negotiations. The U.S. agricultural sector would love to have access to India’s markets, which is especially poignant now since India might not even be able to produce enough food this year to sustain its own population because of the drought and light monsoon season.
India wants trade access to the manufacturing sector on the East Coast. So, there will have to be concessions from both sides of the table. The U.S.’ ability to reach an accord will also be reliant on how much political capital President Barack Obama has left. Will it all be used up in the efforts to get a healthcare plan passed, or will he still be able to approach his party and ask that they back him on a trade agreement.

“It’s about a 50-50 shot that the U.S. will do something,” said Kuehl. “But we’re closer than Doha has been in ten years. This is the trade deal that will not die. It has been declared a corpse so many times you think it would have rotted by now. But, it’s still there.”
Trade ministers say they are committed to reaching a deal in Doha Development Round in 2010.

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

Christmas Scheduled for October as Retailers Race to Win Consumers

Every year, the winter holiday season seems to ambush Americans earlier and earlier. But forget the past. Most people have probably already noticed that Halloween merchandise and candy sales began appearing in their local grocery and chain stores last week. And that’s just a sign of things to come. As the nation is trying to shake off the cobwebs of recession and reignite growth, the country should be prepared for one of the earliest kickoffs of the Christmas shopping season in memory.

“I think you’re going to see the earliest Christmas you’ve ever seen,” said Dr. Chris Kuehl, managing director, Armada Corporate Intelligence and NACM economic analyst. “I’m surprised it isn’t out there already. The Halloween stuff is already hitting and retailers are going to be pumping that like crazy all the way through September and October. Christmas merchandise is scheduled to come out as early as the first of October.”

This week, consumer bankruptcies again reported a rise on their trek to an anticipated 1.4 million for the year, while the unemployment rate hit 9.7% as employers slashed 216,000 jobs. Personal incomes have seen nominal gains after months of declines and the Obama Administration touts that tax relief from the American Recovery and Reinvestment Act has boosted disposable incomes. Many major retailers posted drops in sales in August, though, admittedly, those declines weren’t as massive as in previous months. And, the back-to-school shopping season was even a modest boon for some medium- and small-size retailers, who actually posted considerable gains. With this potpourri of signals and an antsy urge to have the recession clearly at an end, the hunt is now on as retailers try to attract those consumers that have tired of frugality.

“The assumption on the part of retailers is that there’s a limited amount of money out there and there’s a limited number of consumers who are going to spend. And whoever gets to them first wins,” explained Kuehl. “So, there’s going to be a lot of people saying, ‘Okay, we’ve gotten our Christmas shopping taken care of. Now we just need to hide the presents from the kids for the next three months.’”

What emerged in the back-to-school numbers was that consumer demand is still present. It’s just that most consumers are responding to discounts and sales, as seen in the National Retail Federation’s (NRF) back-to-school and back-to-college surveys. The NRF also found that store traffic increased dramatically as people went into stores to check out bargains, though that didn’t automatically translate into purchases, as evidenced by the August retail numbers.

“They’re not necessarily buying,” stated Kuehl. “But the pattern that we’ve seen in the past is that if people start going to the stores and start looking, then they go home and think about what they saw; they look at their budget and then come back and spend.”

With the back-to-school bonanza over, retailers are now keying in on Halloween, setting their sights on Thanksgiving and expectantly awaiting the outcome of what will most likely be an extended Christmas shopping season.

“There’s sort of a signal out there that consumers are getting a little impatient with the recession and would like to get back in the game,” said Kuehl. “And that’s good news for later in the year. The big thing now is everyone is going to be watching the Halloween sales.”

For the remainder of the year, Kuehl believes that the third quarter will culminate in growth, with that momentum extending over into the end of the fiscal year. “And the jobs are going to come shortly thereafter,” stated Kuehl. Even though the unemployment rate in the United States has ticked upwards toward 10%, he thinks that the country has hit the peak in terms of job losses. “I don’t see a whole lot of change on the employment side until after the first of the year. But I don’t think it’ll be too long into 2010 before we start seeing improvement.” He added that the improvement will be marginal at first, so don’t expect the United States unemployment rate to drop to 5 or 6% any time soon. But, it will be improvement nonetheless.

“The number of jobs losses has diminished,” said Kuehl. “We’re not looking at 300,000 per month anymore, but we’re still looking at losses instead of gains. We need for that to turnaround, but no one has quite yet figured out the magic way of how to accomplish that.”

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

Weathering the Storm, Outside and Inside of Bankruptcy

The performance of a supplier's credit department comes down to a great many number of things, some of which might not be so easily controlled by the supplier's staff. Throughout the supply chain, customers can run into difficulties that prevent the supplier from getting paid when payment is due. Luckily for suppliers, there are a number of ways to increase the probability of getting paid by even the most distressed, or even bankrupt, custome, and these strategies were discussed by Deborah Thorne, Esq. of Barnes & Thornburg LLP in her most recent NACM-sponsored teleconference, "Weathering the Storm: Strategies for Suppliers."

"A healthy company is only as strong as the weakest link in its operational cycle," read one of Thorne's first slides. Indeed, a number of different factors figure in to a company's success, and thereby the success of their suppliers. Whether it's the customer's customers or the customer's lender or some other factor that leads the company into financial trouble, suppliers who are well prepared will be much more likely to ride out any unforeseen problems. "You need to know where all your documents are," she said. "Having a plan is really important."

Many issues arise when a troubled company hits a rough patch and then argues that its terms are the ones under which the original sale was made. Setting these things up beforehand, and clearly stating that the supplier's terms are the ones that apply to the sale, is all part of being prepared for future supply chain challenges. Several battles over whose terms apply can become very costly, even leading companies into courtrooms to settle the matter. "Cases have ended up in front of judge because the parties were fighting over whose terms prevailed," said Thorne. "It's also important in terms of what happens when there's a failure to pay. These are all things that you need to know and if you think it's unclear, before there's a break in the chain is a good time to reconcile them."

In addition to having a plan of action for supply chain difficulties, open lines of communication can be critical for a supplier looking to position itself to get paid. "Probably more than anything your lawyer can do is knowing your customer and keeping those lines of communication open," said Thorne. "If you're talking to a person in your customer's purchasing department, you're far more likely to know if there's something happening there and all of those things are terrifically important in getting a sense of whether or not your customer can pay before the payment is due."

Thorne discussed other ways for suppliers to prepare for customer troubles outside of bankruptcy, as well as several legal remedies within the bankruptcy system that companies can use to protect themselves. For more on NACM's teleconference series, or to register for an upcoming teleconference, click here.

Jacob Barron, NACM staff writer

Consumer Bankruptcies Still High, Though Have Eased Down from July

The road to recovery is paid with consumer dollars. No amount of federal money will salvage the economy if individuals aren’t spending and households aren’t able to avoid financial ruin. Conditions are far from perfect, but, it’s also how the figures are viewed.

According to the American Bankruptcy Institute (ABI), consumer bankruptcy filings approached 120,000 in August, which was a 24% increase over the same month last year, but was a 5% decrease from the July 2009 filings of 126,000. July’s consumer bankruptcy filings were the highest monthly total since the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was enacted in October 2005 and represented the second time this year that monthly filings topped 125,000.

For much of the past nine months, the ABI has seen month-to-month increases in consumer bankruptcies. In June, consumer filings were down 6.8% from May figures, while the May figures were about 1% lower than the 125,000 filings seen in April. Add in the August decline and there have been month-to-month declines in consumer filings in three of the last four months.

“Consumers are continuing to turn to bankruptcy as a shield from the sustained financial pressures of today’s economy,” said ABI Executive Director Samuel Gerdano. “As a result, we expect consumer filings to top 1.4 million this year.” Except for January, consumer bankruptcy filings have totaled more than 100,000 per month. During the last two months, Chapter 13 filings have continued to account for 28.3% of all consumer cases.

Though bankruptcy has become one of the most prevalent issues in the current economy, at the end of August, the Department of Commerce reported that real personal spending in July had increased nominally by 0.2% and personal income had increased an equally unimpressive less than 0.1%. This was seen as good news, particularly in light of the drop of 1.1% in personal income in June. The Commerce Department gave the thumbs up to the American Recovery and Reinvestment Act, which, during the first half of the year, supplied more than 95% of working families with tax relief that “boosted their disposable income.”

That’s ideal as the nation is entering the prime spending months with kids going back to school and the holiday season looming.

It does appear that those modest sums of disposable income are tapped, albeit a little tentatively, as the International Council of Shopping Centers (ICSC) reported that in August, U.S. comparable store sales fell 2% from last August. This was tremendous news for chain store sales, because it represented the smallest decline since September 2008 and was a smaller loss than expected. Even Gap Inc., which posted a 3% drop in comparable-store sales in August, could bellow a “w00t” that the decline still was the best performance it has had since January 2008 and on the right side of the 8% decrease it saw last August. For the four-week period ending August 29, the company reported sales of $1.12 billion, which was a 2% decline from the same period last year. The clothing giant patted the back of its denim collections at its Gap and Old Navy stores for the strong back-to-school performance. It’s still striving for rebound as year-to-date, net sales have totaled $7.49 billion—a figure not to sneeze at—but 7% below the same period in 2008.

While massive retailers were happy to simply see the bleeding slow, the ICSC showed that much of the modest declines it reported in its August figures were buoyed by major increases by smaller retailers like Aeropostale, Inc., Cato Corporation and Tandy Leather Factory. Aeropostale, a mall-based apparel retailer, posted total net sales for the four-week period ending August 29 of $241.7 million, a 16% increase from the four-week period last year. Year-to-date, the company’s total net sales have increased 20% and Aeropostale’s same store sales increased 9% in August.

Cato enjoyed similar success with a 6% increase in sales to $59 million for the four-week period and same-store sales increased 5% for August. The company also opened five new stores during the month, recovering much of the ground it lost over the last year in terms of locations.

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

Latest Indicators Show Recovery Weaker than Expected

This week’s economic indicators have let some of the air out of the optimism that has been building about the nation’s financial recovery. Even NACM’s Credit Managers’ Index (CMI) showed declines in key areas after six straight months of gains, indicating that the rebound is weaker than once thought. In all, it gives more credence to the cautionary tale that the Congressional Budget Office (CBO) has painted that the U.S. recovery will be slow and tentative.

There was good news via the latest Institute of Supply Management (ISM) Report on Business that showed in August, economic activity in the manufacturing sector expanded for the first time in 18 months. This bright nugget of information was partnered with executives responding to ISM’s survey felt that the overall economy grew for the fourth consecutive month.

“The year-and-a-half decline in manufacturing output has come to an end as 11 of 18 manufacturing industries are reporting growth when comparing August to July,” stated Norbert Ore, CPSM, CPM, chair, ISM Manufacturing Business Survey Committee. “While this is certainly a positive occurrence, we have to keep in mind that it is the beginning of a new cycle and that all industries are not yet participating in growth.”

Industries that saw contraction in August were primary metals, plastic and rubber products, furniture, wood products, food, beverage and tobacco products, and machinery.

The ISM’s PMI rose 4% to 52.9%, which is the highest point it has been since June 2007. The increase was fueled by new orders, according to ISM’s New Order Index, which hit its highest level since December 2004. “The growth appears to be sustainable in the short-term as inventories have been reduced for 40 consecutive months and supply chains will have to restock to meet this new demand,” said Ore.

NACM’s CMI was expected to top the 50 level — the sign of expansion — but had stopped short at 48.1. NACM Economist Chris Kuehl was reassuring that that didn’t mean recovery wasn’t underway, it simply meant, “the credit system has not healed and it may be some time before there is a sense that the biggest issues are behind the economy.”

The U.S. Census Bureau and Department of Commerce reported a mixed bag of results for the week. The Census Bureau released that new orders for manufactured goods increased $4.6 billion in July, but unfilled orders were down for the tenth consecutive month, the longest streak of declines in the history of the agency’s publishing of the report since 1992.

The agency reported that for new orders of manufactured durable goods, it saw an increase of $8.2 billion in July to $169 billion, which was an increase of more than 5% and a strong rebound from the 1% decline experienced in June. Shipments of these goods also increased for the second straight month to $173.3 billion. Unfortunately, the same positives weren’t true for new orders and shipments for manufactured nondurable goods, which decreased in July, led by petroleum and coal products, which were down more than 7%, or $2.7 billion.

The building sector further let air out of the balloon as the Department of Commerce reported that the seasonally adjusted annual rate of construction spending in July edged lower by 0.2% to $958 billion. This was also down considerably from the $1.07 trillion in construction spending seen in July 2008. For the first seven months of the year, construction spending amounted to $543.8 billion, which was 11.4% below the $613.5 billion seen during the same period last year. Private nonresidential spending fell for the fifth straight month and public nonresidential spending fell 0.8% as state and local governments scaled back projects, despite the injection of federal stimulus dollars.

“We know from contractors’ reports that stimulus money is beginning to flow, but what should be a torrent by now is only a trickle in most categories,” said Ken Simonson, chief economist, Associated General Contractors of America (AGC). “Given that private construction will continue shrinking for several more months, public agencies charged with spending stimulus funds on construction must do so as promptly as possible.”

These declines in nonresidential spending are particularly bad news as the Federal Reserve Board released in August that banks had clamped down on real estate lending as charge-off and delinquency rates for real estate loans have soared to record highs.

One of the bright sides is that the Commerce Department found that new single-family home construction spending continued upwards another 7% in July after a 3.1% increase in June.

The economy’s roller coaster ride continues, but the ups and downs are far less severe and frightening.

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

Big Firms Are Calling the Cash Management Shots

In Monday's Wall Street Journal, a cash management development that many credit professionals may have recognized long ago was illuminated and "officially" writ large: big firms have sped up their collection efforts while slowing down their own payments to suppliers and vendors.

Based on analysis provided by REL Consultancy, the working capital division of Hackett Group, a business-consulting firm based in Atlanta, the WSJ article broke down recent quarterly earnings results, which basically revealed "corporate Darwinism at work." To wit, companies with annual revenue of more than $5 billion are now collecting their bills on average in 41 days versus the 41.9 days measured last year. These same companies are taking an average 55.8 days to pay suppliers and trade creditors, up from 53.2 days in 2008, which represents a 5% increase.

Conversely, companies with less than $500 million in annual sales generally collected cash more slowly while paying their bills more quickly as compared to the same time period in 2008. Payables to vendors averaged 40.1 days, which is a 6.5% decrease compared to last year's figure of 42.9 days. Their efforts to collect payments, however, have increased 8%—from 54.4 days in 2008 to 58.9 days this year.

In the article, Sung Won Sohn, a former chief economist at Wells Fargo now affiliated with California State University, Channel Islands, explained, "There's a power struggle going on as the credit crunch has moved to Main Street. Big firms can force their terms on suppliers and customers. And if you're a small business or a small store in a mall, you have no bargaining power and have to take what’s given, which is not much today."

More specifically, Anheuser-Busch Cos. extended its payment terms for vendors from 30 days to as long as 120 days. Proctor & Gamble Co. worked the other end by "relentlessly focusing" on increasing collections from customers, among other initiatives. General Electric did both: GE increased its payment terms and decreased cash collection times, efforts that freed up $3.8 billion in cash last quarter.

Meanwhile, smaller concerns such as Monsoon Co., a software company based in Berkeley, California, are facing slower payments from its customers. Last year, Monsoon received payment 40 to 45 days after invoicing; this year, customers have stretched that time frame to an average of 70 days after billing.

At Richmond, California-based Hero Arts Inc., a supplier of inks, rubber stamps and other items to independent arts-and-crafts stores as well as large chains, a trickle-down effect is evident. While noting that the company has "snubbed appeals from smaller customers to pay for goods in 60 days rather than 30," Chief Executive Aaron Leventhal admits that there is little the company can do when a primary customer lengthens its payment cycle: "[They] have the power over small vendors. At this point we have kind of swallowed and accepted that indignity."

Subscribers can read the full article—"Big Firms Are Quick to Collect, Slow to Pay" by Serena Ng and Cari Tuna—on the Wall Street Journal website (http://online.wsj.com/article/SB125167116756270697.html).

Have your company's cash management experiences been similar to those described in this recap? Is your employer facing a different scenario? Let us know in the comments section below.

Survey Shows International Trade Finance Improving, But Sector Still Far From Healthy

A mood of cautious optimism has spread across the U.S. and into the world of international trade as a new survey indicates that stability in the trade finance sector is beginning to increase despite some notable remaining weaknesses. Conducted by the Bankers' Association for Finance and Trade (BAFT), in cooperation with the International Monetary Fund (IMF), the survey noted that global access to credit has increased and recovery is underway in some regions, although some significant challenges linger.

"There appears to be a slight improvement in credit availability from the last survey, but the state of the global economy remains weak, further affecting trade," said Howard Bascom, BAFT chairman and managing director for Global Trade Finance and Credit Services at the Bank of New York Mellon. The most recent survey was the third in a series from BAFT/IMF that originally began in December. Eighty-eight banks from 44 countries completed the questionnaire, which asked how the total value of the participating banks' trade finance activities changed from fourth quarter 2007 to fourth quarter 2008 and from fourth quarter 2008 to second quarter 2009.

When compared to previous surveys, notably fewer respondents thought that the decline in value of their transactions was due to credit availability. Other portions of the survey, however, were much less optimistic: nearly two-thirds (62%) of banks surveyed reported a drop in total value of trade finance activities from the fourth quarter 2008 to second quarter 2009 and 86% of respondents noted that a lack of demand for trade activities was responsible for the decline.

"While the survey contains some encouraging information, the data also indicate that considerable issues still exist in the international trade finance arena and must be addressed through public-/private-sector coordination. With global trade estimated to contract by as much as 10 percent in 2009, it is imperative that stakeholders and policymakers work together to help stem further contraction. Global trade cannot recover if financing for trade transactions is not available," said Donna Alexander, president of BAFT. "As with our prior surveys, the information in this survey will be useful to policymakers as they consider ways to provide enhanced support for international trade finance."

Regionally speaking, an overwhelming majority of participating banks noted that at least a portion of their trade finance activities were centered on emerging Asia (89%), followed by emerging Europe (43%) and developing Asia (36%). The survey was sent to an array of differently-sized banks, nearly three-fourths of which had less than $100 billion in total global assets.

Jacob Barron, NACM staff writer. Follow us on Twitter at http://twitter.com/NACM_National.

CMI's March To Expansion Hits Speedbumps

UPDATE: The full report for the August CMI is now available here.

After six months of solid gains, the Credit Managers' Index showed slower progress and registered declines in key indicators. There was still some positive movement in the Index as a whole, but there are obvious weaknesses showing up in terms of credit availability, credit applications and sales. There were also areas of concern in terms of dollar exposure, disputes and other negatives. There was a sense that bigger economic issues began to overtake the sector, slowing down some of the progress noted in the last few months. The Index showed a dramatic decline from the levels in July, but overall the Index gained and moved a little closer to the magic number of 50, climbing from July's combined index score of 48 to the August score of 48.1.

These numbers are a little sobering given the sense that the economy had started to come out of the recession in July's report. This suggests that the proposed recovery is a little weaker than some of the indicators reflect, especially in terms of availability of money. The reduction in credit applications indicates that there is less willingness to lend and that companies seeking credit are being put through more hoops than in the past. The number of additional disputes and delinquencies also suggests that some sectors of the economy are still struggling.

NACM Economist Chris Kuehl, Ph.D. stated that these readings do not necessarily mean that the other signs of economic recovery are not accurate but, he indicated, "the credit system has not healed and it may be some time before there is a sense that the biggest issues are behind the economy. There are some shoes left to drop, most notably the commercial property sector." It had been assumed that the August index would crest over 50-signaling expansion-which correlated to the Purchasing Managers' Index (PMI) that had also risen to levels very near the 50 level. "It is mildly encouraging to note that the index has not fallen, but an anemic .1 gain was much less than had been anticipated," said Kuehl.

Other data that has been used to assert that the recession has started to bottom out is accurate and encouraging. Housing starts are returning back to growth and it is encouraging to see durable goods orders back to normal, but the money situation remains a solid concern for business as it seeks to expand into other sectors to capture some newly available market share.

The issues are the same as they have been for the last few months: consumer confidence and investor confidence. At the moment, the investment community is more encouraged than the consumer, and that creates a problem in the not-too-distant future. Until consumers start to draw on the rebuilding inventory levels, there is nothing to suggest that producers should start gearing up again. This is part of what seems to be making credit scarce-a concern that the current growth is somewhat artificial, motivated by inventory gains in anticipation of demand or programs like "Cash for Clunkers."

"Overall there were more down sectors than positive ones this month," said Kuehl. "There is a small amount of solace to be taken in the observation that none of these areas declined a lot, but growth was expected." The biggest improvement was in number of bankruptcies, but that may be connected to the fact that most of those companies threatened with collapse have already been forced into that procedure.
Manufacturing Sector

The growth that had been seen in manufacturing slowed in August as well. There was still a gain in the manufacturing index-from 48.3 to 48.5-but this was far less dramatic than expected. With the advance of the PMI and the improvement in durable goods orders, it was thought that the manufacturing sector would show a similar increase. The tiny gain essentially reflected a flat month. The biggest shifts took place in the number of new credit applications. There was a nice surge in July as the index moved up to 55.3, but the drop to 48.6 was steep and this suggests that the enthusiasm evident in manufacturing for July slowed as the more constrained month of August dawned.

The factors that kept manufacturing growing in August had more to do with the current consumer base. There were fewer dollars past term, fewer disputes and fewer bankruptcies. The clients that exist in the sector are getting their financial houses in order, but this may also be more of the worst companies leaving the scene as opposed to any general improvement in the status of current customers.

"It would appear there are mixed signals in the manufacturing sector right now. It is true that durable goods orders are up, but much of this number was accounted for by the surge in auto production reacting to the ‘Cash for Clunkers' program as well as the very volatile aviation market. The increase in business machine production is encouraging, but not solid enough to propel a recovery at this point," said Kuehl.
Service Sector

There wasn't much in the service sector that provided encouragement, but there was more progress than in the manufacturing sector as the service index crept upward from 47.7 to 48.1. The most significant change was a reduction in sales. The other factors remained very close to what they had been in July, but this is not unexpected news. The retail sector has been hurt and has been slow to rebound. At the same time, there has been relatively little growth in other service sectors as financial sector prospects remain low: real estate is down and many of the corporate service areas have been reduced in reaction to the problems in the economy as a whole. The only modest gains have been in health care services and the government.

It is notable that some of the problem areas have seen some improvement. There have been fewer disputes and delinquencies and there is less dollar exposure than before. "This is good news as it suggests that some of the worst is over in these service sectors. The stability of the economy has started to manifest in these traditional areas that serve as barometers for the wider economy. Retail has not recovered and may not this year, but the backsliding seems to have halted and those that have survived the recession seem to be hanging in there," said Kuehl.
August 2009 vs. August 2008

"The change from last year's level has been negligible. The data was flat for the month and has delayed the expected crest over 50, into expansion. There is still some hope that September will show a gain that will take the Index back to the position it held in August 2008, but for now, that goal is proving elusive. From this 2008 point, the Index began a precipitous drop that took levels down to the 30s. It is not likely that this pattern will be repeated, but the pace of gains will be slow," said Kuehl.

North Carolina Court Says Service of Lien Notice Violates Bankruptcy Automatic Stay

A subcontractor's decision to serve a notice of claim of lien on funds shortly after its debtor's bankruptcy filing has landed it in hot water with a North Carolina Bankruptcy Court, which recently ruled that the move is a violation of the Bankruptcy Code's automatic stay rule. In In re Harrelson Utilities, Inc., held in the U.S. Bankruptcy Court for the eastern district of North Carolina, the court held that not only was the service of the notice a violation of the automatic stay, which prevents creditors from taking any action to collect money after a bankruptcy petition is filed, but that the action also voids the lien on funds itself, rendering the subcontractor's claim worthless.

Additionally, because under North Carolina law a subcontractor may only file a lien on real property upon the service of a valid notice of claim of lien on funds, the subcontractor's lien on real property was also voided by the court as well. The court in Harrelson noted that if, under state law, the subcontractor has an interest in the funds prior to the perfection of the lien, the action of serving a claim of lien post-petition is an exception to the automatic stay rule. However, if state law provides that the lien right is created by the service of a notice, there is no exception and the lien is then voided. In its decision, the court distinguished between liens on real property and liens of funds, stating that, statutorily, a lien on real property "relates back" to the time of first furnishing of labor or materials. As interpreted by the court, this means that a lien on property creates an interest in the property prior to the actual perfection of the lien. With liens on funds, however, the court ruled that the subcontractor interest is only created upon service and receipt of the notice.

The ruling is a victory for owners in the state, looking to avoid getting hit by liens, but the distinction between liens of real property and funds does no favors for North Carolina subcontractors. As mentioned earlier, since state law prevents the filing of a lien on real property without the service of a valid notice of claim of lien on funds, the court's ruling essentially means that a contractor's or debtor's bankruptcy cuts off the opportunity to perfect a lien on funds. If a contractor files for bankruptcy and a subcontractor serves the notice of claim of lien of funds, this violates the automatic stay, voids the claim and, by extension, eliminates the possibility of perfecting a lien on real property.
An appeal of the ruling has already been filed but, if sustained, subcontractors in the state would essentially be forced to serve liens on funds as soon as labor or materials are first supplied, which would have predictably negative effects on project cash flow. Other observers have noted that this statute could give subcontractors with knowledge of a contractor's financial trouble an unfair advantage over other creditors, as they could react to the news by serving liens on funds when they find out about the contractor's condition, much to the chagrin of other subcontractors not so informed.
This news was originally reported via NACM's Mechanic's Lien and Bond Service (MLBS). For up-to-date information on legal changes throughout the U.S. and tools to help optimize your construction credit department, click here today.

Jacob Barron, NACM staff writer. Follow us on Twitter at http://twitter.com/NACM_National.