February CMI Makes Small Gains After Big January

The growth manifested in January has been interrupted. However, the drop in activity in February was not enough to plunge the Credit Managers' Index (CMI) back into negative territory. In fact, a marginal gain moved the combined index from 55.1 to 55.2 and was somewhat anticipated due to the inspiring recent expansion in the manufacturing sector. Still, it feels more like a decline when compared to the big gains made in January.

"Starting in the latter part of 2009, manufacturing sector businesses began rebuilding inventories back to respectable levels; a process the CMI predicted," said Chris Kuehl, Ph.D., economist for the National Association of Credit Management, which issues the CMI report each month. During the depths of this recession, most businesses did everything possible to reduce costs and protect cash flow. For several months, the CMI illustrated this point with reports of worsening unfavorable factors: more disputes, rejections of credit applications and dollars beyond terms. By the end of 2009, the CMI began to show a shift-businesses that owed money started the process of paying down debt in anticipation of needing access to credit in the near future. This shift in attitude has historically shown that expansion begins within a month or two, which is what started to transpire in December 2009 and January of this year.

"The development in manufacturing was matched to a lesser extent by similar movement in the service sector, and other economic indicators added to the notion that something was stirring in the economy," said Kuehl. Fourth quarter GDP numbers for 2009 were up 5.9%, and the Purchasing Managers Index climbed to the mid-50s with new orders all the way up to the mid-60s. "There now appears to be a reversal under way, but it may be more accurate to refer to this as a breather," Kuehl said.

"The first phase in an economic recovery is the replenishment of reduced inventory and there can't be growth without the supply to meet expected demand," said Kuehl. "If there had been no effort to bolster inventory levels, the arrival of demand would have provoked massive shortages, bottlenecks and ultimately inflation. For now, businesses are looking at low interest rates, commodity prices and labor costs. This is the safest time to build that base, but now they have to wait for the second phase-consumer confidence, which remains in the doldrums to an extent."

Conference Board reports show a big drop in consumer confidence because of concerns about the employment situation. At the same time, there are reports coming in from big retailers such as Lowe's and The Home Depot suggesting that consumers are shopping again. The consumer has yet to commit and until that happens, the economy remains in a waiting position.

The CMI shows that sales were flat in February after a major jump in January, but slight increases in new credit applications and the amount of credit extended indicate that credit remains somewhat accessible. Among the negative factors, the biggest changes took place in disputes and bankruptcies. Neither was unexpected: more companies are struggling with debt and will be maneuvering for more time, and the end of a recession is often harder on companies than the recession itself as they start to see pressure from competitors and may not have the ability to respond.

Manufacturing Sector

The most dramatic change in February was in the manufacturing sector where there was a gain in inventory. Decisions to boost inventory happened toward the end of 2009 and while the resulting buildup has taken about three months, there is evidence of slowdown as the suppliers wait for demand. Most of the favorable factors remained pretty solid in February with an increase in sales and a pretty substantial surge in new credit applications. "Unfortunately, dollar collections were down, likely reflecting the fact that many manufacturers are now stretching to get in position for the expected recovery and that has affected their ability to pay," said Kuehl.

The big shifts in the sector took place in the non-favorable items. There were more disputes, dollars beyond terms and bankruptcies. There seem to be different factors at work with each. The bankruptcy situation tends to worsen at this stage in a recovery. "During the depths of a recession, the pressure on business is entirely from the economy itself and almost everybody is in the same situation-just hunkering down to survive and waiting for the economy to rebound," said Kuehl. "Once the economy starts to move, competition within industries becomes a factor-especially for those businesses better prepared for the downturn. Just enough pressure is applied on the weaker competitor that it becomes too much and they are forced to capitulate."

The disputes and the dollars beyond terms seem to stem from some companies getting over-stretched again. They are trying to get in shape to meet expected demand and competitive threats to their market share, but are still struggling with cash flow. Acknowledged tightness in the lending sector is also reducing the options these companies have that would enable them to float further until the demand hits.

The slowdown experienced in manufacturing in February may extend into March unless demand starts to materialize, which appears to be a 50-50 proposition at best at this point.

Service Sector

There was a drop in the service sector this month from 55.0 to 54.8 and January was more anemic than for manufacturing. The service sector is now feeling the effects of a greater number of layoffs. The manufacturing sector, led by construction, has already taken its lumps. There were portions of the service sector that also got hit early-most notably financial services-but retail rebounded in the holiday season.

The biggest drops occurred in sales and new credit applications. "Some of this is expected as consumer spending is generally slow this time of year. This is being exacerbated by more caution in consumer confidence than in past years as reflected in Conference Board data," said Kuehl. "But business expansion in retailers like The Home Depot, Lowe's, Target and Walmart somewhat contradicts these findings."

There were some declines in the unfavorable factors as well, but better news was sprinkled in. The number of accounts placed for collection increased, but filings for bankruptcy improved to the best number seen in over two years. "The good news here is that there are normally a lot of retailers facing bankruptcy after the holiday season. If they were limping into the end of 2009 needing a truly dazzling year to survive, they probably did not get it," said Kuehl. "It seems the purge in retail took place last year and most of the sector has survived to fight for a place in the 2010 sweepstakes."

February 2010 vs. February 2009

The dramatic improvement from year to year is still pretty obvious. February of last year was clearly a period in the middle of the recession, but as the chart shows, this is when conditions started to improve. From this point forward, the gap will narrow. "The index was still well below the 50 mark until September 2009, but that means that within five months, all reflected chart numbers will be above above 50 unless there is an unexpected crash on the horizon," said Kuehl.

Industry, Regulators Bring Push for Small Business Lending to Congress

Following up President Obama's pledge to thaw frozen credit conditions for small businesses, industry panelists and members of the several government agencies push for Congressional support of a new, temporary bailout fund.

Treasury Department Assistant Secretary for Financial Stability Herbert Allison said during a Feb. 26 joint hearing of the House Financial Services and Small Business committees that he believes a new stimulus effort, the Small Business Lending Fund, would attract more participation from reeling community banks than previous programs. He says the new program would not carry a stigma that was attached to borrowing through TARP and would not have the same type of expensive restrictions as TARP that made it difficult for small banks to participate.

Wes Smith, president of Michigan-based E&E Manufacturing, said community banks largely were not helped by previous government stimulus programs that appeared geared toward helping the largest banks.

"When the original TARP came out, the government picked winners and losers...and the small banks were left in the dark with a problem they didn't create," Smith said. Smith, speaking on behalf of the Motor & Equipment Manufacturers Association, added that smaller banks will continue to struggle to make loans because of the many potentially problem commercial real estate loans on their books, which could be alleviated by a government guarantee program, and catch-all draconian regulation that is inappropriate for banks that operate only on community and sub-regional levels. "Banks can't make loans because the regulators are stepping on their necks," Smith said.

Idaho-based Brighton Corp.'s David Turnbull agrees that prospects for small business and commercial real estate liquidity levels are doomed without being able to "offload some of its commercial real estate" from their books.

"Consider this: Without the existence of Fannie Mae, Freddie Mac and the Federal Housing Administration, we wouldn't have a housing market today, and we would be in a full-blown depression," said Turnbull. "The only equivalent we have today for these conduits in the commercial real estate market is TALF - the equivalent of the Fed creating a super-jumbo market for residential real estate while leaving the entry level to median-priced homebuyers dangling with no viable options. It will not solve the problem."

Brian Shappell, NACM staff writer

ACM Merges with NCT to Create United Tranz*Actions

ACM, NACM's world-class payment processor partner, recently announced that it had merged with long-time competitor, National Check Trust, Inc. (NCT), to form a new financial services company known as United Tranz*Actions, LLC, or UTA for short.

The merger will provide NACM members an expanded product line, as well as a strengthened infrastructure to support continued growth and product expansion. "This is a powerhouse solution," said UTA President Dean Middleton. "We are truly a one-stop, fully loaded billing and payment solution."

"Our competitive advantage is that we are able to distribute your statement and invoicing as your customers want it, make those same documents available online and accept payment-all with the click of a mouse," he added.

NCT has historically focused its check guaranteeing services to the automotive industry and the buildings and materials industry, and has done so very successfully, producing an industry leading product in a competitive marketplace. In addition to its check guarantee service, ACM has recently made great strides in the development of its other electronic services, offering credit card processing, remote check deposit with no NSFs, electronic bill presentment and payment, online bill pay, EFT/ACH check-by-phone and E-mmediate, ACM's check-by-phone service that offered no NSFs.
Now, as UTA, the best of both worlds will be readily available to all NACM members, who can purchase services as a complete benefits package or a la carte.

For the time being, current customers will see no changes in existing services. "There's no rush to make change," said Middleton. "We'll roll out a logo when we decide on one, but after that, the only changes will be for the benefit of our customers."
Source: NACM

Supreme Court Rules On “Principal Place of Business” Definition

The U.S. Supreme Court recently found in favor of the Hertz Corporation in a case that tackled the definition of a corporation's "principal place of business."

Ruling on Hertz Corp. v. Friend et al., the high court sought to resolve different interpretations of the term and in the unanimous opinion, written by Justice Stephen Breyer, the court found that a corporation's "principal place of business" refers to "the place where the corporation's high level officers direct, control and coordinate the corporation's activities." Breyer went on to note that lower courts had referred to this place as the corporation's "nerve center," which the court believed would be found at a corporation's headquarters.

As previously covered in NACM's eNews, the original case was brought as a class action suit by Melinda Friend and John Nhieu in California state court. Hertz sought to have the case remanded to Federal court, claiming that because it and Friend et al. were citizens of different states, the higher court possessed diversity-of-citizenship jurisdiction. The original plaintiffs however claimed Hertz was a California citizen, an assertion that the district court agreed with, and was affirmed by the Ninth Circuit upon appeal by Hertz.

The Supreme Court overruled, stating that the "nerve center" test provides a more consistent and easily applicable rule for courts to rely on than a frequently used general business activities test, whose results are scattershot at best.

"The application of a more general business activities test has led some courts, as in the present case, to look, not at a particular place within a State, but incorrectly at the State itself, measuring the total amount of business activities that the corporation conducts there and determining whether they are significantly larger than in the next-ranking State," said Breyer. "Administrative simplicity is a major virtue in a jurisdictional statute. A ‘nerve center' approach... is simple to apply comparatively speaking."

In addition to Hertz itself, the ruling was cheered by the Chamber of Commerce, the Business Roundtable and the American Trucking Association. It remains to be seen whether the "nerve center" test will be used in situations other than class action lawsuits, most notably in bankruptcy filings, where debtors have often bent the definition of "principal place of business" to "venue shop" their case to different courts in different states, often to the detriment of unsecured creditors.

Breyer made no mention of bankruptcy in the opinion, and noted that the court's ruling will hardly be the last word on the subject. "While there may be no perfect test that satisfies all administrative and purposive criteria, and there will be hard cases under the ‘nerve center' test adopted today," he said, "this test is relatively easier to apply and does not require courts to weigh corporate functions, assets or revenues different in kind, one from another."

Jacob Barron, NACM staff writer

Fed Increases Discount Window Rate

In perhaps the most blatant sign to date that economic conditions are showing significant improvement, the Federal Reserve increased its primary credit rate for short-term bank lending, also known as the discount rate, for the first time in nearly two years.

The Fed announced that the "discount window" lending rate for banks in need of short-term loans from the government would be increased a quarter-point, from 0.5% to 0.75%, effective February 19, 2010. It's a move Fed Chairman Ben Bernanke hinted at before Congress, as reported in the Feb. 16 edition of NACM's eNews, and the first time the rate has changed since March 16, 2008. In essence, the Fed wants financial institutions to seek short-term credit from private market sources, as had typically been the case prior to 2008, when there was a negative stigma attached to borrowing from the Fed's discount window. At that time, such a move was characterized as a bank's option of last resort.

Still, the increase came as a shock to markets, as it widely was believed the discount lending rate would remain untouched until spring. The move is another in a line of recent mixed messages from a Federal Reserve that had been talking up its effort to become more clear and transparent. Among other similar seemingly contradictory gestures was Bernanke's strong hint during testimony earlier this month that an increase in the federal funds rate would be necessary in the near future to stave off inflation, while, moments later, noting the economy "continues to require the support of accommodative monetary policies."

Brian Shappell, NACM staff writer

While We Were Out…

The Mid-Atlantic, home to NACM-National's headquarters office, experienced a record amount of snowfall over the last two weeks, during which some notable news stories may have fallen through the cracks. Below are just a few selections of the things we may have missed while we were digging out our cars.

MBA: Commercial Loan Originations Spike to End 2009
Approved commercial and multifamily real estate loan applications grew by double-digits in 2009's final quarter, according to a Mortgage Bankers Association (MBA) survey unveiled earlier this month. Still, MBA cautioned that the news fell short of being worthy of celebration.

MBA's Quarterly Survey of Commercial/Multifamily Originations for Q4 2009 increased by 12% from the same quarter in 2008. The largest categorical gains were for loans on hotel (up 105%), retail (101%) and industrial (59%) properties.

Still, MBA Vice President of Commercial Real Estate Research Jamie Woodwell warned that commercial mortgage lending remains anemic even with the large quarterly gain. "The trend shows stability coming back to the market, but the pick-up in volumes really indicates just how low origination levels have fallen," said Woodwell.

Brian Shappell, NACM staff writer

Study: Maturing of Non-Bank Commercial Debt Not Widespread in 2010

Another MBA survey, in an apparent attempt to quell fear of widespread maturing of commercial real estate debt, intimated that levels were lower than many in the industry originally feared.

The volume of commercial and multifamily mortgage debt maturing in 2010 ($183.9 billion) accounts for just 13% of the total outstanding and drops to 7% ($99.8 billion) in 2011, according to the commercial and multifamily mortgage study. Moreover, with most of the feared commercial mortgages going on the books between 2005 and 2007, a large portion of the debt balance will not come due for several years, said Woodwell.

Brian Shappell, NACM staff writer

Debt Limit Increased, "Paygo" Rules Reinstituted

Under cover of snow, President Barack Obama signed into law yet another increase in the statutory debt limit, this time by $1.9 trillion, bringing the legal limit on congressional debt to a whopping $14.3 trillion. Unlike previous stop-gap increases, this increase is expected to fund government operations for the remainder of the year.

In addition to increasing the debt ceiling, the bill Obama signed also reinstituted Congressional "pay-as-you-go" or "Paygo" rules which require any new spending to be offset by spending cuts or additional revenue generated elsewhere in the budget.

Jacob Barron, NACM staff writer

Philadelphia Fed Boosts Market Optimism

A recent wave of positive comments from officials at the Federal Reserve Bank of Philadelphia have helped boost confidence among investors and business owners, albeit it from near historically low levels.

Philadelphia's branch of the Fed noted this week that regional manufacturing increased for the sixth consecutive month and now sits at its highest level since 2005. Additionally, the branch unveiled forecasts predicting gross domestic product (GDP) growth of at least 2.7% in each quarter of 2010 as well as significant gains in employment levels. Both helped spur surges in trading on Wall Street.

Brian Shappell, NACM staff writer

Exports Creep Up In December '09, Down for the Year

The U.S. Department of Commerce released its December 2009 report on exports, which showed yet another increase in U.S. global trade in goods and services, this time by 3.3% over November's numbers to a total of $142.7 billion. From 2008 to 2009, however, total exports decreased by 15% to $1.55 trillion over the entire year.

"We can be encouraged by U.S. exports of goods and services increasing in December for an eighth consecutive month," said Commerce Secretary Gary Locke. "However, it is critical we redouble our efforts to increase our competitiveness and meet President Obama's goal of doubling U.S. exports over the next five years to spur economic growth and support jobs at home."

Locke also recently revealed his agency's National Export Initiative (NEI), which outlines the way in which the government will support increased exporting by enhancing trade advocacy for small- and mid-sized businesses, improving access to credit to potential exporters and continuing to enforce global trade laws and agreements.

Jacob Barron, NACM staff writer

New Report Shows Stimulus Created More Construction Jobs Than Expected

A recent report from the Associated General Contractors of America (AGC) indicates that the one-year-old stimulus bill had a greater effect on construction jobs than first thought. AGC's analysis of newly released federal data showed that stimulus-funded infrastructure projects are saving and creating more direct construction jobs than earlier estimates indicated, and that more contractors are likely to perform stimulus-funded work in 2010 as work begins on the non-transportation projects originally accounted for in the legislation.

"The stimulus is one of the very few bright spots in the construction industry experienced last year and is one of the few hopes keeping it going in 2010," said AGC Chief Economist Ken Simonson. "The stimulus is saving construction jobs, driving demand for new equipment and delivering better and more efficient infrastructure for our economy."

The stimulus bill, officially dubbed the American Recovery and Reinvestment Act (ARRA), was signed into law on February 17, 2009. The bill has been controversial since its enactment due to both its $787 billion price tag and critical observations that the legislation has not had the intended effect of creating jobs and stabilizing the economy. The AGC's analysis, however, rebuffs the latter point, showing that large positive effects have come directly from ARRA money and investments.
In the last 12 months, federal reports indicate that $20.6 billion worth of stimulus highway projects have begun, saving or creating nearly 280,000 direct construction jobs, amounting to 15,000 jobs per billion dollars invested. Pre-stimulus estimates had suggested that every billion dollars invested would create only 9,700 jobs.

Despite its positive influence on the sector, Simonson noted that overall declines in construction activity would still overshadow any positive effects the stimulus might have. "The stimulus will keep a bad situation from deteriorating further," he said. "That may or may not make for great headlines, but it is welcome news for construction workers anxious to continue receiving paychecks."
Other positive effects of the stimulus listed by Simonson included the fact that heavy and civil engineering construction employment remained stable in January 2010, even as total construction employment declined by 75,000. Additionally, highway and road construction, which received the bulk of stimulus funds in 2009, was one of the only areas to see an increase in spending in 2009 even as total construction spending fell by $100 billion over the same period.

Jacob Barron, NACM staff writer