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