Multilateral Trade Pact on Life Support

This really is the do-or-die year for the 10-year-old Doha Development Round trade talks sponsored by the World Trade Organization. Still, that hardly means world powers will react any differently than they have in the past despite the likelihood that passing something similar to what is now on the table would pump some $360 billion in trade annually.

Every effort to get the trade talks off dead center have met with bitter disappointment, and it's usually for the same reasons. Now there is yet another surge in interest provoked by what looks like a renewed interest in trade in the United States, though some skeptics assert little came from President Barack Obama's State of the Union speech that had not been heard many times before. There is a lack of confidence from the latter camp that anything dramatic will be introduced to back up the comments, but there's more hope than in previous years.

The barriers to Doha are simple, yet vexing to those who see the advantages of trade. The focus always has been market access. The United States and Europe want to be able to sell their services into the developing markets as well as access for their consumer and industrial goods. Developing nations want to access the European and U.S. markets for their farm production, consumer goods and their industrial output, which seems simple enough in the theoretical trade sense. The problem is that there are groups in every nation who want no part of that import competition and will fight to the bitter end to keep rivals at bay. For a decade, these forces have overwhelmed those who would benefit from the trade.

A simple trade pact has problems enough, as evidenced by the delays by the United States to complete favorable deals with Colombia, Panama and, until recently, South Korea. When the trade pact is based on a multilateral approach, the difficulty is magnified considerably. Any deal on access to a given market automatically must be offered to any member of the WTO; that includes just about every nation on the planet. Though economic benefits far outweigh the concerns, the trepidation is understandable.

Analysis: The business community typically is more enthusiastic about the multilateral trade deal than the many individual pacts that get signed. It is far easier to develop a trade strategy when the rules are universal as opposed to contending with different sets of tactics for each nation involved in trade. The complexity of the current system means that many companies quit trying to access those markets that would otherwise be prime opportunities. Keeping track of all the rules, regulations and opportunities provided by the various trade deals can be intimidating for the smaller companies. They are the biggest supporters of the larger pact, but their voices tend to get drowned out by those who assume they will be losers in the new trade environment. Supporters of the Doha attempt point out that conditions are ripe to make a push to complete a deal. The possibility for passage should grow steadily worse in the years ahead because of the oncoming elections in key nations.

Source: Armada Corporate Intelligence's Strategic Global Intelligence Brief

Fed Maintains Direction on Rates, Treasury Securities

The Federal Reserve broke from its two-day monetary policy meeting, the first of 2011 and first without frequent contrarian Thomas Hoenig, to continue the positions taken throughout much of 2010.

Partly because of continued perceptions of low inflationary levels, the Fed's Federal Open Market Committee (FOMC) opted not to change the near 0% target for the federal funds rate nor to water down its stated effort to buy Treasury securities. Both are still seen as necessary to stimulate short-term economic growth the Fed statement again acknowledged as ongoing, but weaker than needed. The FOMC voted unanimously on the policy track Wednesday, the first time that has occurred in months. However, things may soon change as two new voting members for 2011 are regarded as hawkish inflation fighters concerned with the FOMC's ongoing efforts to stimulate the economy. The Fed's full statement follows below:

"Information received since the Federal Open Market Committee met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions. Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, while investment in nonresidential structures is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending 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. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4% 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; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen."

German Economic Growth Carrying Europe

The latest set of polls and surveys reinforce the message that has been coming from Europe as a whole for several months: the German economy is confident and growing.

The surveys of business, investors and consumers are all converging to send the same message that the German economy is strong, getting stronger and instrumental in dragging much of the euro zone economy along with it. Just as important is the fact that not every nation is getting a chance to hang on to the German coat tails, which will present some issues in the months ahead. Germany's latest PMI data is coming from a "flash" index based on surveys of about 2,000 businesses. The statistics are not as reliable and complete as the bigger PMI studies released in a week but, thus far, have been pretty solid indicators of what is to come. The latest number is 55.2, and its new business index hit 55.4, a 39-month high for that sub-index. This is also well above last month's level - 53.9. That suggests growth has been consistent and poised for more rapid acceleration in the months to come. That assumes that the European Central Bank (ECB) is not forced to start acting against inflation. Even should that develop, the German economy appears to be better insulated than those in most in Europe partly due to the ongoing ability of its business to diversify their market position.

It is widening the gulf between the Germans and the rest of Europe that worries many. At the same time that confidence in the German economy has reached a 20-year peak, the attitudes in the financially strapped nations have weakened. The new order numbers in Ireland, Portugal, Greece and Spain have fallen to five-month lows, and there is little expectation that conditions will improve before the end of the year or perhaps into 2012. The rate of joblessness has improved in Germany, but the Eurozone as a whole likely will hover around 10% for the bulk of the year. It may even worsen as the various austerity plans start to get serious.

Analysis: The division between the nations that are coming out of the recession and those still mired in the crisis will create some very awkward moments in the near future. Start with the potential moves the ECB will feel compelled to take if inflation becomes the issue they fear. The Germans and the French will demand that the rates be hiked sooner than later despite the potential to cripple the recovery efforts in the worst hit nations. The already strained unity of the European Union will be pushed to the breaking point. The last thing these states want is to see the Euro get stronger at the same time that debt is harder to accumulate. The Germans and other healthier economies will be under even greater pressure to bail these nations out. That will hardly be a popular political decision. Such division fuels those who question the ability of the Euro itself to survive the crisis. At present, the powers that be are saying the right thing about the Euro and the need for euro zone unity. However, the diverging nature of economic growth will put the whole system to the test unless the rise of the German and French economies is enough to haul some of the others out of the abyss.

Source: Armada Corporate Intelligence's Strategic Global Intelligence Brief

(UPDATED) Fed Beige Book: Economic Expansion Continues

Just days after Federal Reserve Chairman Ben Bernanke nearly promised growth would be better in the next year (see story in Thursday's eNews), 10 of the 12 Fed banking districts experienced modest or moderate economic improvements during the final six weeks of 2010.

The Fed's Beige Book summary of economic conditions found improvements in just about every corner of the nation, save the greater Minneapolis and San Francisco areas. Manufacturing continued to be among the strongest performing sectors in all 12 districts, Fed contacts noted. Among the best performers again were in the Richmond, St. Louis and Chicago districts. In the latter, light and heavy motor vehicle activity dominated in the sector. However, those supplying construction-based businesses continue to find struggles as the real estate sector again appears to be recovering at a much slower pace, if at all, from the recession years. Contacts in nearly every district in the industry sector reported an optimistic outlook for 2011.

And though construction again demonstrated its struggles, as little demand for new retail and non-healthcare-based industrial spaces exists, there are some notable commercial real estate successes in the latest edition of Beige Book. Business leasing increased modestly in Richmond, Chicago, Minneapolis and Kansas City. Even previously struggling Dallas showed optimism over "tentative improvements." Mixed-use properties including condominium/multi-family housing activity appeared to be trending up, too.

In the area of credit, business lending/loan demand was stagnant in November and December. Meanwhile, credit standards remained mixed, leaning to the tight side, even as business credit quality appeared stable or improved. As such, loan demand was still muted to end 2010.

First District - Boston
Manufacturing sector contacts in the district reported positive conditions, aside from those dealing with commercial real estate businesses. Still, companies in the sector remained "lean" with inventories. While there's no report of a rebound for commercial construction and lending activity, conditions remained largely stable.

Second District - New York
Delinquency rates on commercial loans increased through late December. There has been tightening credit standards for businesses, Fed contacts noted. Loan demand has been mixed, pending on the specific market, but largely steady. Commercial real estate markets were also mixed with positive news for office properties and negative reports for the industrial market. Office leasing activity surprised experts by increasing to a four-year high. Still, much of the activity bump was comprised of businesses moving from one space to another, generally smaller one.

Third District - Philadelphia
Overall, manufacturing orders and shipments increased for the six-week period, though order patterns were "erratic." Gains were most notable in the furniture, testing/measurement, chemical and food products industries. Those in lumber and electrical, on the other hand, reported declined activity. Little change to the struggling commercial real estate from earlier in the fall was noted. Longer-term leases, however, appeared ready to trend again soon. Credit quality in the district was slowly improving, said contacts.

Fourth District - Cleveland
Production was either stable or improving, depending on the industry. Some expected seasonal manufacturing activity declines occurred. Service-based and steel industries showed more increases though, said contacts. Commercial real estate conditions were mixed, largely because of uncertainty. Some appear to be tip-toeing toward green-lighting some larger projects. Rates for business credit remained stable, as did credit quality.

Fifth District - Richmond
"Solid" gains were noted in the district in December, particularly among contacts in the chemical and auto-part productions areas. Port activity dipped from last period but was improved from the same period in 2009. A bulk of the increase was tied to imports from Asia. Loan demand improved slowly during the period, said contacts. Commercial real estate activity remained anemic except when prices were deeply slashed. Apartment construction activity increased again in the job-rich Washington, DC area.

Sixth District - Atlanta
Modest manufacturing activity increases were noted, as were plans for increased near-term production levels. Declines in freight, motor vehicle and equipment orders were troubling though. Commercial construction remained even more muted than the slow pace of December 2009 with few expectations for improvement before 2012. Credit standards started to ease though businesses, especially newer and small ones, remained frustrated at the poor terms offered. Agriculture struggled mightily amid drought and frigid temperature conditions that did still undetermined damage to this year's crop.

Seventh District - Chicago
"New orders were solid and order backlogs increased substantially," the Fed said. The rosy outlook is positive for next year as well. Strong news is spread over many industries: tubing, hydraulics, fluid power products, metals, automotive, heavy equipment and steel, among others. Commercial space subleasing has increased on lower pricing and though vacancy levels remain high, local contacts were optimistic in December. Business spending increased at a steady face as did hiring...of temporary employees, that is. Credit conditions were said to be improved.

Eighth District - St. Louis
The agriculture sector performed well, especially in the area of cotton production. Commercial real estate struggled in most markets including Louisville, though contacts there were optimistic for improvements in vacancy rates in 2011. Commercial loan activity decreased slightly. Manufacturing continued to increase as plant closure plans were few in December. Expansion plans are still slated for several businesses in automobile parts, plastics, glass, furniture, food manufacturing and sanitary paper production.

Ninth District - Minneapolis
Manufacturing was up, as were prices for Ag products, though snow totals hampered the efforts of farmers somewhat. The district was one of the few with good news in the area of commercial real estate. "In Minneapolis-St. Paul, several large leading deals were announced, and a large suburban office tower was recently sold," said the Fed. It's helping fueling newfound optimism in the district.

Tenth District - Kansas City
Manufacturing activity and optimism for 2011 continued to surge. Expect increased hiring and capital spending levels in the region. Commercial construction and vacancy rates took another step backward, though leading activity is expected to trend upward soon. Agriculture conditions, once hot in the Central United States, "deteriorated" to end 2010. Cold temperatures and a lack of precipitation could pose a serious threat to crop output in 2011, especially wheat development. Demand, terms and availability tied to commercial loans showed little change.

Eleventh District - Dallas
Manufacturing contacts expressed some optimism for the coming months, but appear less celebratory than most other regions. High-tech manufacturing appeared to be a more positive story than most industries, though. Office leading activity "is spotty but appears to be moving in a positive direction," said Fed contacts. Commercial real estate lending remained weak though pricing and terms showed signs of becoming more attractive.

Twelfth District - San Francisco
Demand was higher at manufacturers of semiconductors and other technological products, as has been the case in recent periods. Metal fabricators and aircraft parts producers reported good news as well. Demand for Ag products from the district increased again, too. Commercial real estate activity remained unchanged "at very low levels." Business continued to be slow to pull the trigger on capital expenditures and, thus, loan demand moved little from the fall.

Brian Shappell, NACM staff writer

Bank Activity on the Rise

One of the most consistent inhibitors as far as the economic recovery is concerned has been the lack of credit. The collapse of the financial community presaged the recession, and it has taken the banking system a long time to sort through the damage. There remains much to be done to correct the mistakes, and there are still close to 1,000 banks being closely monitored by the FDIC. However, there evidence has emerged that some banks are getting back in the game in a meaningful way.

It remains a very different world than existed during the boom, and that is a good thing. The encouraging part is that there now seems to be some willingness to make loans to well-run companies that want to expand. Without access to this money, there would be little opportunity for business to grow. Without that growth, there is not much progress on the job front.

According to the latest data from Moody's Analytics, the growth in loan activity was 0.2% in the third-quarter. That is not exactly opening the flood gates, but it is the first gain in more than two years. The expectation is for 3% growth in 2011, and that will go a long way towards pushing the anemic recovery towards a period of real expansion. Traditionally, the last thing to improve in the course of economic recovery is commercial lending, and the last recession has been harsher on banks than in the past. Not only have the banks had to worry about the viability of the companies that are coming to them for loans, they are deeply concerned about their own viability. Many continue to carry a great deal of bad debt. The number of bank failures in the last few years rivals numbers posted during the savings-and-loan debacle from a few decades ago, and there will be more falling before the year is out.

The best part of this expansion is that much of the activity is centered on middle-market and small business. The rate of lending to the companies worth between $10 million and $500 million has increased by about 7%, and small business lending has spiked by 40% in some banks. The levels remain far below those of just four or five years ago. Still, the trend is much better than it has been since the collapse in 2008.

Analysis: There are several factors that will mitigate against another big boom in lending. The most reckless of banks failed and are no longer part of the scene. Those banks that remain are chastened and are under far more scrutiny from the government and from their own shareholders. There is just less risk tolerance than in the past. The companies that are coming to the banks are different as well. There are waves of applicants that are desperate to stay alive and their chances are nil. But those that have the credit quality to get a loan are also planning to borrow far less. Many of them have more cash than in the past, and most of them have pretty modest expectations as far as the coming year is concerned. The hope in the financial community is that lessons were learned. However, if the past is any indication, too many of those lessons will be forgotten and too soon.

Source: Armada Corporate Intelligence's Strategic Global Intelligence Brief