Congress Fires Shot Across China’s Bow

(Editor's Note: See more coverage on China-U.S. trade row, including the take on the topic at the FCIB International Round Table in New York, in the latest edition of NACM's eNews. Click here to view).

(Business Intelligence Brief) This may not be the most apt analogy though - this is perhaps more akin to putting a stick in a hornet's nest given the likely reaction from China. At this point, the vote from the House of Representative was 90% campaign politics and 10% real trade strategy.

The vote was overwhelming and was indeed bi-partisan but there was no overt support from the White House and the Senate is not likely to pass a companion piece of legislation. As symbolism, it was important in that is showed just how unpopular China is in the US today. The reactions from China were predictable - angry denunciations of the action and threats to place limits on trade. The standoff is the same as has existed for the last several years and there is nothing in this gesture that will really alter the situation in either nation.

The Chinese clearly manipulate the value of the yuan to ensure that it does not interfere with their export centric economy. They are hardly the first nation to manipulate the value of their currency and they will certainly not be the last. Japan recently took direct steps to weaken the yen as they became concerned about the impact its strength was having on their exports and this move was far more interventionist than the actions taken by China. The point is that nations manipulate their currency values and probably always will. Some of the techniques are more subtle than others - China is pretty blunt in that it simply pegs its currency to the dollar but every nation affects the value of its currency through the interest rates set by its central bank.

What makes the issue with China so emotional is that Chinese exports have become so ubiquitous and so many US companies have been affected by the competition from Chinese business. The low value of the yuan is an important factor in making Chinese goods cheaper but it is hardly the most important. China has many trade advantages that go far beyond the yuan value - low wages, low production costs, subsidies for exporters, a fully fledged trade infrastructure, cooperative banks and so on. Even if China allowed the yuan to appreciate, the country would still enjoy substantial trade advantages.

Analysis: The actions by the House were designed primarily for domestic consumption. Voters are angry and the last thing they want to hear is that their Congressmen are favoring China over the companies in the US that could be hiring. The challenge to this kind of strategy is that the Chinese are not without their own ability to react. The most obvious method is to cut off access to the Chinese market and this tactic has been used often. Suddenly a US company is shut out of the one of the fastest growing markets in the world and that costs jobs. China has longer term influence as well and this poses a greater threat.

The Chinese have purchased close to $1 trillion in US debt - almost 30% of all the debt the US has sold in overseas markets. The US remains dependent on China as far as debt purchase is concerned - at least as long as the US wants to avoid addressing its budget crisis through higher taxes and cuts in spending. The fact is that Congress could actually send a pretty effective message to the Chinese. If the members of the Senate and House actually addressed the deficit with some sober attention to actually balancing the budget, the US would not need to finance its obligations by selling to the Chinese and that would allow the US to regain some leverage in these trade disputes. But it seems to be easier to just stomp one's feet and complain.

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

Swing State's Capital Spiraling Toward Bankruptcy Filing

Pennsylvania's state capital, long rumored to be on the brink of Chapter 9 bankruptcy appears closer than ever to the brink after rejecting the mayor's suggestion to appoint a state-funded advisor in lieu of seeking guidance on officially filing. Though a point of fierce debate among city policy-makers, the City Council's vote this week to seek advice on filing bankruptcy seems a death knell for those hoping to avoid the dubious fate.

Earlier in the month, Pennsylvania Gov. Ed Rendell (D) hurried state aid to the city to avoid default on debt service despite the governor's long-held opposition to Harrisburg seeking bankruptcy as a solution to its massive budget woes. Harrisburg, PA took multiple hits to its credit rating earlier this year largely because a plan to renovate a trash incineration plant for the city went array. The project came with more than $200 million in debt it guaranteed for the retrofit project, and several officials have argued they have few options short of doubling property tax rates or fire-selling city-held assets
In an interview with NACM earlier this year, Moody's Senior Economist Ryan Sweet said the well-publicized problems have potential to add to the ongoing crisis of confidence.

"The initial impact is a psychological one," said Sweet. "Businesses will be very worried about future taxes in these areas. It could deter some investments if they think taxes are to rise unexpectedly." He adds such uncertainty also could give businesses cold feet regarding adding to payrolls with new or returning employees.

Sweet says cities like Harrisburg are in an even more unenviable position because of budget woes at the state level. Because of its own deficit, Pennsylvania state officials have all but told its capital city that it won't be able to ride to the rescue financially, even if it did throw them a lifeline two weeks ago.

"It puts the city economically at risk of a much weaker recovery," Sweet says. "Harrisburg is very reliant on state government as an employer. They have a few other divers, but they're all pretty much dwarfed by the government's role in the economy."
(Note: More bankruptcy updates on Philadelphia Newspapers LLC, Circuit City and Blockbuster in this week's NACM eNews, out Sept. 30th).

Brian Shappell, NACM staff writer

President Obama Signs Small Business Bill

President Barack Obama has signed into law a bill designed to help U.S. small businesses through tax cuts and a government-run loan pool The effort and its timing were seen as crucial for Democrats who pushed it in advance of an October recess for lawmakers to finish campaigning ahead of the upcoming General Election.

Months after the House passed a similar aid package for U.S. small businesses, the Senate followed suit thanks to a pair of Republicans who broke ranks not only by voting to end debate on the matter on Sept. 14, but for the legislation as well.

Just as in a previous vote to limit debate on the Small Business Jobs and Credit Act of 2010 (H.R. 5297), the Senate passed the bill with 61 votes in favor. Months of partisan-fueled idling for the bill ended just two days prior when a pair of Republicans-Sens. George Voinovich (OH) and George LeMieux (FL) - joined Democrats in an effort to end debate and move toward a quick floor vote.

Its framers said the cornerstones of the bill include an array of tax cuts and the establishment of a $30 billion lending fund which would provide capital to small, viable community banks to increase lending to smaller firms. The fund is designed to be performance-based and would incentivize those lenders that extend new credit by decreasing the dividend rate banks pay as they increase lending. The legislation was also purportedly designed to be deficit-neutral and potentially reduce the tax gap. It is widely held Democrats believed they needed this legislative effort to move forward to combat talk of a lackluster economic rebound, especially for badly struggling American small businesses.

Most Republicans argued against the measure as government intrusion on free markets and another costly measure on top of previous efforts. Part of the vitriol attached to the legislation could be traced to an early move by the Democratic leadership in the Senate to place strict limits on the GOP's ability to offer amendments on the proposal as well as the jockeying on the part of the increasingly divided parties leading up to a one of the more hotly contested general election in recent memory.

Brian Shappell, NACM staff writer

Fed’s 'Extended Period' of Rock-Bottom Rates Continues

The Federal Reserve again appeared unwavering in its belief that the sputtering pace of the economic rebound necessitates an "extended period" of historically low interest rates. The Fed's Federal Open Market Committee left the target for the federal funds rate at a range between 0% and 0.25% following its policy meeting Tuesday.

The Fed's statement again acknowledged the recovery is stalling somewhat after months of holding a more optimistic view. Still, it has little room to maneuver on rates because of how low they already are. And though the Fed announced plan to purchase another $5 billion in Treasury notes earlier in the week, a move designed to help keep longer-term rates low as well, an announcement of additional purchases did not come in the Fed's Tuesday statement. Fed officials did leave open the door to do so at a later date, pending in part on employment figures in the upcoming weeks and months, a growing concern.

The Fed also hinted at growing concern regarding unemployment's subsequent impact on consumer spending/confidence, anemic conditions in commercial real estate and business spending that, while growing, is doing so at a slower pace than earlier this year. Committee member Thomas Hoenig continued to object with leaving the rate unchanged, voting against doing so in favor of an increase to enable the Fed to make a future downward adjustment if and when its impact is more badly needed. Hoenig, contrary to most of the voting membership, also believes inflation indeed should be considered more of a looming threat sooner than his colleagues believe.

Meanwhile, as a number of experts have started beating the drum that extended low rates could lead to deflation. Still, such a scenario remains though unlikely unless consumer plummets in upcoming months.

Brian Shappell, NACM staff writer

What to Do with “Addicted” European Banks?

(Business Intelligence Brief) The European Central Bank (ECB) has a problem. That is any understatement of course as they have many problems. This, more vexing one is that the ECB has propped up some struggling banks in the most troubled nations in the Eurozone over the last few years and now these banks have become utterly dependent and its support.

They have been referred to as the "addicted banks" as they have no way to raise additional capital beyond what they can get from the ECB. Presently, the ECB is loaning about $800 billion annually, down from over $1 trillion last year, but 61% of that total is going to banks in four states -- Greece, Ireland, Spain and Portugal -- whose GDP accounts for less than 18% of the Eurozone total. These banks have become a major drag, and there appears to be no good way out of the dilemma. It had been hoped that all this EB support would have been enough to engage the private sector but, thus far, these banks are still financial pariahs.

The banks using these ECB loans to simply sustain liquidity are in the worst shape, and it is not at all clear how this dependency can be altered without collapsing these banks. The ECB wants to end most of these loan programs in 2011, but that may not be possible without some legal manipulation. The fear is that banks that are separated from the others due to their liquidity issues will be sentenced to death, thus creating significant problems in the affected nations. At the moment, the most troubled banks have been able to hide behind the ECB support system with their weakness suspected almost exclusively by the investment community. There assumption exists that they can continue functioning as long as the ECB spigot remains open. However, if the weakest banks are denied full engagement in the auction of these loans, they will lose whatever access to private capital they had, and their demise will be imminent.

If the ECB allows these banks to go under, they solve one issue at the expense of another as this will cripple the banking system in the most economically challenged Eurozone nations. The problem just shifts to another set of institutions, and more pressure is brought on the Eurobond system that has been set up to address the financial crisis in these states. It is a classic Catch-22. If the ECB doesn't do something to fix the banks, the investors will lack the confidence they need to get engaged in these economies, but the only fix available is likely to make the investors more nervous than they are now.
Analysis: There are a host of other issues at play. Some of the latest developments are positive and others more neutral. The most positive news is that the Eurofund established to deal with all this has earned triple-A ratings from all three of the main agencies. Additionally, the European Financial Stability Facility is strong in the event any of these nations have to turn to it for survival. This is very likely in the case of Greece and, to a somewhat lesser extend Portugal and Ireland, which is looking far weaker than in previous assessments. The nearly $1 trillion vehicle is half backed by the European nations and half by the International Monetary Fund. For a while, it appeared the ratings would be less than stellar. It now looks certain that the Germans will play their role, leading to improved confidence in the system.

The other development that will play into all this is the decision to delay the stress tests for the Greek banks. Few expected the majority of them to pass the test, and it seemed to serve no real purpose to impose restrictions that were unlikely to be realistically met. The delay also suggests that conditions are just starting to improve and that given some additional time they may be able to make changes that allow them to squeak past inspection.

Chris Kuehl, NACM Economic Advisor and Co-Founder of Armada Corporate Intelligence

UPDATE 9/22/10: Small Business Bill on to President

Months after the House passed a similar aid package for U.S. small businesses, the Senate followed suit thanks to a pair of Republicans who broke ranks not only by voting to end debate on the matter on Sept. 14, but for the legislation as well. The bill, now on the way to the White House for likely signage, could be inked into law before month's end, when Captiol Hill politicians return to their states and districts for the last month of campaigning in an intriguing and increasingly heated 2010 General Election.

Just as in a previous vote to limit debate on the Small Business Jobs and Credit Act of 2010 (H.R. 5297), the Senate passed the bill Thursday with 61 votes in favor. Months of partisan-fueled idling for the bill ended just two days prior when a pair of Republicans-Sens. George Voinovich (OH) and George LeMieux (FL) - joined Democrats in an effort to end debate and move toward a quick floor vote.

A conference committee's final version reconciling the House and Senate versions of the package was completed this week and passed onto the President Barack Obama on Thursday. The reconciled version almost surely would be signed by Obama in rapid fashion even though H.R. 5297 does not include a plan unveiled last week by Obama to allow small businesses to write off 100% of their new investment in plants and equipment through 2011.

Its framers said the cornerstones of the bill include an array of tax cuts and the establishment of a $30 billion lending fund which would provide capital to small, viable community banks to increase lending to smaller firms. The fund is designed to be performance-based and would incentivize those lenders that extend new credit by decreasing the dividend rate banks pay as they increase lending. The legislation was also purportedly designed to be deficit-neutral and potentially reduce the tax gap. It is widely held Democrats believed they needed this legislative effort to move forward to combat talk of a lackluster economic rebound, especially for badly struggling American small businesses.
Most Republicans argued against the measure as government intrusion on free markets and another costly measure on top of previous efforts. Part of the vitriol attached to the legislation could be traced to an early move by the Democratic leadership in the Senate to place strict limits on the GOP's ability to offer amendments on the proposal as well as the jockeying on the part of the increasingly divided parties leading up to a one of the more hotly contested general election in recent memory.

There are also several small business advocacy organizations who openly questioned whether the legislation, as it is written, will actually lead to real job creation and tax savings for said companies.

Brian Shappell, NACM staff writer

Updated 9/28/10: New Boss in Philly Newspapers Bid Same as Old Boss

For the second time since April, a group of investors spearheaded by Angelo, Gordon & Co. has won an auction to purchase the assets of Philadelphia Newspapers LLC, including the Philadelphia Inquirer and Daily News. The latest bid was made on Sept. 23 and is worth about $105 million, well below the $139 million April agreement with the lenders, now operating under the name Philadelphia Media Network.

Although more than a dozen other unions tied to the production of Philadelphia's largest yet financially strapped two newspapers renegotiated labor deals with a potential new ownership group, the decision to dig in by a union representing the former publisher's delivery drivers scuttled the previous purchase. After passing a second deadline to complete negotiations between Philadelphia Media Network and the former owners of the Philadelphia Inquirer and Daily News (Philadelphia Newspaper LLC) without a deal with a local Teamsters Union, the purchase fell through. Lenders opted to back out of funding the deal after the union refused to budge on issues that included pension program changes. Philadelphia Media Network had come to terms with no less than 13 other unions tied to the publishing outfit since its April agreement to purchase Philadelphia Newspaper's assets for $139 million.

U.S. Bankruptcy Judge for the Third District Stephen Raslavich, who barred Philadelphia Media Network from using a controversial but very common credit bidding tactic to purchase the newspapers and other assets in April, ordered the subsequent Sept. 23rd to be a cash-only, "as is" purchase that would need to be settled by mid-October. The Angelo, Gordon & Co. group won again. Raslavich had extended the original deadline for Philadelphia Media Network to settle terms with unions by two weeks after the original deadline of Aug. 31st was reached without deals with at least three unions. It appears unlikely the judge would want to do so again.

The new owners likely will face similar troubles in renegotiating the Teamsters union contract and, perhaps more importantly, industry problems that include lower readership, escalating costs and online, often free, advertising vehicles that take away from traditional newspaper revenue streams. Bruce Nathan, Esq., Lowenstein Sandler PC, said newspaper ownership old and new will continue to face a tough road:

"They need to revamp their product for the long-term. But frankly, it's expensive and very challenging and the ad revenues are not the same." Nathan predicated that with so many companies being overleveraged financially, it means some publishers simply "don't have the time" to update their business models in order to survive.

Brian Shappell, NACM staff writer

China Welcoming, Warning United States on Trade, Currency

In one breath, Chinese officials seem to be telling the United States that it would welcome more American products into the nation, but in another, an economic expert at a state-run think tank warns the United States would making a serious mistake by starting a "trade war" over currency valuation and the rising trade divide between the powerhouse nations. Either way, trade relations between the nations appear increasingly strained, perhaps in part from increased political posturing in the national election run-up and the newfound harder stance from U.S. Treasury Department officials on China's currency flap efforts.

National Development and Reform Commission Vice-Chairman Zhang Xiaoquiang said this week that China would welcome an increase in imports from the United States. The news followed a recently renewed anger among Washington policy-makers of the undervalued yuan giving the Chinese a decisive trade advantage and news that the nation's trade surplus hit its second highest level on record in August.

However, as the Conference Board's Ken Goldstein pointed out, Chinese officials never said whether there is actual Chinese consumer demand for the products that would be allowed in at a greater rate or if they'd actually be "allowed" to purchase them. Goldstein chalked up Xiaoquiang's attempt to extend the olive branch as yet another example of Chinese officials "blowing smoke." Moreover, Xiaobing Shuai questioned whether or not the eased importing would affect many sectors of U.S. production in the first place.

"China has traditionally used its purchasing power to make a statement---but those are mostly one-time deals and only benefit a small set of industries, such as airplanes or advanced machineries," said Shuai. "They need to purchase those products anyway, and they normally shift between U.S. and Europe depending on the political environment. I wouldn't count on it to accelerating the recovery."

Meanwhile, Chinese policy expert Ding Yifan, of China's Development Research Center, warned that China could initiate a selloff of its U.S. Treasury holdings, causing a surge in domestic interest rates, as the result of a American-initiate "trade war." Yifan admitted the move would be drastic, but increasingly likely if U.S. lawmakers make a hard push to enact sanctions against the Chinese government over the currency. Though such a move by the Chinese would have a significant impact, most believe the predictions and warnings are more likely a thinly veiled economic bluff.

"I think it is just rhetoric [and] posturing," said Shuai of the expert's prediction/warning. "I actually think China relies on U.S. consumer markets more than they admit. If the U.S. started to add taxes on China's imported goods, millions will lose jobs in China. Eventually some compromise will be made."

Brian Shappell, NACM staff writer

Beige Book Indicates Growth Rate Tapering Off

Economic growth from mid-July through the end of August continued in much of the nation, but the pace of such growth decelerated quite noticeably according to a newly unveiled Federal Reserve report.

The Fed's Beige Book roundup of conditions in 12 regions of the nation acknowledged widespread signs that growth levels continue to disappoint from previous rebound predictions for mid-2010 and some areas' levels slowed significantly. The slower pace of growth was particularly noticeable in manufacturing, which had outperformed several other sectors throughout much of 2010. Commercial real estate construction, which didn't have such favorable news early in the year, continued to drag on economic growth.

District 1 -- Boston
The New England area was among one of the more upbeat in recent weeks on improvements in the manufacturing and technology fields. There was even talk of near-term job growth on the way this year in and around Boston. Nearly all manufacturing contacts of the Fed in the area reported favorable results for the second quarter, especially in the pharmaceutical and semiconductor sub-sectors. In commercial real estate, however, pessimism still exists even as leasing activity remained weak and largely unchanged.

District 2 -- New York
Previous improvements in economic growth in the second district fell off a bit in July and August. Commercial real estate vacancies were stable for the most part, but rents were well off levels from one year ago in key parts of the region -- Manhattan, Long Island and northern New Jersey. Additionally, commercial lending standards tightened noticeably even as demand subsided yet again. What had been widespread improvements in manufacturing for much of the year have leveled off or almost vanished.

District 3 -- Philadelphia
Philadelphia demonstrated more mixed economic conditions during the period than its counterparts in districts one and two. Manufacturers reported small declines in new orders and shipments, overall. There was, however, an uptick in demand for wood, food, industrial and measuring/testing products. Demand for business loans remained quite low even as credit quality therein showed improvement, said Fed contacts. Little change in slow commercial construction conditions, or optimism for improvement for that matter, was reported.

District 4 -- Cleveland
Previously stagnant economic growth improved mildly on aggregate. There were reports of marginally lower orders in recent weeks. However, there were also a few contacts reporting double-digit production increases. Some improvement, from very low levels, was reported in inquiries regarding new commercial projects. Still, most activity was tied to industrial and educational needs rather than office and related space. Business-related borrowing remained soft, though there were hints of increased interest on the way.

District 5 -- Richmond
More evidence of slowing growth rates became apparent by August. While overall manufacturing activity was up, most of that was relegated to the early portion of the Fed tracking period. Still, there are areas where improvements continued solidly, primarily for some chemical and packaging manufacturers. Weak banking conditions did not change, especially among small business customers. Meanwhile, more downward pressure on rents amid growing vacancies was reported by commercial real estate contacts.

District 6 -- Atlanta
Like its northern counterpart, sixth district growth receded in July and August. Amid high vacancy rates and little negotiating strength on rents, commercial real estate confidence going forward was bleak. Fed contacts reported businesses with credit lines refused to use them because of unfavorable terms. Even expansion in manufacturing, though continuing, saw the pace downshift.

District 7 -- Chicago
Fed contacts showed cautious optimism despite "moderated" growth. Business spending actually continued at "a steady pace," though inventory rebuilding is off last year's pace. New commercial construction interest remained muted, though an increase in commercial redevelopment appeared to gain steam. Manufacturing growth rates slowed, though Fed contacts admit it was hard to accurately gauge how much conditions softened during the period. The district did export heavily, though, especially among companies doing business in Asia and South America.

District 8 -- St. Louis
Modest growth was the story of this district. Manufacturing continued to hum along with the opening and expansion of plant operations there. Among industries planning expansion in the district were those in automotive, glass and aerospace products. Commercial real estate demand was a city-by-city situation for the period. Vacancy rates decreased in Little Rock and Memphis but grew in Louisville and St. Louis. However, "the pipeline for new projects is lean." Credit standards and demand were stable.

District 9 -- Minneapolis
Most areas of the economy saw growth during the period, with two blatant exceptions being residential and commercial real estate. Commercial permits were well off last year's already slow pace in markets such as Fargo, ND and Montana. Vacancy rates were at a record high, as well. Manufacturing, however, improved on last period's strength and even long-struggling labor markets saw a positive uptick during the period.

District 10 -- Kansas City
Growth was described as "modest" during the period. Though commercial construction woes finally eased somewhat, manufacturing stagnated, and factory orders dropped. Ongoing problems with the housing market were an even bigger story. Still, bankers reported stability in overall loan quality as well as demand from borrowers, which increased earlier in the summer.

District 11 -- Dallas
Energy, transportation and staffing firms were among the areas tied to the most growth in recent weeks. Mixed manufacturing sector performances were expected to give way to a late-year slowdown in the Southwest. Demand for "high-tech" products held steady, though. The lack of private nonresidential construction was very noticeable, said contacts. The primary source of construction activity is attached almost solely to public projects. Meanwhile, business-based bank borrowing decreased again amid perceived widespread pessimism.

District 12 -- San Francisco
Manufacturing activity continued to grow, with best returns coming from semiconductors and technology product-makers. Elevated vacancy levels continued to weigh on demand for commercial construction. Banks reported loan demand dropped, especially among businesses that simply appeared uninterested in all but the most necessary capital spending endeavors.

Brian Shappell, NACM staff writer

South African Workers Strike Ends, But is the Damage Permanent?

The widespread and, at times, ultra-violent public workers strike in South Africa effectively ended Tuesday after nearly three weeks. Now comes what may be the even harder parts: recapturing some of the international business capital the nation gained during a successful hosting of the World Cup earlier this summer and creating some type of stability in the nation that won't scare off business and investment opportunities.

Predictions are piling up that what may have been an ill-planned public workers strike has destroyed much the gains South Africa made during the World Cup. The concern is that investors and businesses will be scared away from activity there because the illusion of stability that had become apparent earlier this year was just that: an illusion. The nation's largest labor union, the Congress of South African Trade Unions (COSATU), spearheaded a lengthy public workers strike on August 18 after the government balked at demands for a pay raise of 8.6%, more than twice the rate of inflation. The violent nature of the strike rose to a level far beyond what was seen in Greece earlier this year or during the almost expected annual "strike season" periods in South Africa itself.

COSATU eventually called off the strike amid negotiations of a new labor deal with the South African government as bad public relations was mounting amid deaths at understaffed hospitals and multi-billion-dollar economic damage to a nation that had struggled, like many worldwide, with a deep recession in recent years. It did so even as many of the rank-and-file workers - apparently angered at both the government AND its better-paid union leadership - balked at the idea because the government's offer did not rise to THE union's original demands.

Mekael Teshome, associate economist with Moody's, predicted there are certain to be short-term ramification of the strike, but does not believe the recent events truly hold the key to South Africa's economic future or strip away all of the international goodwill gained from World Cup. Among other factors, Teshome says unrest is almost expected for those paying attention to labor happenings in the African nation over recent years.

(Editor's Note: To see full story, with more analysis from Teshome, check out NACM's upcoming edition of eNews, which will be available at on Thursday.)

Brian Shappell, NACM staff writer

Good and Bad News in the Auto Sector

(Business Intelligence Briefs) The good news is that automakers are getting better and better at making cars efficiently. The last two years has forced changes on almost every company that makes vehicles, and most have responded with innovations and improvements that would usually have taken years, perhaps decades, to introduce under better conditions.

With their financial backs to the wall, the carmakers have been forced to make up for lost sales with ruthless business efficiency. The Chrysler tie to Fiat has meant the company has adopted the Italian system that turned Fiat around in Europe, and this was accomplished in less than a year. GM and Ford are both well into their five year plan of efficiency, not to mention ahead of schedule. New models are coming out sooner than anticipated, and there has been serious development of the in-demand alternative fuel vehicles. The same process has been underway with Toyota, Nissan, Honda as well as the other Japanese and Korean automakers. From a strictly manufacturing perspective, these are good days in the automotive sector. If only the consumer was responding with similar enthusiasm.

This is the bad news part. As expected, the markets dried up after the incentives expired, and the latest numbers look pretty grim in comparison to what they were a year ago. The "cash for clunkers" program was in full swing in August of last year, making this August look anemic. On average, sales in the industry fell by about 21% from a year ago. This decline surprises few as the incentive pattern has been experienced in many industries, notably housing, during the last year. The more important number in 2010 is the month-to-month comparison, which remains pretty steady. Sales in August were about 5% lower than in July, a normal occurance given the time of year.

Analysis: There are a couple of indicators giving the automotive manufacturers some hope for the rest of the year. The first is that luxury cars are starting to sell better than they have for the past two years. Mercedes and BMW have seen increases of around 15% from last year, and there are similar numbers for Lexus, Infiniti and Cadillac. These are the brands that sold scantily during the "cash for clunkers" period. The demand now is related to a willingness on the part of lenders to take some risks with these consumers.

That is the second piece of good news for the sector although the manifestation of bank interest is still very spotty. Banks are slowly coming out of their hibernation and at very different rates throughout the country. The willingness to lend is nearly entirely based on the situation the bank itself faces. More and more, community banks are getting engaged, and that has been good news for dealers in those parts of the country.

The anticipated harvest this year will be good news for dealers in farm country. The expected profits from high commodity prices will allow farmers to replace equipment, and there are reports from many parts of the agricultural community that suggest that farmers will be buying a lot of new trucks and cars in the months ahead. That is part of the overall awakening of consumer demand. The dealers are noticing more shoppers, more attendance at car shows and signals that demand is waking up. Now comes the challenge of matching want with the ability to get a loan and make the payments.

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

Updated 9/8/10: Not (as) Bad News: Newspapers Getting Help in Bankruptcy Proceedings

Though attempts to reemerge from bankruptcy by the new owners of Philadelphia Newspapers LLC's assets and the Tribune Company have seen their share of obstacles, both got news in the last week that they'll each be getting something they respectively need: time and help.

Philadelphia Media Network Inc., which bought the Philadelphia Newspaper's assets including the Philadelphia Inquirer and the Philadelphia Daily News, had until Aug. 31 to finalize the $139 million purchase, which required approval by 14 unions tied to the publications, agreed to following a Spring auction. That date came and went, which originally was thought to be a potential death knell. However, Chief Bankruptcy Judge Stephen Raslavich extended the deadline by two weeks, to Sept. 14, late in the game.

Though it was thought that the dominos would fall into place with its agreement with the Philadelphia Newspapers Guild, which included concessions such as pay cuts and an agreement not to continue an appeal to disallow the sale, two of the 14 unions tied to the publications remained holdouts.Three unions have made agreements with Philadelphia Media Network in the last week. One of the two remaining holdouts, a Teamsters union representing drivers, is scheduled to vote Sunday. 

Meanwhile, Tribune Co., publisher of the Los Angeles Times and Chicago Tribune among many diverse assets confirmed that a mediator has been brought in to assist with the vitriolic negotiations for its bankruptcy exit. Judge Kevin Gross was appointed to the position by the U.S. Bankruptcy Court for the District of Delaware. It's part of Tribune's attempt to backtrack and build some type of consensus among the various stakeholders after allegations of wrongdoing that included complaints from lower-level creditors.

Tribune watched its plan to exit bankruptcy evaporate in late August. Many creditors originally cried foul over what appeared to be a deal that would leave smaller stakeholders with little to nothing. But even as more eventually came on board with the plan, creditors of various sizes who formerly supported the Tribune's plan to exit bankruptcy withdrew amid widespread allegations that the 2007 leveraged buyout of Tribune, which also owns more than 20 television stations, essentially amounted to a massive fraudulent financial transfer. There were also reports circulating that a group of unsecured creditors would file their own Chapter 11 reorganization plan without the support of Tribune.

More time for Philadelphia Media Network and a helping hand in the form of a mediator for Tribune essentially were necessities for each to move forward. However, the road is far from smooth from here.

Bruce Nathan, Esq., Lowenstein Sandler PC, noted in last week's eNews that many publishing groups like these are facing massive long-term challenges because of overleveraged books, recession-driven decreases in advertising revenue and a shrinking readership and advertising based on various free and/or online options. Nathan called it a deadly combination.

"I mean, I don't even get the paper anymore. I read the [New York] Times online, and I'm an old goat," he said.

Brian Shappell, NACM staff writer

August CMI Shows Modest Recovery Despite a Continued Weak Service Sector

The trend in data this past week was hardly encouraging, resulting in another chorus of pronouncements regarding an imminent return to recession. The housing market remains in the doldrums, GDP numbers were revised down in reaction to the worsening trade deficit numbers and there was a decline in the markets. In the midst of all this gloom comes the latest iteration of the Credit Managers' Index (CMI) and it is looking much like a beacon of hope. Over the last several years, the CMI, issued monthly by the National Association of Credit Management (NACM), has proven over and over that it is somewhat prescient when it comes to bigger economic trends. The precipitous decline in the CMI in June and July 2008 presaged the overall collapse of the economy three or four months later. The index started to gain as early as October 2009, followed by the rest of the economy, which showed some recovery by the end of the year (5% growth for the quarter). Worsening conditions began to appear in the CMI as early as May of this year followed by the economy as a whole in June and July.

"The good news coming from the August CMI is that the index showed some modest recovery, which was more dramatic in the manufacturing sector than in services," said Chris Kuehl, Ph.D., NACM economic advisor. "If the past is any prologue, this may signal some slow improvements in the overall economy within the next month or two. This optimistic assessment is tempered by the fact that the service sector remains weak and, given the size of this sector in the U.S. economy, as a whole remains a significant drag on overall recovery."

The improvement in the index-from 53.0 to 53.3-stems from small adjustments in areas that traditionally signal distress. The number of accounts placed for collection improved, invoking a number of suggestions as to why this is the case. Part of the reason, Kuehl noted, is that many of the weakest creditors have now exited the system-they have folded. There is also some renewed patience on the part of creditors according to survey respondents' comments: a willingness to work with accounts because improved business conditions may be on the horizon. The natural preference is to get paid by a customer and keep them in the system. Having to resort to collection usually means the relationship is destined to deteriorate. There is now a growing sense that patience may be rewarded should the economy stage any sort of turnaround in the coming months.

The fact that business bankruptcies fell a bit is another example of the change felt in the credit community. The weakest customers have already left the system and those that remain generally look strong enough to survive. In sales, there were some small changes in a positive direction and a pretty impressive improvement in dollar collections. Overall, the CMI is consistent with other observations made by economists this week.

Some parts of the economy are doing far better than others. Unfortunately, the down sectors are the bigger drivers in the overall economy-housing being at the top of the list. As is indicated by looking more closely at the CMI manufacturing numbers, the gains are being made in the industries that have been sustaining the economy for most of the last six months. Manufacturing has seen improved performance in sectors related to energy development, health care and, to a lesser extent, electronics. Even automotive has started to show a little improvement and, if recent numbers from the rail sector are any indication, there may be more manufacturing gains in the months to come. "Rail is often referred to as the canary in the coal mine for the economy and carloads have spiked in the last two months, a very good indicator of future manufacturing activity," said Kuehl.
The full report, complete with tables and graphs, along with CMI archives may be viewed at