December CMI Improvement in Key Sub-Sectors Spreads Cautious Optimism

The news for the end of the year was better than anticipated, matching the news coming from the retail sector in general. The gains in the overall Credit Managers' Index (CMI) were impressive, but of more significance is the improvement in some key sub-sectors. For the past four to five months there were pretty steady gains in areas like sales and new credit applications-the sectors that usually herald some improvement in business conditions. But, until this month, the gains had not reached levels set earlier in the year. It now looks like there is some momentum heading into 2011; as the combined index now sits at 55.8.

Sales reached the highest point of the last 12 months, getting back to levels last seen in April when it was at 65.7. It now stands at 65.9, a solid improvement on the 61.9 registered in November. "Sales numbers have been rising in both manufacturing and service sectors and that is promising for the coming quarter," said Chris Kuehl, PhD, National Association of Credit Management (NACM) economic advisor and director of Armada Corporate Intelligence. "The improvement in new credit applications is more significant yet, given the impact it has on future growth. For the first time in well over three years, it broke 60. There is certainly reason for future optimism as this factor was only registering 54 to 54.8 as late as September. More and more businesses are now anticipating expansion and are seeking credit in order to meet that expected demand."

The gains in credit extended and dollar collections were more modest, but both categories are now above 60 as well, pushing the favorable factor index to a relatively robust 62.1. The last time this occurred was back in March and April when there was a similar anticipation of growth in the overall economy.

That is the good news. The not-so-good news is found in the index of unfavorable factors where there are trouble spots showing up. There were more rejections of credit applications, but some of that was expected with the overall increase in credit applications. The more troublesome aspect of these rejections indicates far more unqualified applicants than in the past. "This is the point in an economic recovery that provokes some desperation within the business community," said Kuehl. "As key competitors start moving to capture more market share, their rivals have no choice but to try to keep pace, forcing companies to seek expansion regardless of whether they can really afford it."

Several other unfavorable factors also showed weakness. There were more disputes, more accounts placed for collection and more filings for bankruptcy. The data suggest that another series of industry shakeouts are on the way. This is the period when weak companies that have been hanging on in anticipation of increased demand will either get the business boost they need to survive or will discover that the rescue is too late. Overall, the combined index of unfavorable factors remained steady compared to last month, but it's expected that these numbers will worsen in the months to come-unless and until there is a more pronounced recovery in the economy.

The data support reports from the financial press in the last few months. A period of consolidation is likely in many industries as 2011 progresses. There are many companies that barely made it through the last year, hanging on for the opportunity to participate in the economic recovery. If that rebound is not manifested soon, they will not have the credit needed to survive and there will be a period of consolidation. There is already a great deal of action in the merger and acquisition world, mostly involving companies running out of options. "The CMI data show reason to be upbeat about the future, but there is also reason to be worried about some companies," said Kuehl. "It has become a matter of winners and losers at this stage, as the competition focuses on who is positioned to gain in the next quarter or two."

Click here to view the full report, complete with tables and graphs, along with CMI archives.

Trade Doesn’t Provide Panacea for Africa

(BUSINESS INTELLIGENCE BRIEF) It appears that there are two dominant schools of thought when it comes to the prospect of economic growth in Africa. There are the optimists who assert that Africa is on the verge of becoming the next big thing as far as development is concerned. They point out that Africa now has a total population that rivals that of China and assert the urbanization that has been taking place for the past decade has allowed the African population to provide the critical mass needed to bolster business. There are several politically stable African states that have been sporting growth rates that rival those of the Asian states. Additionally, Africa remains a destination where developed nations go for raw materials and exceedingly cheap labor. Pessimists are ready with a laundry list of challenges.

Their pause comes from the reality that more than a dozen wars being waged on the continent to the fact that almost half the population of the continent is in abject poverty, living on less than five cents a day. They also point to the low education level, ongoing health crisis -- including AIDS, cholera, typhus, malaria, etc. - and rampant government corruptions that leaves some nations generally too weak to defend their positions when there is genuine investor interest.

Both positions are correct as far as they go. Africa is a place of stunning contrasts, and there is both opportunity and threat for the global business community. One of the key differences between Africa and the other developing parts of the world is the focus of intense efforts to perfect development and there has been a battle here as well. There are the forces of aid and the forces of trade, and they are often at loggerheads with one another.

The more traditional approach to African development has come from the aid community and they have been active for decades, funneling billions of dollars there. The notion is simple enough - provide monetary and tangible assistance to the impoverished nations so that they can advance with the basic building blocks of society - an educated and healthy population that is lifting out of the mire of pure poverty. Unfortunately a great deal of that assistance has been wasted as governments have either fallen prey to corruption or they just lack the capacity to handle the aid. Critics of the aid approach have asserted that this builds a kind of welfare state dependency that is akin to what happens with individuals who get stuck on the dole and can never seem to break the cycle.
The problems of aid based assistance gave rise to the theory that what Africa needed was trade based assistance. If the Africans were encouraged to get engaged in global trade, they would be able to emulate the success of the Asian states that have used the export as their ticket to economic growth. Both Europe and the United States tried to encourage trade with Africa by reducing tariffs for goods made in these nations. It worked in a fashion, but the impact has been far less than anticipated as there is much more to participating in global trade than being able to dodge some tariff barriers. The first rush of business to come to Africa after the United States reduced these barriers was in the textile trade and that didn't really work out the way planned. The Asian clothing makers simply shipped in the cloth and used the local African workforce for assembly work on cheap items that were then sent to West. It didn't do much for the development of the African states, and it allowed the Asian manufacturers to avoid the duties that had been imposed in the US and Europe to control their exports. U.S. companies were further damaged by the cheap competition while the African nations that had been the intended target for assistance got little.

The ultimate solution is for the African states to develop their own domestic economies to the point that they can sustain the populations. This will take additional aid in many cases, and it will require additional export activity but moist of all it will require an environment that supports the entrepreneur. That may yet be the single biggest barrier as the majority of states in Africa are still judged to be the most difficult environments for starting a business in the world due to heavy regulatory burdens, inefficient bureaucracy and taxation that is uneven and capricious. Add to this a lack of solid banking and business security, and the challenge intensifies.

Chris Kuehl PhD, of Armada Corporate Intelligence, is NACM's Economic Advisor

“Red Flags” Clarification Act Signed Into Law

The "Red Flags" Clarification Act of 2010 was signed into law this past weekend.
While the law has been couched as a relief for the nation's small businesses from the burden of the Federal Trade Commission's (FTC's) regulations, many doubts linger surrounding the constituency of trade creditors, who, despite the new law, may still be required to have a "Red Flags" program in place as the statute originally dictated.

As described by the FTC, the new law "gives businesses the flexibility to tailor their written ID theft detection program to the nature of the business and the risks it faces. Businesses with a high risk for identity theft may need more robust procedures-like using other information sources to confirm the identity of new customers or incorporating fraud detection software. Groups with a low risk for identity theft may have a more streamlined program-for example, simply having a plan for how they'll respond if they find out there has been an incident of identity theft involving their business."
While this explanation sounds like a relief for businesses in general, it says nothing about exemptions from the regulations, only a new flexibility in their application. When asked how the law affects the majority of NACM's membership, Wanda Borges, Esq., of Borges & Associates, LLC, noted that "I don't think this changes a thing for our trade creditors," describing the bill as "short and almost nonsensical."

Although the new law adds a few more criteria to the definition of a creditor, it fails to explicitly and openly exempt trade or business creditors. The final portion of the bill also leaves the door open to further regulation that could apply to any business in any industry. "They may have succeeded in eliminating the need for small law firms and small doctor's offices to have 'Red Flags' programs in place, but that catch-all at the end means our trade creditors aren't exempt," she added. "I think what it does is gives businesses a better opportunity to determine whether or not they're low risk or high risk. It's clear that they have not excluded trade credit."

Stay tuned to NACM's Credit Real-Time Blog for more updates on the new law's application.

Jacob Barron, NACM staff writer

Fed Lowers the Boom on Swipe Fees

Charged by Congress with making the call on mandates governing interchange fees paid by merchants for debit card transactions, the Federal Reserve proposed greatly reducing the fees which financial institutions can charge and network exclusivity agreements.

As part of the Dodd-Frank Act, the sweeping financial reform package inked into law earlier this year, the Fed unveiled a proposal that would set a maximum cap on interchange fees ("swipe fees") at $0.12 per transaction. The Fed estimated that merchants were charged, on average, $0.44 per transaction, and that revenue from said fees comprised upwards of $16 billion for the industry last year alone.

The proposal, if implemented - there is a traditional public comment period that extends through February 22 - would be a significant victory for small businesses who saw the fees as unfair and a serious financial burden. Subsequently, the move at best would leave uncertainty at Visa and Mastercard and, at worst, would have a severely negative impact on their revenue streams.

The Fed noted the following: "The proposed new Regulation II, Debit-Card Interchange Fees and Routing, would establish standards for determining whether a debit card interchange fee received by a card issuer is reasonable and proportional to the cost incurred by the issuer for the transaction. These standards would apply to issuers that, together with their affiliates, have assets of $10 billion or more. Certain government-administered payment programs and reloadable general-use prepaid cards would be exempt from the interchange fee limitations."

The Fed went on to request public comment on two alternative interchange fee standards: "one based on each issuer's costs, with a safe harbor (initially set at 7 cents per transaction) and a cap (initially set at 12 cents per transaction); and the other a stand-alone cap (initially set at 12 cents per transaction)...The Board also is requesting comment on possible frameworks for an adjustment to the interchange fees to reflect certain issuer costs associated with fraud prevention."

Short of delays or a significant shift in the requirements, the new rule is scheduled to take effect on July 21, said the Fed.

Brian Shappell, NACM staff writer

UPDATE: FTC Applauds “Red Flags” Clarification Act, But Questions Linger

Federal Trade Commission (FTC) Chairman Jon Leibowitz applauded Congress' recent passage of the "Red Flags" Clarification Act of 2010, admitting that, in their original form, the rules went too far.
"We're pleased Congress clarified its law, which was clearly overbroad," said Leibowitz in a December 9 FTC press release. "Now we can go forward with less litigating and more protecting consumers from identity theft. I want to express my appreciation to Congressmen John Adler (D-NJ) and Mike Simpson (R-ID), and Senators John Thune (R-SD) and Mark Begich (D-AL), for their excellent work in resolving the uncertainty created by Congress."

Leibowitz previously chided lawmakers for taking too long to act on a clarification measure. In a release last May that announced a delay in the "Red Flags" Rule enforcement date, the Chairman urged Congress to quickly pass legislation that eliminated the Rule's unintended consequences. Lawmakers finally responded in the last two weeks with the "Red Flags" Clarification Act, which passed unanimously in both chambers and limits the definition of the word "creditor" in order to ensure that it doesn't apply to certain services and small businesses.

In the most recent release, the FTC also took the opportunity to reiterate that the Rule was always meant to be flexible. "It gives businesses the flexibility to tailor their written ID theft detection program to the nature of the business and the risks it faces. Businesses with a high risk for identity theft may need more robust procedures-----like using other information sources to confirm the identity of new customers or incorporating fraud detection software," they noted. "Groups with a low risk for identity theft may have a more streamlined program----for example, simply having a plan for how they'll respond if they find out there has been an incident of identity theft involving their business."

While the new legislation should, at least theoretically, apply to far fewer businesses, some feel that the bill doesn't go far enough, and fails to exempt trade creditors in any meaningful way. "I don't think this changes a thing for our trade creditors," said Wanda Borges, Esq. of Borges & Associates, LLC. "It's so short and almost nonsensical, I really think they accomplished very little." Specifically, Borges noted that the bill's adjustments to the definition of what constitutes a "creditor" fail to explicitly exclude trade creditors. Moreover, a provision at the end of the bill serves as something of a catch-all, noting that creditors can be required to comply with the "Red Flags" Rule if they're determined to maintain accounts subject to a reasonably foreseeable risk of identity theft.

"They may have succeeded in eliminating the need for small law firms and small doctor's offices to have 'Red Flags' programs in place, but that catch-all at the end means our trade creditors aren't exempt," she added. "I think what it does is gives businesses a better opportunity to determine whether or not they're low risk or high risk. It's clear that they have not excluded trade credit."
Stay tuned to NACM's Credit Real-Time Blog for more updates on how this applies to you and your company.

Jacob Barron, NACM staff writer

Downward March of the 'PIIGS' Continues

The grouping of nations dubiously known as the "PIIGS" (Portugal, Ireland, Italy, Greece, Spain) can't seem to catch a break. Not long after Ireland's reluctant acceptance of a European bailout and widespread pontification that Portugal will follow, the group now has contend with austerity-related rioting in Greece and a likely ratings downgrade in Spain.

Violent protests erupted this week in Greece as public sector workers demonstrated against deep austerity measures taken by the nation's leaders. At least one Greek official reportedly was injured in the chaos, which resulted in a widespread shutdown of businesses and port operations. Greece was the first member nation to officially accept a European Union/International Monetary Fund bailout as its finances spiral out of control.

Meanwhile, the Spanish were incensed by a report this week from Moody's Investors Service calling the outlook for the Spanish banking system negative on fears of poor bank capitalization. The once hot-running and third-largest European economy continues to face economic woes thanks to massive problems in sectors such as real estate. Moody's noted its expects deteriorating "fundamental credit conditions among Spanish banks over the next 12 to 18 months:"

"The economic downturn of the past three years has led to a 4.9% decline in Spain's gross domestic product and a sharp rise in unemployment (19.8% in September 2010 from 8% YE 2007). ‘Moody's expects corporate profits to remain depressed for some time, especially in view of the limited likelihood of an additional economic stimulus, adding strain on unemployment and contributing to further deterioration in loan quality,'" said Alberto Postigo, VP-Senior Analyst and author Moody's latest report on the Iberian nation.

Brian Shappell, NACM staff writer

FTC Applauds “Red Flags” Clarification Act

Federal Trade Commission (FTC) Chairman Jon Leibowitz recently applauded Congress' passage of the "Red Flags" Clarification Act of 2010, admitting that, in their original form, the rules went too far.

"We're pleased Congress clarified its law, which was clearly overbroad," said Leibowitz a recent press release. "Now we can go forward with less litigating and more protecting consumers from identity theft. I want to express my appreciation to Congressmen John Adler (D-NJ) and Mike Simpson (R-ID), and Senators John Thune (R-SD) and Mark Begich (D-AL), for their excellent work in resolving the uncertainty created by Congress."

Leibowitz had previously chided lawmakers for taking to so long to act on a clarification measure. In a release last May that announced a delay in the "Red Flags" Rule enforcement date, the Chairman urged Congress to quickly pass legislation that eliminated the Rule's unintended consequences. Lawmakers finally within the last two weeks with the "Red Flags" Clarification Act, which passed unanimously in both chambers and limits the definition of the word "creditor" in order to ensure that it doesn't apply to certain services and small businesses.

In the most recent release, the FTC also took the opportunity to reiterate that the Rule was always meant to be flexible. "It gives businesses the flexibility to tailor their written ID theft detection program to the nature of the business and the risks it faces. Businesses with a high risk for identity theft may need more robust procedures-like using other information sources to confirm the identity of new customers or incorporating fraud detection software," they noted. "Groups with a low risk for identity theft may have a more streamlined program-for example, simply having a plan for how they'll respond if they find out there has been an incident of identity theft involving their business."

However, with the new legislation, the "Red Flags" Rule should, at least theoretically, apply to far fewer businesses, meaning that many companies may not have to worry about having even something as simple as a documented plan.

Stay tuned to NACM's Credit Real-Time Blog for more updates on how this applies to you and your company.

Jacob Barron, NACM staff writer

Fed Staying the Course on Rates, Securities Purchases

Increased talk that provisions of a tax deal hammered out by President Barack Obama and suddenly popular Congressional Republicans will put upward pressure on inflation failed to register with a Federal Reserve still stoically focused on elevated unemployment levels and, to a lesser extent, tight credit conditions. The Fed's Federal Open Market Committee emerged from its economic policy meeting Tuesday with word that it would not increase the near 0% target for the federal funds rate or alter its plan to boot the economy by purchasing another $600 billion in Treasury securities through spring of next year.

(For Immediate Release from the Fed) "Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

The Committee will maintain the target range for the federal funds rate at 0 to ¼% and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
Voting against the policy was Thomas M. Hoenig. In light of the improving economy, Mr. Hoenig was concerned that a continued high level of monetary accommodation would increase the risks of future economic and financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy."

Ireland Suffers Triple-Hit to Credit Rating

Already reeling from its reluctant request for a European Union (EU) bailout, the bad news kept coming for Ireland Tuesday. Just days after being downgraded by Standard & Poor's and receiving strong hints that Moody's Investment Services would soon do the same, Fitch Ratings slashed Ireland's long-term foreign and local currency default ratings by three notches because of the banking crisis, all while giving the republic a virtual pat on the back for its overall "strong underlying fundamentals."

Fitch, which already lowered Ireland's rating on October 6, again cut its outlook for the struggling European nation largely on the ongoing need to support the crumbling banking system, left in wreckage after risky bets on long-term real estate sector strength, and the cost of restructuring following its agreement to take money from the EU and International Monetary Fund (IMF). Fitch noted the following:

"The downgrade reflects the additional fiscal costs of restructuring and supporting the banking system, reflecting ongoing contingent liabilities arising from the guarantee of Irish bank debt and deposits (equivalent to 93.5% of GDP at end-3Q2010); weaker prospects and greater uncertainty regarding the economic outlook as a result of the recent intensification of the financial crisis; and the associated loss of access to market funding at an affordable cost, resulting in reduced fiscal financing flexibility. The scale and pace of the deterioration of public finances, continuing contingent fiscal and macro-financial risks emanating from the banking sector, combined with the highly uncertain economic outlook and loss of market access, means that Ireland's sovereign credit profile is no longer consistent with a high investment grade rating. Ireland's continued investment grade status is underpinned by the EU-IMF external support, as well as the Irish government's demonstrated commitment to fiscal consolidation and still strong underlying economic fundamentals. The structural budget deficit, which is estimated by the IMF to be equivalent to 8.6% of GDP in 2010, is the largest in the Euro Area and of any Fitch-rated sovereign in the single 'A' and 'BBB' rating categories."

Fitch's later explanation for its "strong fundamentals" assessment included assertions of a diversified and 'investment-friendly' economy as well as its modern history of debt service and social stability. The ratings agency did, however, intimate the downgrade likely would be Ireland's last for the forseeable future.

The EU confirmed it will send a total of about 67.5 billion Euros to Ireland, which is choking on debt from the real estate and banking busts, starting with an immediate 10 billion Euro infusion. The EU is mandating the nation bring its annual deficits below 3% of its total gross domestic product by 2015 and are forcing the Irish to dip into the national pension fund to alleviate some immediate financial problems, an unprecedented move in Europe.

Ireland's Prime Minister Brian Cowan, after months of putting on a brave public face that the nation would not need assistance, committed to the bailout and a four-year austerity plan to reduce its swelling budget deficit. Earlier this year, Ireland's credit rating was downgraded significantly by both Moody's Investment Services and Standard & Poor's on debt fears. Cowen was among those who mocked the ratings moves, not to mention the agencies themselves, flawed and inaccurate.

Moody's Analytics Economist Melanie Bowler recently told NACM that Ireland's acceptance of the bailout after much foot-dragging likely would help European banks regain some confidence, at least in the short-term, However, it also almost assuredly will impede the prospects for any kind of Irish rebound and longer-term growth in the near future. As such, multinational companies, fearing the impact of undoubtedly higher taxes "may start to look elsewhere" to operate, she speculated.

Brian Shappell, NACM staff writer

Brazil Faces Inflation Threat

(BUSINESS INTELLIGENCE BRIEF) As Dilma Rousseff prepares to take office in Brazil, she is facing an issue that has not plagued Brazil in some time: economic progress being undermined by bouts of extreme inflation. This was what led to the tongue-in-cheeks assessment of the nation as the "country of the future and always will be". The threat this time, however, is far less dramatic than in the past as the rate is nowhere near the double- digit levels that blasted holes in the nation's economy in the past.

But at 6%, the inflation rate is high enough to induce heartburn in the investment and banking communities as well as real fear within consumer ranks. Part of the threat is caused lemgthy and bitter experiences by Brazilians with the ravages of high prices, and their natural inclinations inevitably make the situation worse. This is already starting to occur, as many assume that prices will rise next year and are trying to buy what they want now. That fuels the inflation scourge as does the fact that Brazil's growth is attracting a great deal of international attention.

Rousseff will face a tough challenge from the moment she takes office as she made some ill-advised promises during the campaign and will now have to break them or risk a more profound inflation spike. In the heat of the second round campaign against Jose Serra, she reverted to the tactics of past left-leaning campaigns and promised that there would be wage hikes for the unions and government workers. She also vowed to pressure the central bank to reduce the record high interest rates, expand welfare and start up various project so that more people could find work. It was a very typical message from a populist but now the candidate is the president, and these promises will be immensely hard to keep without setting the economy off in a destructive direction. This is the point where people will see whether Rousseff has the skills of her predecessor, Inazio "Lula" da Silva, who ran a similar campaign when he first won office. He made all the usual promises regarding wage hikes and expanded welfare but, upon taking office, he emerged as a pragmatist and one who had the strength to explain to his supporters why these changes in policy had to be made. He gained support from the center but lost some of his left wing supporters. This came back to haunt the Workers Party in the last election as Marina Silva from the Green Party exploited the disillusionment of the left and mounted a challenge to Rousseff that gained sufficient momentum to force the second round. Now it will be the turn of Dilma Rousseff to show that she has that same pragmatic streak and the political strength to pull off this reversal from the campaign. There are also those who assert that she is not really that excited about being the kind of pragmatist that Lula was. She considers herself closer to the left of the party.

Analysis: The steps that need to be taken include reneging on the promises of wage hikes and expanded welfare and it also involves reducing the pressure on the central bank to lower interest rates. The fact is that the bank is about to raise them again in an attempt to slow the pace of inflation. The expectation is that the 10.75% rate will be hiked at least another quarter point as early as the end of January, and that creates problems in some key areas of Brazil. It makes the real stronger and that is not welcome news for an export community that is already having some issues selling outside Brazil. It will inhibit the expansion of small and medium-sized business. There is also the fact that high interest rates are attracting a lot of "hit" money from the global investment community, which has the perverse effect of boosting inflation. The inflation surge started with the stimulus measures introduced in 2009. Unlike the effort in the United States and Europe, the Brazilian stimulus plan worked like a charm and now the economy has started to overheat. The first test of the Rousseff government will be tough - pitting her desire to address her core supporters against the needs of the business and investment community.

Chris Kuehl, founder of Armada Corporate Intelligence, is NACM's economic advisor

House Passes “Red Flags” Legislation, Bill Headed for Passage

The U.S. House of Representatives approved legislation amending the application of the "Red Flags" Rule Tuesday night. The bill, the Red Flags Clarification Act of 2010, was passed by voice vote and now heads to President Barack Obama's desk for signature into law.

According to Rep. Paul Broun (R-GA), one of the bill's champions in the House, the bill would exempt many small business owners and other unrelated businesses from the burdensome regulations, promulgated under the Fair and Accurate Credit Transaction Act of 2003 and due to be enforced by the Federal Trade Commission (FTC) at the end of this month.

"Similar to many federal regulations, several unintended consequences resulted from the Fair and Accurate Credit Transaction Act. As a result, accounting, legal and healthcare practices were subjected to unrelated and over burdensome regulations. I am pleased that my colleagues in both the House and Senate supported this bill," said Broun. "At a time when we are experiencing record high unemployment, Congress needs to provide our nation's job creators relief from unnecessary regulations. This legislation will do just that."

The bill previously passed the Senate last week.

Stay tuned to NACM for further updates on the bill and how it will affect you and your business.

Jacob Barron, NACM staff writer

Delayed Trade Pact with South Korea Appears Complete

Days after word came down that a new tax information exchange agreement renders the finalization of a U.S.-Panama free trade agreement imminent (see this week's eNews for full story), it appears an accord has been reached in a long-delayed pact with South Korea.

Widespread reports surfaced Friday that the U.S.-South Korea free-trade agreement (FTA) has been completed. Sticking points involving the auto industry, including plans to phase out the United States' 2.5% tariff on South Korean-produced vehicles within five years, appeared to have been ironed out. The U.S. auto lobby and trade unions have staunchly opposed the agreement, calling it imbalanced. Their critics have called objections protectionist. The trade deal had yet to be ratified late afternoon (EST) and, as such, specifics of the final pact remained murky heading into the weekend.

Business analysts had branded President Barack Obama's November trip to Asia a litmus test of the administration's interest in trade and perhaps even the president's once strong international influence.
A major talking point in the run-up to the G20 meeting held in Seoul, the hold-up on the U.S.-South Korea helped ensure Obama's trip to Asia largely was seen as a disappointment.

Obama, for his part, said the Korean agreement was not something he wanted to rush into unless a deal was "mutually beneficial." Unfortunately for the president, who has been branded by some industry experts as anti-trade and anti-business, it did not help his image among U.S. businesses that his declarations that the FTA would be finished before the G20 were not realized. Whether or not the seemingly impending ratification of the deal, as well as one with Panama, changes that view remains to be seen.

Brian Shappell, NACM staff writer

Senate Quietly Passes Red Flags Clarification Act

The Senate very quietly passed a bill exempting many firms from the Federal Trade Commission's (FTC's) "Red Flags" rules this week.

In the Red Flag Program Clarification Act of 2010, the Senate voted by unanimous consent to amend the Fair Credit Reporting Act's (FCRA's) definition of "creditor," offering further clarification on one of the "Red Flags" rules' vaguest provisions and ultimately limiting the scope of the regulations. Specifically, the bill further defines a creditor as any entity who, in the ordinary course of business, obtains or uses consumer reports in connection with a credit transaction; furnishes information to consumer reporting agencies in connection with a credit transaction; and advances funds "based on an obligation of the person to repay the funds or repayable from specific property pledged by or on behalf of that person."

Essentially, the bill is designed to exempt law firms, accountants, doctors, nurse practitioners and other service providers from the "Red Flags" rules, but also sweeps small businesses out from underneath the regulations' reach. The bill was introduced jointly by Senators John Thune (R-SD) and Mark Begich (D-AL), both of whom described the bill as a relief to smaller firms across the country. "Small businesses in South Dakota and across our country are the engines of job growth for America," said Thune. "Forcing them to comply with misdirected and costly federal regulations included in the FTC Red Flags Rule will hurt their ability to create jobs and continue growing our economy."

"It is very important to consider the needs of small businesses, such as medical providers, when implementing consumer protections," Begich added. "Our goal is to streamline requirements for businesses to ensure the proper implementation without onerous costs."

The bill has been referred to the House Financial Services Committee for further consideration.
The FTC has so far made no comment on the bill's passage through the Senate, but Chairman Jon Leibowitz had previously urged Congress to pass similar legislation that further clarifies the rule and its application. "Congress needs to fix the unintended consequences of the legislation establishing the Red Flags Rules-and to fix this problem quickly," said Leibowitz in the FTC's May 2010 press release announcing a delay in the rule's enforcement date till December 31, 2010. That date is currently still in effect, but the clarification act could become law before then, preempting the regulations' enforcement for many of the nation's small businesses and service providers.

Stay tuned to NACM's Credit Real-Time Blog for latebreaking updates.

Jacob Barron, NACM staff writer

Fed Beige Book: Economy Continues to Buck Fear-Based Forecasts, Albeit Slowly

Continued fretting over the potential for a double-dip recession again belies the facts presented by the Federal Reserve. The Fed's latest Beige Book roundup of economic conditions illustrates reason for optimism...though certainly not enough to fuel widespread cork-popping heading into 2010's swan song days.

The Dec. 1 edition of the Beige Book, the last to be released in 2010, found Fed contacts reporting improved economic conditions as well as optimism, cautious as it may be. The Fed noted overall improvements in 10 of the 12 reporting districts with the strongest overall gains found in the New York, Richmond, Chicago, Minneapolis and Kansas City regions. Manufacturing, as has been the case throughout a year defined by a tepid recovery, continued to carry most of the water, so to speak. The Fed notes in Beige Book. Agriculture fair well, too, on aggregate. And there's even some newfound optimism for the first time in a while in the areas of credit standards and commercial real estate.

First District - Boston
Fed contacts in the district reported widespread sales growth and remained upbeat about short-term activity levels. A few producers have even returned to pre-economic collapse levels of sales, though some contacts question whether 2011 can best levels seen this year. Modest improvements were found in the commercial real estate market, fueled by increases in leasing activity in Boston and, to a lesser extent, Providence.

Second District - New York
Commercial real estate continued to struggle to find its footing, Fed contacts noted. Most reported stagnation or small losses in office markets again this period. Meanwhile, New York remains one of few still reporting widespread tightening of credit standards.

Third District - Philadelphia
The district reported overall manufacturing growth in shipments and new orders, though Fed contacts characterize conditions as "uneven" and dependent largely on the industry in question. Bankers in greater Philadelphia are nervous that the economic recovery "will come too slowly to reverse deteriorating financial conditions among some local firms." There has been little change of note in vacancy rates or prices, and stagnant conditions are expected throughout next year.

Fourth District - Cleveland
Manufacturing orders rose or held stable for most in late October and November. Most are finding faster growth opportunities by exporting products, again led by the auto and heavy equipment industries. Commercial real estate activity in the district is relegated almost exclusively to industrial projects, and some reported more work at this time last year. Commercial loan demand held firm on the backs of energy-, healthcare- and manufacturing-related companies. Overall credit quality also was stable in most markets in the eastern portion of the Midwest.

Fifth District - Richmond
Manufacturing's slight downturn last period was short lived as activity ramped up again, noticeably with packaging and automotive parts suppliers. Commercial loan demand has started to rise for the first time in a while, and financing of new commercial equipment picked up in areas including South Carolina. Still, commercial real estate was characterized as "generally week." An increase in the multifamily/condominium housing sub-sector is expected in Baltimore even as rents and occupancy levels are seen as low in most of the district. Those in agriculture fetched higher prices for commodities, but could face lower yield issues later.

Sixth District - Atlanta
Already hurting commercial real estate levels worsened again in the over-supplied district. Nearly every key market continues to struggle with elevated vacancy rates. Credit among small businesses reportedly improved, yet they're still having trouble getting favorable loan packages from banks, Fed contacts said. The region's oil production industry along the Gulf of Mexico continued to operate at levels well below pre-Hurricane Katrina levels. And, unlike many districts, manufacturing was not able to carry the district to an overall gain thanks to what most considered a "flat" six weeks.

Seventh District - Chicago
The pace of manufacturing activity and optimism kept up its recent momentum. This is especially true for the fabricated metals, automotive, heavy equipment and aerospace industries. Even recently soft steel production is widely expected to get a January bump. Credit conditions improved, though core business loan demand remained somewhat stymied. An early and sizeable crop harvest has Fed contacts in agriculture riding high, notably in Michigan and Wisconsin. Commercial real estate contacts noticed a small uptick in industrial projects.

Eighth District - St. Louis
The word in St. Louis, at least from the manufacturing sector is encouraging: "expansion" New plants and expansion are expected in the boating, sanitary paper, primary metal, auto parts and textile industries, said Fed contacts. Those are more than offsetting plans to contract in areas such as wire, air conditioner and container production. Commercial real estate, as usual, was very mixed with vacancy rates varying widely by industry, with large variations even within specific markets. Credit quality and demand for business remained largely unchanged. Agriculture contacts reported an early completion of corn, soybean, sorghum and cotton harvests and also fretted about a reduction in the level of adequate topsoil moisture going forward.

Ninth District - Minneapolis
Commercial development permits surged in Fargo, ND and Sioux Falls, SD; but they plummeted in the district's key market (Minneapolis/St.Paul). Worse yet, in the latter, office and industrial vacancies hovered near record levels. Manufacturing, like in most areas, was up, though the Fed did not highlight any particular industry in the region. Thanks to ideal weather, agriculture contacts saw large and early harvests, not to mention very solid prices.

Tenth District - Kansas City
After a summer setback, the region posted a second consecutive growth period over the last six weeks. The strongest gains, which occurred later in the period, were found in the food, fabricated metal and electronics production areas. Little change was seen in vacancy rates and rents, though Fed contacts reported optimism for improvements in those areas during the early portion of 2011. Common to several regions, an early corn and soybean harvests were considered positive and lucrative. Credit quality and business loan demand were largely unchanged, and neither is expected to make a significant move during the next six months.

Eleventh District - Dallas
District 11 is one of just two with mostly negative news in the area of manufacturing. Many industries saw declines or unexpected stagnation in November. Aircraft parts and petrochemicals industries were among few with positive news. Agriculture also diverged from the positives out of most districts as producers complained of low rainfall and poor topsoil moistures. Cotton prices hit a record high though. Commercial real estate, however, did get a sizable bump in optimism on increased office leasing, though tight credit conditions continue to stymie new development.

Twelfth District - San Francisco
Manufacturing gained again from mid-October through mid-November, especially for producers of commercial aircrafts/parts, semiconductors and technology products. Poor overseas crop yields drastically boosted demand for products from the district, Fed contacts said. Commercial real estate activity remained unchanged at anemic levels. Businesses, however, appear more ready than previously this year to test the waters on capital projects, financial contacts told the Fed.

Brian Shappell, NACM staff writer

World Looking at Portugal as EU’s Next Financial Domino

It has not been a good week for Portugal. Not only did its combined bid with Spain to host the World Cup soccer tournament in 2018 over Russia flop resoundingly, but all eyes appear to be focused on the nation as the next to require some type of financial bailout from the European Union.

When Ireland announced it would cave to international pressure and accept a bailout from the EU and International Monetary Fund for about $90 billion, the negative focus soon turned toward Portugal at a shocking pace. After official bailout acceptances this year from Greece and Ireland, Portugal was seen widely as the next European debt-saddled nation to stumble toward the need for a lifeline.
And the outlook update from at least one ratings agency this week did not help matter. Standard & Poor's, who moved to cut the credit ratings of both Greece and Ireland months before their official requests for bailout loans, placed the republic "on CreditWatch with negative" implications:

"‘The CreditWatch placement reflects our view of increased risks to the government's creditworthiness,' said Standard & Poor's credit analyst Frank Gill. ‘These risks stem from uncertainty about the government's possible recourse to official funding and the consequences that obtaining such funding could have for the position of private-sector creditors vis-a-vis official
creditors after 2013.'

In 2011, Portugal's minority government is set to implement an ambitious fiscal austerity program with an emphasis on reducing expenditures. However, we see the government as having made little progress on any growth-enhancing reforms to offset the fiscal drag from these scheduled 2011 budgetary cuts. In particular, we believe that policies the government has pursued have done little to boost labor flexibility and productivity. As a consequence of the Portuguese economy's structural rigidities and the volatile external conditions, we project that the economy will contract by at least 2% in 2011 in real terms. The downward revision to our growth projection also reflects the fact that Portugal has not reduced its large external current account deficit during 2010.

In addition to what we view as the economy's weak growth prospects, the large stock of Portuguese debt that non-residents hold (54% of GDP) has increased the government's vulnerability to rising real interest rates. This contributes to the country's large gross external financing needs and, we believe, raises the likelihood that Portugal will seek external assistance from the EU."

(Editor's Note: See coverage of the Irish bailout in this week's eNews at www.nacm.org).

Brian Shappell, NACM staff writer

Faltering Manufacturing Sector Stalls CMI Growth

The progress noted over the last three months in the Credit Managers' Index (CMI) came to an end in November, at least as far as the manufacturing sector was concerned. The service sector data was a little more encouraging, but not enough to keep growth from stumbling. The combined index posted less than a 0.1 increase, which was barely enough to push the index from 54.9 to 55.0. "The issue was less about demand and growth than the fact that past issues were starting to catch up again," said Chris Kuehl, PhD, economic advisor for the National Association of Credit Management (NACM). "There was actually a pretty impressive gain in terms of overall sales-from 60.8 to 61.9-even though this factor in the service sector contracted somewhat. There were also gains in new credit applications and amount of credit extended. These indicators suggest real growth in both sectors and match data coming from the Purchasing Managers Index as well as more recent data from the retail community. The declines came from the indicators that point to debt issues and the struggles of companies that have not managed to get through the recession all that easily."

The dollar collection data showed a substantial decline-from 61.9 to 58.6-and for the most part the index of unfavorable factors demonstrated a similar decline. There was an increase in dollars beyond terms and in filings for bankruptcies as well as in other indicators. The pattern is not unfamiliar to the credit community and based on past data, there was reason to expect some of these results to start showing up. This is a critical time for many companies and some are not ready to address the situation effectively. During the worst of the recession, most companies were in the same position: hunkering down to survive. As the recovery started, the majority of those companies that made it through the worst of the decline maintained a pretty cautious position due to lack of real demand. Now there is some sense that an economic rebound may finally be on the horizon and some companies are starting to gear up for that rebound with more marketing, sales efforts and inventory accumulation. If a few companies in a given sector start to make moves, there is additional pressure on others in that sector to match them. If they are not financially strong enough to make that move, they can swiftly fall behind if the expected sales rebound does not occur on schedule.

Kuehl noted there is another take away from the unfavorable factors category. It appears that companies struggling to stay afloat are now having additional trouble getting access to credit, even if they have some opportunity to expand their business. The banks in general have returned to their more cautious ways and there are widespread reports of limited access to capital. The investment community remains unengaged, leaving companies with only their suppliers for credit. "That same set of limitations applies to these companies and that threatens to impose a stranglehold on credit availability in general," he said.

This month's anecdotal evidence also suggests some companies are waiting to see what happens at the congressional level. If tax cuts are not extended, many companies will need to pay out far more than they paid in the past and that has executives holding back a significant amount of capital as a contingency. Presumably, when the tax decision is made, this money will either be put toward the additional tax or released for other uses. There is also discussion over whether other issues concerning small businesses will be addressed-everything from revising the medical reform law to moves to push more stimulus into the economy. One of the areas already recommended for reform is a provision in the health care law that requires most companies to file 1099 tax forms on any contract that amounts to more than $600 a year. NACM views this as a destructive provision for small businesses as it would tend to force them to choose fewer, larger businesses to provide a wide variety of services and products as opposed to several smaller ones, and require additional resources to issue the forms.

The full report, complete with tables and graphs, along with CMI archives may be viewed at http://web.nacm.org/cmi/cmi.asp.

Whitehouse Bankruptcy Bill Held Over In Latest Business Meeting

Sen. Sheldon Whitehouse's (D-RI) bankruptcy bill was held over again in the Senate Judiciary Committee's latest business meeting.
S. 3675, the Small Business Jobs Preservation Act, was on the agenda for the meeting on November 18, but the Committee set the bill aside, choosing instead to advance a bill with broad bipartisan support (S. 3804, the Combating Online Infringement and Counterfeits Act).

Committee Chairman Sen. Patrick Leahy (D-VT) broached the subject of S. 3675 before quickly exiting the meeting, leaving Whitehouse and Sen. Jeff Sessions (R-AL) to discuss the bill's prospects. However, Whitehouse used his statement to request a clarifying amendment to the Bankruptcy Code that would govern a judge's authority to compel a lender to produce a high-ranking staff member to discuss a filing debtor's mortgage before foreclosure.

"When someone files in bankruptcy court and they have a foreclosure issue, the court has a process that requires them to sit down and discuss the modification," said Whitehouse, referring to a procedure used in his own home state of Rhode Island. "It has resulted in a flood of successful modifications, and it provides for mediation potentially, but just getting people in the room together produces results."

Whitehouse requested the clarifying amendment due to a pending case filed by a lender against his home state that alleges a bankruptcy judge has no authority to require anyone from the bank to be there. The amendment would ensure that the Code gives the judge this ability and effectively shut down the case.

Sessions sympathized with Whitehouse's concerns and Whitehouse noted that they hoped to move the amendment to the Senate floor in the lame duck session, which may signal that his office will not seek further action on S. 3675 before the end of the legislative session.

NACM has worked closely with Whitehouse's office on S. 3675, which would create a new small business bankruptcy procedure, and continues to do so. Should the year end without action on the bill, Whitehouse is expected to pursue a similar measure in the next Congress.

To learn more about S. 3675 and NACM's other legislative efforts, visit NACM's advocacy page here.
Jacob Barron, NACM staff writer

Ireland Officially Requests Financial Bailout

The "Emerald Isle" dubiously and tentatively became the second member nation this year to officially ask for a financial bailout from the European Union's central bank as the global economic downturn continues to plague high-debt countries across the Atlantic.

Ireland's Prime Minister Brian Cowan, after months of putting on a brave public face that the nation would not need assistance, announced Sunday that Ireland agreed to take a bailout package and will commit to a four-year austerity plan to reduce its swelling budget deficit. It is estimated the aid package, to come from the European Union and the International Monetary Fund, will be worth at least 80 billion Euros (nearly $125 million).

Ireland's economic situation became increasingly untenable amid rising budgetary costs tied to widespread bank failures caused largely by the bursting of an overheated, unsustainable housing bubble that ushered in a new wave of prosperity there last decade. The situation is not entirely unlike the real estate bubble that struck in the United States, among many other nations, and helped spark a deep economic downturn. Ireland's credit rating was downgraded by both Moody's Investment Services and Standard & Poor's, which caused defensive Irish leaders to call the ratings' systems flawed and even mock the performance of the big three, which also includes Fitch Ratings, publicly for their own poor performance in predicting the downturn.

Moody's Analytics Economist Melanie Bowler predicted the move likely will help European banks regain some confidence, at least in the short-term, but it also almost assuredly will impede the prospects for any kind of Irish rebound and longer-term growth.

"Multinational companies, the backbone of the Irish economy, may start to look elsewhere," she said. "Following a sharp deterioration in competitiveness in the 2000s, some firms decided to relocate to cheaper locations in Europe. While recent wages cuts and weak price pressures are helping boost Ireland's traditional advantage, the bailout will raise questions about the stability of Ireland as a destination for foreign direct investment."

Perhaps more important is the likelihood that corporate taxes will be increased, said William Reinsch, director of the National Foreign Trade Council trade association. Those companies that made significant financial investments, such as the construction of large factories, may be stuck. However, those without as many strings indeed may look elsewhere. The most sensible way to prevent flight may be to hold back on the likely desire to up those taxes but the need of the badly damaged economy might make such a strategy impossible, said Reinsch.

"What happens to their tax rates is the first question that needs to be asked, but it is not the first question that will be answered, honestly," Reinsch told NACM. "Those who made less of an investment [such as doing little more than locating some research and development operations there] may have incentive to relocate. It's hard to say, as none of that has been broached yet."

Working in Ireland's favor on the business front, however, is the fact that many of the companies that moved some operations are very large. This could render a quick exit strategy difficult to implement or unlikely to occur, based on previous history.


"Some companies are like aircraft carrier -- they don't turn on a dime," Reinsch told NACM. "It takes them a while to evaluate what's happening."

Brian Shappell, NACM staff writer

Obama's Asia Trip Fails to Yield Korean FTA

South Korea signed on to a key free trade agreement with a nation from the West this week. That nation, however, was not the United States to the chagrin of business analysts who believed President Barack Obama's trip to Asia this month was a litmus test of the administration's interest on trade.

Many words could be used, largely dependent on the political leanings of the analyst, to describe Obama's trip to South Korea for the G-20 economic summit - It would require perhaps the rosiest-colored glasses to consider "success" among them. A major talking point in the run-up to the G-20 meeting, held in Seoul, was the U.S.-South Korea free trade agreement that has been languishing since 2007. Though Obama vowed to have the agreement hammered out before the G-20 convened, no deal was struck even upon the president's exit from Asia. South Korea did forge a new free trade agreement with Peru, which should boost the Asian nation's automotive export prospects. Ironically, it's the auto sector that's a major part of a sticking point, as South Korea has largely rejected importing U.S. cars on the reasoning that they are bigger polluters than domestic cars. The U.S. auto lobby and trade unions have staunchly opposed the agreement, calling it imbalanced.

Obama, for his part, says the Korean free trade agreement remains a priority and that he didn't want to rush into a deal that wasn't mutually beneficially just to get it completed. Unfortunately for the president, who has been branded by some industry experts as anti-trade and anti-business, finishing the trade agreement was seen as an important step to proving the administration is serious about trade.

(Editor's Note: See full story, including analysis on Obama's activity at the G-20 summit, in today's eNews, which will be available late Thursday afternoon).
Brian Shappell, NACM staff writer

Is There an Obama Export Policy Under Development?

(Business Intelligence Brief) For the past two years there has been something of a mystery as far as the president is concerned. Is President Barack Obama anti-business, or does he think that business concerns are invalid? Is the President a free-trade advocate or a protectionist? Is the United States interested in pursuing some kind of trade policy that engages with the rest of the world or not? The biggest mystery is whether the hostility towards trade and global business was really something that reflected the beliefs of Barack Obama or the Democrats in Congress.

Looking at Obama as senator, one would see a pattern of votes that suggested that he was more trade advocate than not and, in the campaign, he was less antagonistic regarding the issue of trade expansion until he elected to contest Hilary Clinton on the subject. Meanwhile, the focus of the Democrats as a whole has been virulently protectionist with some exceptions in states that relied more heavily on the export community.

The ten day Asian trip may signal one of two things. This may either be the emergence of a new Obama - free from having to mollify a hostile Democratic party, or it may simply be an example of saying what the audience comes to hear without meaning to do much to advance the U.S. trade position. The reaction to Obama at the G-20 meetings was as close to an outright snub as any U.S. leader has received in years. Even an unpopular President George W. Bush never got the brush-off that Obama was subjected to. Much of this was anger at the US position on its currency but some was frustration with the lack of a framework on trade after two years of waiting for the Obama plan to develop.

Analysis: The G-20 meeting was humiliating, and the foreign press has been unmerciful. Many analysts in Europe had been hoping to see a radical shift from the Bush years, and and many are betraying their own naiveté as they express shock at the U.S. positions. The fact is that Obama reflects U.S. interests - Bush did and so does Obama. That these interests are not the same as those of other nations should come as no shock. The Europeans are mad at the United States for policies that weaken the dollar (such as last week's quantative easing effort outlined by the Federal Reserve last week) as it makes their export sector less effective. In the past, the shoe was on the other foot, and the United States thundered at the weak Euro.

What should the Obama do now? The simple answer is that the president needs to remember he is also "Salesman in Chief" and must champion the nation in trade - both directions. For two years this has not been the role that Obama has played but, at this last meeting, he seemed to get engaged despite the hostility. An engaged president is vital in the trade arena, and it is good to see Obama taking on such a role -- especially given the anger that was being directed his way.

--Chris Kuehl, of Armada Corporate Intelligence, is NACM's economic advisor

UPDATED: Beige Book Continues Signs of Stagnation

On the heels of the Federal Reserve Chairman Ben Bernanke's confidence-shaking testimony before Congress, the Fed released its Beige Book report on conditions from the last six weeks within its 12 regions on Wednesday.

The report's economic roundup painted a less optimistic picture than previously in 2010, as Fed contacts noted the pace of economic growth slowing in regions that had been improving, albeit slightly; two districts experiencing stagnation (Cleveland, Kansas City) and a pair where activity was actually failing to remain stable, let alone make gains (Atlanta, Chicago).

Granted the negative news was nothing new to the commercial real estate sector, indentified as a drag on the recovery in all regions throughout much of this year. And though banks' lending criteria for businesses to garner loans remained restrictive, the bigger issue is that actual borrower demand has fallen to very low levels. Still, the Fed contends that "on balance," the economy still is still in a growth period, a very slow one. Some pieces of positive news came from at least half the nation's regions in manufacturing, especially in those tied to the automotive industry; tourism, save the oil-spill wrought Gulf Coast; and employment opportunities, though there's a lot more part-time (non-benefits) work available. However, such optimism on the jobs front was reported prior to Wednesday's Labor Department report that found unemployment rising in 75% of U.S. urban markets.

District 1 -- Boston
Business activity was seen increasing in recent weeks, with vendors generally reporting increased revenue and work. Commercial real estate reports were mixed, which actually is much more than several other regions could boast. Commercial property vacancies rose in markets like Hartford and Boston on fears of increased unemployment and lower demand for such properties. However, their colleagues in Providence can be described as “upbeat.”

District 2 -- New York
Though economic growth in the second district has shown signs of improvement, the demand for business loans continued to wane. Additionally, the cost of loans again grew. Vendors found sales and inventories at expected levels. And, like the Boston Fed bank, the commercial real estate market for the area appeared somewhat steady for the region, on balance. Most improvements, however, were found in Manhattan suburbs on the New York state side.

District 3 -- Philadelphia
The district reported slight economic growth, and product manufacturers noted an increase in shipments despite a small dip in future orders. Credit quality was seen as improving, though loan balances have remained largely unchanged. Commercial real estate contacts reported steady vacancy rates for the most part and little demand for new construction as companies continue to look for less space.

District 4 -- Cleveland
Overall economic growth and manufacturing remained stagnant during the last six weeks. Still business’ production remains well ahead of the pace through this point last year. Mild improvements in commercial real estate from the spring started to shrink more recently. Most interest in new construction presently is relegated to government-funded infrastructure and some industrial categories. Demand for business loans remained soft, though there have been signs of increased interest, said Fed contacts.

District 5 -- Richmond
The district’s economic performance was categorized by the Fed as “mixed or modestly improving since the last report.” Manufacturing continued to show strength here, especially for those supplying homebuilders that are building to replace depleted inventories or new product designs to fill a growing consumer demand for smaller (more efficient) houses. The commercial side of real estate continued to struggle mightily in Richmond, Baltimore and metropolitan areas of North Carolina.

District 6 -- Atlanta
Economic activity slowed in the district, with low optimism apparent in most industries, save tourism. There is fear of the impact of the ongoing Gulf Coast oil spill cleanup, though. Business loans and use of credit cards appeared to drop during the latest Fed tracking period. And commercial real estate continued to spin its wheels with little in the way of reasons for optimism emerging.

District 7 -- Chicago
The pace of the economic rebound here has dropped of late. Part of that comes from a slowing in business spending, though capital spending specifically on information technology has increased. Real estate activity, already low in the area, took another hit during the latest period with only public, infrastructure-related construction on the come. However, the district was one of the few to report an uptick in business loan demand and credit quality.

District 8 -- St. Louis
The eighth district continued its improvement, notably in manufacturing and automotive sales. Demand for and ratio of business loans, however, continued to dwindle. Also slow, unsurprisingly, is the long-struggling commercial real estate sector. Contacts don’t expect any demand for new commercial construction for at least another year.

District 9 -- Minneapolis
Economic growth was slight for the recent period in the district. The manufacturing sector, notably construction equipment producers, saw a solid increase in activity. However, commercial real estate was weak and declining. About the only good news was found in Sioux Falls, SD, where a bump in commercial permits was found, and with a Minnesota/Wisconsin-area contractor that deals mostly in heavy infrastructure.

District 10 -- Kansas City
Weak commercial and residential real estate performances acted as a drag preventing overall economic growth from advancing in the region – and another slide was predicted by industry contacts. Manufacturing-based businesses continued to find some gains, though the pace of growth slowed for the second straight month. Still, new orders have held stable for vendors. Demand from such businesses for bank credit remained low.

District 11 -- Dallas
Despite cautious optimism, the region’s economic expansion continued “at a moderate pace.” Non-construction based businesses have had reason for optimism. A few firms are in the commercial real estate market went out of business or are on their last legs, with few predictions of an uptick in the sector any time soon. Business loan demand, as well as all other categories, was soft, and loan performance was holding stable with levels noted in previous months.

District 12 -- San Francisco
After months of deterioration, the district finally reported a slight uptick in economic activity. Still, commercial real estate activity remained unchanged “at very low levels.” A Fed contact noted that those commercial property sales that did occur in the last six weeks fetched “surprisingly high” prices. Banks believe loan demand from uncertain businesses will not pick up until there are clearer signs where the economic rebound, or lack thereof, is going.

Brian Shappell, NACM staff writer

Struggling Banks Risk Loss Of Top Performers

The staff of a supplier's bank, or their customer's bank, can often serve a vital role in the extension of credit, whether it's to reduce risk or just to iron out the wrinkles in the transaction and hopefully create the most profitable solution for all parties involved. In the wake of the financial crisis, however, training budgets have fallen by the wayside and a new study, conducted jointly by the American Bankers Association (ABA) and the Corporate Executive Board (CEB), shows that the nation's banks are at risk of losing their top talent, which could have negative ramifications far beyond the banking industry.

The study showed that while successful companies in other industries spend an average of $1,100 per employee on training, banks only spend an average of $650 per employee. This underdevelopment of top-performing staff increases the risk that they'll leave the industry and, in the long-term, reduce overall productivity. "The study raises the question: what is being done to prepare the next generation of bank leaders?" said Doug Adamson, executive vice president of ABA's Professional Development Group. "High-performing employees have told us that in order for them to stay and be more productive, they need to be recognized as top performers and have well-defined development plans in place."

Additionally, the survey showed that training and development should mean more to the banking industry than it might to other industries due to the sector's heavy reliance on internal hiring. A hefty 60% of banks hire their employees from within, according to the study, which also noted that 40% of bank CEO respondents believed that they weren't doing enough to help their employees grow.
One culprit of underdevelopment was half-established talent management policies. "We were surprised to learn that while bank CEOs are acutely focused on the importance of talent in today's market and clearly link talent management practices to their institutions' overall success, most banks have talent management practices that are only partly in place," said Adamson. "Banks will continue to compete on the quality of their employees and must help talented employees reach their full potential to build talent pipelines for the future."

In addition to surveying CEOs, the study also involved employees themselves and their opinions of their occupation, industry and overall productivity. "One quarter of high potential employees are considering leaving their organizations, and those folks put forth 21% more effort than their disengaged peers," said managing director of CEB's Financial Services Practice Russell Davis. "Today, every bank risks losing its future talent base." The study also showed that the economic downturn has fundamentally reduced employee productivity, with the number of employees exhibiting high levels of discretionary effort declining by 53% over the past four years.

More on the study can be found at the ABA's website (www.aba.com).

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

Republicans Win House, Gain in Senate; But Questions Abound for Industry


The Republican party can claim a fairly resounding victory in Tuesday's midterm election by taking a majority in the House of Representatives and cutting into the Democrat's super-majority in the Senate. However, though small business appeared to pine for such results, the 2010 race may have left more questions than answers. Chief among them may be: Will there actually be a massive improvement made for small businesses in the areas of manufacturing and credit? The jury on that could remain out well into the 112th Congress.

Republicans gained at least 60 seats in the House and about a half-dozen more in the Senate with some close races still being tallied. On the surface, the GOP victory appeared to be just what the doctor ordered for small businesses, especially in manufacturing. In fact, a pair of studies released in the week before the election from Discover and FTI Consulting, indicated just that.

Discover's Small Business Watch saw its monthly measure of small business confidence in the economy increase by 10.4 points to a level of 84.2. The study's directors attributed the strong gain directly to the perception that Republicans would almost certainly retake the majority at least the House. Meanwhile, FTI Consulting's study found 64% believe economic conditions would improve and 60% thought employment levels would rise if Republicans won a majority in either house of Congress. A similar ratio of respondents indicated they believed GOP policymakers were more likely to be cooperative with the business community going forward.

Should those responses prove accurate, the most likely short-term legislative changes would come in a significant revision of unpopular health care-related provisions requiring a 1099 for any business transaction over $600 as well as passage of a small business aid package that was pushed by the Obama White House in October. The latter appeared to die in Congress more from pre-election partisan gamesmanship than actual objection on either side to helping struggling small businesses. The change in Washington, DC might also inspire lawmakers to push for quicker resolution on long-pending free-trade agreements with Panama, South Korea and Columbia.

Byron Shoulton, senior vice president and international economist at FCIA Management Company, believes those Democrats who have opposed breaks for businesses and/or increased exporting, something the administration has shown increased interest in, may have to compromise more than any time in the last two, perhaps four, years.

"I do believe the current mood favors tax cuts on small businesses among other likely incentives to help boost the economy and regain consumer confidence," said Shoulton. "The new majority has every reason to move boldly to help small businesses as much as possible. I expect they will." However, Shoulton admitted that some "new arrivals" to Congress may come to Capitol Hill trying to prove something to the voters who elected them on an anti-incumbent, anti-Washington platform and other simply may not want to ease the pressure on President Barack Obama.

Economists Xiaobing Shuai, of Chmura Economics & Analytics, and Ken Goldstein, of the Conference Board, appeared even more pessimistic regarding the idea of compromise among federal lawmakers.

"Because both parties are moving away from center, it is difficult to see anything big coming out of Congress," said Shuai. "Both parties will be posturing for the Presidential election in 2012."

Moreover, Goldstein said matters are complicated further by the reality that it's not just Democrats and Republicans battling - It's both traditional parties being joined in the mix by the emerging Tea Party membership, which didn't exactly toe the GOP line or get much support from party stalwarts during the 2010 campaign season. The latter group could be unlikely to play ball, so to speak.

"This three-way free-for-all is made for gridlock," said Goldstein. "Some of the victors specifically campaigned on NOT compromising. Small business must therefore look to the Federal Reserve and the local banks, not to Congress or the White House. It also suggests looking for legislation to be passed in both houses and NOT vetoed could be waiting for Godot."

Brian Shappell, NACM staff writer

Fed Holds Rates, Launches Another Effort to Rescue Economic Rebound from Stagnation or Reversal

The Federal Reserve's Federal Open Market Committee emerged from a two-day fiscal policy meeting Wednesday to announce it would not change the long-steady target for the federal funds interest rate and, more significantly, was launching a new wave of Treasury securities purchases at a price tag of $600 billion. The latter, perhaps intimating the Fed's lack of confidence in a sharply divided and changing Congress to quickly push beneficial legislative changes, is designed to bolster what it admits has been "disappointingly slow" economic growth.

From the Fed release: "Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Voting against the policy was Thomas M. Hoenig. Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy."

Global Regulators on Mission to Downgrade the Ratings Agencies

The "Big Three" credit ratings agencies - Moody's Investment Services, Standard & Poor's and Fitch Ratings - have certainly been active stamping their upgrades and, more likely of late, downgrades on everything from global companies to individual nations. Now, a global panel of regulators and economic officials, many incensed by downgrades of struggling European nations and ratings inaccuracies in the run-up to the global downturn, has struck at the very foundation of the ratings agencies in an organized effort to undermine much of their influence on financial markets.

As predicted in a two-part story in NACM's Business Credit Magazine earlier this year (the July/August and September/October editions), the ratings agencies have fallen into the crosshairs of governments around the world and face almost certain changes, potentially sizable ones, to their business models. The strongest, most united hit against the credit ratings agencies (CRAs) came in an Oct. 27 manifesto from the Financial Stability Board (FSB), an offshoot of the G-20. FSB's "Principles for Reducing Reliance on CRA Ratings" calls for the rapid implementation of a series of standards designed to "reduce stability-threatening herding and cliff effects that currently arise from CRA rating thresholds:"

"The principles aim to catalyse a significant change in the existing practices, to end mechanistic reliance by market participants and establish strong internal credit risk assessment practices instead. The ‘hard wiring' of CRA ratings in standards and regulations contributes significantly to market reliance on ratings. This, in turn, is a cause of the ‘cliff effects' of the sort experienced during the recent crisis, through which CRA rating downgrades can amplify procyclicality and cause systemic disruptions. It can be also one cause of herding in market behaviour, if regulations effectively require or incentivize large numbers of market participants to act in similar fashion. But, more widely, official sector uses of ratings that encourage reliance on CRA ratings have reduced banks', institutional investors' and other market participants' own capacity for credit risk assessment in an undesirable way."

FSB suggested authorities and "standard setters" remove/replace references to CRA ratings in existing laws and regulations, when possible, in favor of alternative provisions as soon as prudently possible.

The effort is bold, definitive and grandiose, though not altogether unexpected. Economic officials in many nations have lashed out at the independent ratings agencies any time they have issued downgrades to nations' credit ratings in recent months. It has a generated a seemingly ongoing war of words in Europe, as the ratings agencies have been particularly hard on the high-debt "PIIGS" (Portugal, Italy, Ireland, Greece, Spain) in 2010. It is worth noting that five of the spots at the proverbial G-20 table are held by European nations of the European Union itself, all of which have publicly criticized the CRAs, and that does not include a pair of nations essentially considered part of the "Eurasian" block (Russia and Turkey).

Brian Shappell, NACM staff writer

Hot Rebound Expected for Commercial Real Estate in Southern Port Cities?

Port cities in or near the Gulf of Mexico have certainly had a rough couple of years thanks to massive fallout from Hurricane Katrina, the BP oil spill and the deep recession. The commercial real estate industry, both regionally and nationally, also hasn't been in a good position since the middle portion of last decade following its well-documented and severe industry correction. However, panelists at the Urban Land Institute (ULI) 2010 Fall Meeting in Washington, DC believe opportunity may be on the way for real estate for said port cities.

Southern ports and dependent industries have become accustomed to negative game-changers affecting them. However, the upcoming completion of the $5 billion Panama Canal expansion project could move the needle significantly in the other direction. ULI Senior Resident Fellow Steve Blank and Author/Consultant Jonathan Miller, who wrote ULI's 2011 edition of "Emerging Trends in Real Estate," said the expansion should help stabilize and grow commercial real estate, especially in New Orleans and Houston, by leaps and bounds. The expansion should cause a surge in shipping trade through the United States, though the usual suspects likely won't be in on the newfound opportunities, they predicted.

"They're not going to the West Coast ports because those ports have all they can handle," Miller said at the conference. "This is actually a very good thing."

It's possible that Savannah, GA could be added to that list as well since, as Miller and Blank noted, nearby Atlanta stands as the "international gateway to the U.S. South." Fortunately for the smaller, costal city, it doesn't have a fraction of the overbuilding problem to contend with as does Atlanta.

Hans Belcsák, president of S.J. Rundt & Associates Inc., and a Brookings Institution report each outlined the impact of the canal expansion, featured in the November/December issue of NACM's Business Credit Magazine, saying it represented a huge opportunity for those ports and U.S. businesses, in general. While neither discounts the impact on West Coast Ports as much as the ULI panelists, each intimates the southern ports stand to gain the most in large part because of increasing opportunities in Brazil. Aided by a growing middle class and hosting of globally high profile events over the next decade (FIFA's World Cup, the Olympic Games), Brazil is expected to surge past its present ranking of tenth among nations receiving exports from U.S. companies, said Brookings. The expansion of the canal allows for far quicker and cheaper shipping between the emerging economic power and a large portion of the United States. And it's not the only major market that will become more accessible as a result of the expansion...far from it.

NACM members can see much more on the Panama Canal expansion and its impact on U.S. Businesses on page 6 of the November/December edition of Business Credit Magazine. Click here to sign in and view an online copy of the magazine).

Brian Shappell, NACM staff writer

GAO Report Recommends Updates to FDCPA

A recent report from the U.S. Government Accountability Office (GAO) urged Congress to update the nation's ruling collection law to account for changes in both the industry and the technology available to third-party debt collectors.

Of greatest concern to the GAO were the problems caused by the dearth of information collectors often have about their targeted accounts. "State and federal enforcement actions, anecdotal evidence, and the volume of consumer complaints to federal agencies-about such things as excessive telephone calls or the addition of unauthorized fees-suggest that problems exist with some processes and practices involved in the collection of credit card debt, although the prevalence of such problems is not known," said the report. "One issue is that collection agencies and debt buyers often may not have adequate information about their accounts-sometimes leading the collector to try to collect from the wrong consumer or for the wrong amount-or may not have access to billing statements or other documentation needed to verify the debt." The report goes on to note that as the prevalence of debt-buying increases, accounts for collection can often be sold and resold, making verification even more difficult as the debt moves further and further away from the original parties.

The FDCPA, enacted in 1977, also lacks provisions that pertain to several technologies now ubiquitous in America's business world. E-mail, voice mail and mobile telephones were all non-existent at the time, and some of the Act's precepts reflect this: the GAO report notes that, in some instances, a debt collector may technically be in violation of the FDCPA if someone other than the debtor overhears a voice mail message revealing the debt collection effort. Other technologies that may have FDCPA ramifications for collectors are caller ID machines and predictive dialers, which can violate the Act's provisions prohibiting harassment by an overabundance of calls.

The GAO's recommendation was for congress to update the legislation to account for both the absence of information and the new technologies now relied on by debt collectors. Additionally, and perhaps more practically, the GAO suggested giving the Federal Trade Commission (FTC) rulemaking powers. When the legislation was first passed, it withheld this authority from the agency, which has limited its ability to address concerns such as the ones listed in the GAO report.

A full copy can be found by clicking here.

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

SBA, Commerce, Treasury Among Agencies Accused of Blocking Independent Watchdogs

Two high-ranking Republican Senators recently criticized 13 federal agencies for hamstringing their own respective inspectors general (IGs), who serve as the agencies' independent watchdogs.
Following the results of an April survey of 69 federal inspectors general, which asked whether they had encountered any interference from the agencies they were charged with monitoring, Senators Chuck Grassley (R-IA) and Tom Coburn (R-OK) recently issued letters to the 13 agencies whose IGs suggested that they had received a lack of complete cooperation, whether in the form of blocked access to information or bureaucratic barriers that impeded effective investigations. Among those agencies receiving letters were business and financial divisions like the Small Business Administration (SBA), the Department of the Treasury and the Department of Commerce.

"Inspectors General can't conduct effective oversight of tax dollars and programs when the very agencies subject to the oversight impose delays, red tape, and roadblocks," said Grassley. "To let this continue in the executive branch is letting the fox decide who gets in the henhouse."
The letters asked each agency head to explain some of the more serious allegations leveled by the IGs in their responses to the original survey. Among them were allegations that the SBA's IG encountered significant delays on 13 projects, even having to request the same information over 16 times per project and experiencing delays in excess of 11 months. The Senators' letter to the Treasury also outlined an instance where an IG was denied unrestricted access to information from the Office of the Comptroller of the Currency (OCC) for use in investigations of possible fraud by failed financial institutions, while the letter to the Commerce Department accused the agency of broadly "filtering" the IG's access to information.

"Good government starts with good oversight. When officials block investigations they do nothing more than protect the people and processes that waste billions of taxpayer dollars every year," said Coburn. "Inspectors General are the unsung heroes of Washington. Every day they fight battles to save taxpayers money. Officials who would deny them the documents and information they need to prevent waste, fraud and abuse, are doing the American people a great disservice and cannot be called public servants."

The other agencies receiving letters were the Department of Homeland Security, the Department of Transportation, the Department of Education, the Environmental Protection Agency, the General Services Administration, the Internal Revenue Service, the Library of Congress, the National Labor Relations Board, the Social Security Administration and the Department of State.

Jacob Barron, NACM staff writer

(UPDATED) Fed's Beige Book: Concern or No, Economic Growth Continues

The talk of the last couple of months in economic spheres revolved around growing concern that the United States will decline into a double-dip recession in the near future. However, the Federal Reserve's latest study indicates such a scenario has not reared its head in recent weeks and that growth continued, "albeit at a modest pace."

The Fed's Beige Book report, tracking economic conditions in each of the nation's 12 banking districts, found continued, though in some areas sluggish, growth in the economy from September through early/mid-October. Leading the way for the U.S. economy continues to be the manufacturing sector. Seven of the 12 districts reported aggregate gains in production and/or new orders "across a wide range of industries." Three others remained at or near August levels, while only two districts (Richmond and Philadelphia) found easing in the sector. Still, new job openings in the sector remained few and far between as companies try to do, as the cliché goes, more with less. Inventories also are considered "generally light" for most firms to keep costs down during what has been a slow rebound.

The agricultural sector also performed over the last six weeks or so. The seasonal harvest "was generally ahead of its normal pace, and above-average yields were expected in most reporting districts," according to Beige Book. One could expect even more optimism from the sector because of an increase need for U.S. exports in struggling ag nations such as Canada and Russia, the latter of which sustained massive damage from uncooperative weather and farmland wildfires in recent months.

Commercial real estate problems continue to be noted, especially escalating vacancies and subsequent reduced rental rates. Still, there have been pockets of optimism on the commercial real estate side with bumps in leasing around the Richmond, Chicago and Dallas districts. Fed contacts in the latter two also reported a rising trend of investor demand for distressed commercial properties, perhaps foreshadowing long-awaited stabilization.

Bank-to-business lending also remained somewhat stymied as demand for loans continues to be low. Postponements of capital spending continued at most businesses because economic and political uncertainties.

District 1 -- Boston
Building on success during the first two quarters, continued positive sales growth was a leading story throughout New England. The semi-conductor industry was rolling in part because of strong overseas demand and a bump in the U.S. automotive industry. Some in the industry did carry a slightly less optimistic view of potential in 2011. Commercial real estate was mixed in the district: Boston vacancy rates are trending up for office space and down for apartments; Portland leasing volumes were stable; and Providence appeared more upbeat than most on increased stability and prospects.

District 2 -- New York
Commercial real estate rental rates held “mostly steady” in most parts of the region, save fo r a small decline in Manhattan proper. This was somewhat surprising given the Fed’s report of widespread, though small, increases in vacancy rates. Meanwhile, credit standards tightened for business loans, which could be of little consequence at present since loan demand, especially from small and mid-sized businesses, remained rather low.

District 3 -- Philadelphia
Philadelphia was one of only two districts that reported a decrease in manufacturing shipments and/or new orders. The industry was optimistic that conditions will strengthen within the next six months. Only one in five businesses expected market deterioration through early 2011. Fed contacts noted business loan demand was “incredibly weak,” and those with credit lines are using them less than normal. In the meantime, credit quality continued to improve among borrowers based in Greater Philadelphia. Those in commercial real estate can’t say the same as the industry remained in a largely stagnant period.

District 4 -- Cleveland
Several contact in the region noted double-digit increases of production on higher order demand. It appeared much of the bump in demand comes from abroad rather than in the U.S., including in the areas of auto and heavy equipment. Commercial real estate was little changed from the last period or even September 2009. New hiring in most industries remained flat or dropped, though a seasonal uptick in holiday season workers naturally was expected.

District 5 -- Richmond
Richmond is the other district to report a notable decrease in manufacturing activity. With industries dependent on consumer spending and optimism, such as the textile and residential real estate product industries (windows, doors, etc.), there clearly was less need to produce. Lending activity, even to some smaller businesses, appeared to be shifting from community banks to larger-sized, better capitalized counterparts. Commercial real estate activity stayed “weak,” in part because contractors are having problems garnering credit from local lenders.

District 6 -- Atlanta
The pace of new commercial construction and renovation, size of backlogs, demand for rental properties, price points and outlook for real estate all dropped again in the region. Both loan demand and district banking conditions were weak, as well. Modest manufacturing increases are planned in the short-term, in part because of international shipments.

District 7 -- Chicago
After a slump during the summer, manufacturing activity rebound by September. It actually was the best month of the year for several metals manufacturers. Mining and medical equipment businesses flourished, as well. Vacancy rates started to stabilize in most of the district on slight improvement in demand for some industrial and retail spaces. Business loan demand remained steady and credit conditions gradually improve. Still, credit availability for small business has become a source of concern. Agriculture did well during the early part of the period with strong harvest-time yields. However, activity slowed more recently, especially in part of Iowa and Wisconsin, because of heavy rains.

District 8 -- St. Louis
Few portions of the region reported any improvement in commercial property sales, vacancy rates or potential for new construction. Bank loans to businesses decreased again in September/early October, though at a miniscule rate. Planned plant openings and expansions far outweighed the scattering of manufacturing business struggles. Expanding industries in the area include those producing motor vehicle products, plastics, transformers, frozen food and detergent. Largely because of the ongoing housing downturn, production was down in the appliance and furniture manufacturing areas. Agriculture advanced well ahead of the usual pace on near perfect harvesting weather. However, subsequent drought conditions loom.

District 9 -- Minneapolis
Already slow commercial real estate demand receded further in September. Fed research indicated about 20% off all office space and 8% of all retail space was vacant at summer’s end. Manufacturing was up on gains at producers of jet engines and parts, fishing tackle, dental products, metals and beds. Wet weather put the brakes on the agricultural sector somewhat though district crops “were relatively large and in good condition.”

District 10 -- Kansas City
Manufacturing experienced a mild rebound on higher demand for factory-made products. Commercial real estate remained on the downturn, and expectations for the near future aren’t optimistic. Just about every category of commercial real estate struggled. Loan demand remained somewhat steady, with a bump in applications from businesses. Agriculture, especially corn and soybean crops, performed well through the most recent six-week Fed tracking period.

District 11 -- Dallas
High-tech and petrochemical product manufacturers reported strong growth domestically and increased interest abroad, especially in China. Production of cement, lumber and fabricated metals remained somewhat flat on economic and geopolitical concerns. Little to no speculative construction occurred, though contractors remained busy with hospital and education-related work, Fed contacts said. Loan demand and activity grew, thought the most significant acceleration was for the purpose of auto purchases by consumers. Tropical Storm Hermine was actually seen as a positive, looking forward, because it improved soil moisture for much of Texas.

District 12 -- San Francisco
Technology and semiconductor manufacturers saw another period of growth, though the pace appeared to slow slightly. While overall manufacturing remained up, there are notable problems for metal and wood production. Commercial real estate vacancies remained very high though there are signs in a decrease in total space availability. Business credit applications in the district summed up the conditions in that sector for most of the districts: “Demand continued to be restrained by businesses’ cautious approach to capital spending and desire to deleverage.”

Brian Shappell, NACM staff writer