Flat CMI Report Reflects Inflationary Burdens on Manufacturing Sector

April 2011 is the month the U.S. economy started to confront dual threats and the credit community almost instantly reflected the transition. For the past two years the focus of the business community has been almost solely oriented toward recovery and finding strategies that would propel them toward that recovery. The threat of inflation was not a concern beyond the sense that at some point all the efforts to dig out of the downturn would come back to haunt the economy. That was before the price of oil started to accelerate at a rate not seen since the 2008 debacle. Now the inflation threat has become a clear and present danger and one that is affecting the business and credit community.

In March the manufacturing sector held its own and provided the sole piece of good news for the Credit Managers’ Index (CMI Report) as a whole, but in April the sector stumbled and exchanged positions with the service sector. In March the news for the service side was not so good, but in April it staged a bit of a recovery and much of this appears to be related to the hike in inflation as well as the reactions from the business community most affected by price shifts. The changes from month to month have been subtle and the CMI itself barely moved from the position it marked in March, up just 0.1% from 55.7 to 55.8. “The devil is in the details,” said Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and economic advisor for the National Association of Credit Management. “Overall sales stayed at almost the same rate from month to month but that obscures the fact that there was a real reversal of fortune with the two sectors.” Sales fell in the manufacturing sector while they rose in the service sector—the exact opposite of what happened in March. Some of this can be accounted for by the fact that inflated pricing in some parts of the economy causes a rise in sales that benefits one group, but punishes another, Kuehl said. Sales from gas station outlets were up so much that the nation’s overall retail numbers rose 0.8%, but when gasoline and food costs are stripped out of that number, the growth falls to 0.3%, a solid indication of how much inflation has had an effect.

Looking at some of the other favorable factors for both sectors there was more evidence of divergence. The number of new credit applications in manufacturing fell to levels not seen since the start of the year, but in the service indicators the fall was even more dramatic—numbers not seen since October of last year. The evidence is pretty strong that business has returned to a more cautious position than they had started to adopt earlier in the year. There is now much more concern about the future of the economy through 2011 and that has caused many businesses to pull back on credit. Given that it was the expansion of credit that had been fueling enthusiasm at the start of this year, one can expect further slowdowns in expansion for the next few months.

Yet another sign of divergence is the rate of dollar collections between the two sectors. Overall, the number improved from 60 to 61.3 but that obscures a shift. Dollar collections were actually down in the manufacturing sector while recovering nicely in the service sector. Commodity inflation is taking a much bigger bite in manufacturing and is affecting cash flow. The bulk of the impact of inflation is being felt in the basic industries at the moment, although the consumer is seeing more of that rise every day. Manufacturers are paying those high fuel costs along with everybody else, but they are also paying record prices for everything from steel to copper to resins and chemicals. It is not just gasoline that goes up when the price of oil rises. The price of feedstock for the fertilizer industry rises and so do the prices of petrochemicals. Transportation costs have risen as well and that affects the manufacturer first as they are paying for the transportation of the raw materials they need.

“The overall news from the CMI is that conditions have stabilized, but the fact is that there is considerable volatility just under the surface,” Kuehl noted. The expectation is that inflation issues will affect the service sector in short order and the advantage held by that category will diminish in future index readings.



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The online CMI report for April 2011 contains the full commentary, complete with tables and graphs. CMI archives may also be viewed online.



CICP Road Diary: Entry #8 Studying

Sure, this whole CICP course thing has been cool, but where in the course material does it say anything about having to take a test? Riddle me that, hmm?

Oh wait, it’s right there. Page one. Well that was clumsy of me.

Yes, I’m only kidding. I’ve been fully aware of the test’s looming presence throughout my time spent wending my way through each module and each post-test. Luckily, star professor Paul Beretz has done a fine job giving us the hints we’ll need to study properly, hints that I’ve relied on heavily in my own review efforts.

This isn’t to say that he’s given us the answers. He hasn’t, and I would imagine that him doing so would defeat the purpose of a test, but what we do have is an idea of what the test will look like and what to focus on when studying ahead of time.

It’s an open book test, and I can still remember a time during my educational career when that meant “barely even a test at all,” but, in the case of the CICP, the number of questions, the type of questions, and the sheer volume of material makes it an open-book test in name only. Sure, when I take it, next week (the last possible week in which to take it), I’ll have access to all the materials I’ve pored over numerous times before (via the internet), but that’s a lot of text people, something like hundreds of pages if I decided to go whatever the opposite of green is and print everything out for my own use. I’ll have to know things off the top of my head, or I won’t get everything done in time.

Speaking of time, I’ll have four hours to answer 100 multiple choice questions and 20 short answer questions. Apparently, the short answers should be really short. Paul has noted that simply writing more won’t get you a better grade on these questions, so it’s best to keep them brief so you have time to answer all of the questions. Coming from my point of view, in the world of professional writing, this is somewhat difficult to accept. In the world of professional writing, length equals credibility. If you can’t write a good article, at least write a really long one, right? I’m hoping I can buck the writer in me and aim for brevity when I take the exam.

Ok I was only kidding there too, but still, it’ll be important to remember that I have many other questions to answer when I’m working on the short answer ones. Typically, in the short answer, discussion questions in the post-tests, I’ve taken the time to indulge my own musings on whatever it is the question is asking for. I can’t do that in the test.

In any case, I’m going through the modules one by one now, stopping at the summaries and especially the post-tests for some extra review. I’ll probably check in once more before actually taking the exam, and then once again after, but if I don’t see you before I dive in, head first to the 4-hour CICP test, be sure to wish me luck.

Till next time,

~Jake

Fed Finally Admits Rising Inflation, Still Hedges on Rates

Talk of escalating inflationary pressures has been circulating for months now and, in a last-on-in-the-pool type of manner, the Federal Reserve finally admitted such. But it still hasn’t shaken the Fed and Chairman Ben Bernanke’s resolved to keep rates historically low to help foster growth or continue stimulus efforts full speed ahead.

Following the Fed’s latest two-day meeting of the Federal Open Market Committee this week, it was announced that the target for the federal funds rate would remain at the rock bottom range between 0% and 0.25%. The Fed also announced it would continue its in-motion plan to purchase $600 billion in longer-term Treasury securities. Both, however, was expected.

Perhaps unexpected was the Fed’s warming to the idea that many embraced weeks and/or months before: that inflation is creeping into the picture. Granted, its announcement typically downplayed inflation even if no longer ignoring its presence.

“Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued,” the Fed said in a statement. In addition, while hailing continued gradual economic recovery, the Fed also acknowledged that commodities prices, especially those based on crude oil, “have risen significantly.” There is obvious concern, both inside and outside the Fed, of its impact on stymieing the already lackluster economic recovery.

Brian Shappell, NACM staff writer

IFRS, GAAP Convergence Schedule Pushed Back

The International Accounting Standards Board (IASB) and its U.S.-counterpart, the Financial Accounting Standards Board (FASB), recently announced a delay in their accounting standards convergence schedule.  While the original plan was to complete convergence work by June, the boards voted to delay the target for completion to the second half of 2011, although the U.S. insurance standard is targeted for even later, in the first half of 2012.

The two boards have been hard at work, erasing the boundaries between International Financial Reporting Standards (IFRS) and U.S. generally accepted accounting principles (GAAP). However, in their most recent progress report, the boards announced their decision to allot more time to complete the work of converging the two standards into one, cohesive global version.

“Today we are reporting further substantial progress on our work to improve and align international and U.S. accounting standards, while providing additional time to finalize the remaining convergence projects,” said Sir David Tweedie, chairman of the IASB.  “The convergence program continues to raise the standard of financial reporting worldwide, delivering much-needed improvements in key areas and providing a solid platform for global high quality standards.”

In their report, the IASB and FASB also announced that they had completed five other projects which would yield new standards in the next few weeks. They will also jointly issue new requirements in relation to fair value measurement, and put three remaining memorandum of understanding (MoU) projects on priority. These MoUs cover financial instruments accounting, leasing and revenue recognition, while aiding the boards’ joint mission to converge IFRS and GAAP.

“The progress report highlights the many areas where we have already improved and converged our standards, and our plans for completion of the priority projects,” said Leslie Seidman, chairman of the FASB.  “We have also clarified our plan to continue to engage stakeholders in the remaining steps of the process, and give them an opportunity to review the draft standards before they are finalized.”

The process of merging IFRS and GAAP could have ramifications on how commercial creditors read financial statements for public companies.

Jacob Barron, NACM staff writer

CICP Road Diary: Entry #7 Live From the I.C.E. Conference

Well, technically, I’m not writing this “live” from the I.C.E. Conference. That title just sounded better than “Live, Several Hours After Returning Home from the I.C.E. Conference.”

In any case, after a rainy, mildly bumpy flight back to Baltimore, I returned from the International Credit Executives (I.C.E.) Conference, the first iteration of such an event that I’ve attended after fully completing my CICP course requirements, save the test. That’s right, I’m all done the course, although I had a mini-panic attack as I left for the Conference last week that there was something I had missed. There wasn’t, and now, all that’s left is the test.

The conference, I’d say, was an unqualified success. Lots of new faces as far as I could tell, and a lot of very intelligent people talking very intelligently about very intelligent things. One of the best parts was checking people’s name badges and recognizing their names from the CICP comment boards and group discussion pages. It made for some sudden, “hey, I know you!” moments, but they were all in good fun. I got to chat with them and now have even more of an incentive to dig back through the discussions, since now I have faces to go with names.

Just being able to kind of exchange with people whose expertise is head and shoulders above mine was pretty invigorating, and I think I have the CICP course to thank for that. Sometimes, when I cover a conference, if something comes up that I don’t really understand, I’ll make sure I get the whole quote, then look up what I didn’t get later on. That didn’t really happen that often this time around; every issue that was discussed was also covered, both practically and conceptually, in the course. I’m not saying in any way that I stacked up with my fellow attendees in terms of credit and risk management ability, but I could hang with them in a conversation, and even say something insightful from time to time, which is a good feeling.

I even asked a question during one of the forums, which is big for me. I never do that.

Anyway, the panel discussions were thorough and largely question-and-answer based, which was great. Brazil seems to be the new Venezuela, in as far as it now holds the title of “most-discussed country” at FCIB events, a title that belonged to Venezuela for several years, I think.  With Brazil, the chatter is more positive though (how could it not be?). With Venezuela, it was a list of lamentations and complaints about Hugo Ch├ávez, which were always interesting, but redundant after a while. Nice to see a new face take the top spot.

Look for more coverage in eNews and in Business Credit magazine too (with pictures there). Hope everyone who attended had a similarly pleasant time. I’ll be back later after I go studying for the test, which I’m thinking I’ll take next week, if I can handle it. 

Till next time,

~Jake



Fed Beige Book: Optimism for Growth, Concern Over Disruptions Both Rising

Review of the most recent economic growth conditions in the 12 Federal Reserve districts and the outlooks for them appear to continue to grow, slowly, but not without some significant shades of gray.

The Fed's latest Beige Book regional conditions roundup found only moderate improvement to the economy; but it was an improvement characterized as "widespread across sectors." Perhaps the most enthused about overall recent growth and near-term prospects were contacts in the Kansas City district.

The Beige Book noted that manufacturing continued to lead the way for the rest of the economy with the most steady improvement and, long-absent evidence of increased hiring. Ten of the 12 districts (excluding mixed results in Boston and Richmond) demonstrated "robust" manufacturing sector activity, with New York performing exceptionally well. There was even talk of improvements in the long-battered commercial real estate sector, with more than half of the districts noting reasons for an optimistic view.

Granted, there were plenty of worrisome signs in the latest Beige Book roundup, which tracked a period from mid-to-late February through early April. Chief concerns among Fed contacts were the possibility of significant sales and production disruptions stemming from the Japan disasters, elevated commodity prices and the impact of a still dragging resident real estate sector on household wealth/consumer confidence.

First District - Boston
Manufacturing contacts noted business was good overall with particularly strong returns for the chemical business and great expectations for the first-quarter on the part of technology-related producers. However, totals did not surge at the level of other districts. Still, reports from Fed contacts estimate employment gains for most business services to range from 3% to 12% this year. Commercial real estate was essentially flat during the last six or so weeks. There were signs of higher office rents in the key Boston market.

Second District - New York
Strong consumer spending has helped optimism in the district. Newfound stability is the name of the game in the multifamily/mixed-use real estate game. Office markets are mixed with a scaling back of concessions from property owners in New Jersey, but there was a surge to a multi-year high in vacancies in Long Island, NY. No change has been reported in credit standards or demand for loans on the part of commercial and industrial firms.

Third District - Philadelphia
Manufacturing rebounded in March with more than half of the district's manufacturers noting increases in shipments and new orders. Fabricated metals and industrial machinery producers led the charge, said the Fed. Within commercial real estate, rents appear to have "bottomed out" and are beginning a slow build. Demand for loans from that sector and most small businesses in general seems to have picked up in March.

Fourth District - Cleveland
New orders and production were steady despite some fears of seasonal declines noted in the last Beige Book. Still, production was generally higher in the district at this point last year than at present. Manufacturers are, however, maintaining predictions of moderate growth throughout 2011. Those in the construction sector have reported rising prices in building materials of late, especially steel and all petroleum-based components. Demand for business loans great at a modest pace, and came from a widespread swath of sectors.

Fifth District - Richmond
Manufacturing demonstrated more expansion in March, though not as robust as other districts, the Fed said of District 5. In fact, one auto-parts supplier noted demand has exceeded available capacity. However, those in that industry as well as others relying on raw materials have noticed delays and fretted they could worsen and slow production considerably. Small businesses have been borrowing more from banks of late, largely for equipment upgrades and plant expansion projects.

Sixth District - Atlanta
Demand for credit in the region has not rebounded like some other regions, especially those to the north. There were, however, some gradual labor market recoveries of note. Manufacturing, naturally, had even better news with more strong growth in new orders and production levels. Rainfall totals have helped agricultural producers, but there are lingering levels of drought in much of the region.

Seventh District - Chicago
Like in February, business spending showed an uptick in March. Capital expenditures are occurring as planned, with several major manufacturers purchasing key equipment. Small improvements were noted in vacancy rates, though not commercial real estate rent prices. More expansion was found in manufacturing, led by the steel, automotive and heavy equipment sub-sectors. Credit conditions also showed improvement in late February and March. Agricultural contacts noted volatility in commodity prices, but that soil was generally in good shape to begin planting season.

Eighth District - St. Louis
After being the only district to show a decrease in manufacturing activity during the last Beige Book period, some growth was noted in the sector throughout March. But it's a tale of two groupings with firms in silicone products, rubber products and military vehicle manufacturing, among others, planning for expansion amid good returns; but firms in surgical equipment, packaging and weapons manufacturing saw seeing layoffs and decreases in operations. Commercial borrowing decreased by nearly 9% through late March/early April. Agricultural sector contacts noted minute gains.

Ninth District - Minneapolis
Manufacturing output again surged, and more than half the companies polled expected better sales in 2011 than in 2010. Commercial construction activity increased, with office permits seeing an uptick in markets such as Sioux Falls, SD. Office and industrial vacancy rates were also down in areas including Minneapolis/St. Paul and Fargo, ND. Agricultural producers in the district enjoyed strong conditions considering the flooding they had to contend with. Prices for commodities increased in recent weeks, as well.

Tenth District - Kansas City
Manufacturing showed rapid expansion, led by high-tech service and transportation firms as well as factories. New orders surged and expectations for coming orders remained strong. Demand from business for credit has increased, though credit standards have remained largely unchanged for the fifth consecutive six-week tracking period. Ag growing conditions were tested mightily, with much of the winter wheat crop threatened by intensifying drought issues.

Eleventh District - Dallas
High-tech manufacturing, which had enjoyed good conditions earlier this year, and the previously struggling construction product business changed shoes for a period. High-tech firms are feeling the impact of Japanese factory shutdowns, while those in construction enjoyed a surge as pent-up demand following poor weather conditions brought people back to the market in droves. Office and industrial leasing enjoyed a small uptick. Ag contacts noted drought conditions affected upwards of 90% of the district though demand for their products stayed strong.

Twelfth District - San Francisco
Manufacturing showed strong gains, again with commercial aircraft/parts and semiconductor producers doing well. Ag product activity was "robust," and contacts noted rising prices. Commercial real estate remained at very low levels. Businesses in several sectors have been showing more interest in garnering credit, mostly for capital spending projects, Fed contacts said.

Brian Shappell, NACM staff writer, can be reached at brians@nacm.org


1099 Repeal Signed into Law

President Barack Obama has signed the 1099 reporting requirement repeal bill into law.

The Senate passed H.R. 4 earlier last week and sent it to the president for his approval, which he gave yesterday. Had the president not signed the repeal, 1099 would've required all businesses to file an Internal Revenue Service (IRS) Form 1099 for every vendor from which they annually buy $600 worth of goods or services, beginning in 2012. The 1099 requirement was enacted as part of last year's health care reform bill.

The repeal will be funded by requiring taxpayers who receive federal health insurance subsidies to repay them if they end up earning more than 400% over the poverty line. While some Senate Democrats had reservations about this pay-for method, which takes a swipe at another part of the health care reform bill, the final 1099 repeal vote was firmly bipartisan, with only 12 Senators voting against.

Refer to the April 7 edition of eNews for more details.

Jacob Barron, NACM staff writer

CICP Road Diary: Entry #6 Nearing the End

Well, the end of the course is in sight.

I plan on blogging for at least the next few weeks, as I prepare to take the CICP exam, and also hob-knob with other current CICPs at next week’s International Credit Executives (I.C.E.) Conference. I’d like to take this opportunity though to just go ahead and give myself, and everybody else who’s taking the course, has taken the course, or will take the course, a giant pat on the back.

This is a little premature, as I could fail the CICP test miserably, in which case all of these blog entries would be mysteriously deleted, and filed away until next season, when I’ll try again and act like this never happened, but still, I think the course is more of an accomplishment than people might think it is before they’ve taken it.

I thought about it, and at first, I might’ve believed the same thing; that an online course, while certainly convenient, wouldn’t carry the same rewarding feeling that comes from attending and completing a regularly scheduled class in person.  I was wrong though. Even though I’m about to go through the last two modules (on credit insurance and the future of international credit and risk management), pressed right up to the deadline for doing so (Sunday is the last day, I believe), I feel like I’ve actually been a part of something, and it’s a pretty good feeling.

Sure there are many things I wish I had been better about, but I’ll detail those in a later post, when I’ve had a chance to collect my thoughts and see what an international conference is like after you’ve taken the course. Right now, I’d just like to go ahead and selfishly congratulate myself. Then, and perhaps more importantly, I’d like to unselfishly congratulate everyone else in the course, or anyone who’s ever taken the course. Finally, I’d like to congratulate everyone else who will take the course. You’ve earned it, hypothetical, future students.

As far as workload is concerned, the last portions of the course are pretty reading-heavy, which is good. There are some interesting white papers that are tailored to this current edition of the course. They’ll be different when you take it, but that’s the point I suppose. The course, even in its very nuts and bolts, is doing its best to stay cutting edge. It does so pretty successfully I might add.

See you all in Chicago! Who’s going?

Till next time,

~Jake

Fed Beige Book: Optimism for Growth, Concern Over Disruptions Both Rising

Review of the most recent economic growth conditions in the 12 Federal Reserve districts and the outlooks for them appear to both continue to grow, slowly, but not without some significant shades of gray.

The Fed’s latest Beige Book regional conditions roundup found only moderate improvement to the economy; but it was an improvement characterized as “widespread across sectors.” Perhaps the most enthused about overall recent growth and near-term prospects were contacts in the Kansas City district.

The Beige Book noted manufacturing continued to lead the way for the rest of the economy with the most steady improvement and, long-absent evidence of increased hiring. Ten of the 12 district (excluding mixed results in the Boston and Richmond districts) demonstrated “robust” manufacturing sector activity, with New York performing exceptionally well. There was even talk of improvements in the long-battered commercial real estate sector, with more than half of the districts noting reasons for an optimistic view.

Granted, there were plenty of worrisome signs in the latest Beige Book roundup, which tracked a period from mid-to-late February through early April. Chief concerns among Fed contacts were the possibility of significant sales and production disruptions stemming from the Japan disasters, elevated commodity prices and the impact of a still dragging resident real estate sector on household wealth/consumer confidence.

(Note: for an extended version of this story, featuring a region-by-region breakdown of the Fed’s 12 Beige Book districts, click here.

Brian Shappell, NACM staff writer

Portugal Bailout Terms Progressing

Portugal's acceptance of a financial bailout from the European Union (EU) is nearing finalization as the Iberian nation's officials are hard at work negotiating the final terms with the EU and the International Monetary Fund (IMF).

Freddy van den Spiegel, chief economist and director of public affairs for BNP Paribas Fortis, told NACM Portugal’s action was a necessary step but far from a Panacea for deep problems in the Iberian nation or the rest of the EU.

“The bailout is not really a surprise; it demonstrates the political agreement to rescue the Euro,” said van den Spiegel, at speaker at this weekend’s FCIB I.C.E. Conference in Chicago. “In the short run, this is positive as it restores some confidence in the EU. However, the existing problems are not resolved, and this remains a challenging problem for the future.”

It will mark the third of the so-called “PIIGS” nations (Portugal, Italy, Ireland, Greece, Spain) to accept a bailout in less than one year amid crushing debt loads. It has been speculated that such a bailout could reach upwards of $120 billion (USD) and almost certainly will come with forced austerity measures.

(Note: Registration for the 2011 I.C.E. Conference will remain open through the weekend and onsite at Chicago’s lush/historic Drake Hotel. For more information or to register, visit http://www.fcibglobal.com/ICE2011).

Brian Shappell, staff writer


Gearing Up for the 3% Withholding Tax

As the clock continues to tick toward 2012, many credit professionals have been asking about the 3% withholding tax, which is still set to go into effect at the end of the year on most government contracts.

The provision was tucked into the Tax Increase Prevention and Reconciliation Act (TIPRA), enacted in 2006, originally included as a means to reduce the nation’s tax gap, which is the annual difference between taxes legally owed and taxes collected, totaling about $345 billion. Essentially, the idea was that since a number of contractors that did business with the government didn’t accurately pay their tax bills, a withholding requirement would offset the revenue lost from these contractors’ non-compliance. Observers quickly noted that merchants selling to the government that were forced to comply with this new requirement would simply raise their prices, meaning the whole provision would provide zero sum gain.

The provision was originally set to go into effect on all contracts dated after December 31, 2010, but that deadline was delayed to contracts dated after December 31, 2011 by a provision in the American Recovery and Reinvestment Act of 2009, popularly known as the stimulus bill.

The details of the provision are many, and more than a little beguiling.

According to the text, the withholding requirement would apply to government entities, including states, municipalities or any instrumentality thereof, with annual procurement budgets in excess of $100 million, which would exclude a lot of local agencies in many smaller towns. It would also only apply to purchases worth more than $10,000, and according to the Internal Revenue Service (IRS), entities and businesses would not be allowed to divide payments up into two or more in order to make them exempt under the $10,000 threshold. Certain payments would be excluded, like payments of interest, for real property, to tax-exempt entities and to foreign governments, although it should be noted that “real property” does not include payments for the construction of buildings or public works. This is a fairly vague definition, so establishing which of these payments would or would not be subject to the withholding requirement could prove challenging.

IRS guidance on the subject notes that the withholding would only apply to payments made by the government entity to the prime contractor, meaning there is no flow down to subcontractors. Payments made under contracts existing prior to the December 31, 2011 effective date will not be subject to withholding.

Advocacy

NACM has opposed the 3% withholding tax since its inception, and continues to hope that lawmakers come to their senses and repeal it.

Several bills and amendments have been proposed over the course of the provision’s life that would remove it from the record, and prevent it from ever damaging the cash flow of companies that do business with local, state and federal entities. The most recent of these is an amendment, still pending at the time of this writing, to S. 493, the Small Business Innovation Research (SBIR) and Small Business Technical Transfer (STTR) Reauthorization Act, introduced by Senators David Vitter (R-LA) and Scott Brown (R-MA). Vitter and Brown have previously introduced their own standalone repeal bills before combining them into this amendment, which would likewise eliminate the 3% withholding requirement and tell agencies and companies to act as though it were never enacted.

The issue with previous repeal efforts was that they weren’t attached to measures that would offset the revenue loss of repealing the 3% withholding; as expensive as it would be in the long run, the 3% tax would generate revenue for the government, and any repeal effort will have to include some commensurate form of spending cuts or revenue generators. Amendment 212 gets around this by rescinding $39 billion in funds appropriated but unspent by government agencies, excluding the Departments of Defense and Veterans Affairs.

“The withholding is a flat percentage of revenues from government payments, bears no relationship to companies’ taxable incomes and will restrict cash flow needed for day-to-day operations and investments,” said the Government Withholding Relief Coalition (GWRC) in a recent letter to lawmakers in support of Amendment 212. NACM is counted among the dozens of members of the Coalition, which was formed to repeal the requirement shortly after its enactment and the NACM Government Business Group (GBG) has been active in keeping its members informed of the implications and encouraging contact with respective representatives.

The letter continued, pointing out that governments and governmental entities themselves will scarcely have the resources to handle the implementation of the new requirement. “In addition, the administrative and capital investment costs that compliance with 3% withholding will impose on businesses and governments will be substantial, and the mandate will be exceedingly complicated to implement. Three percent withholding will be especially burdensome for small firms. With the withholding mandate scheduled to take effect on January 1, 2012, businesses and governments are expending limited resources now in order to make the major system and process changes needed to implement this provision. This is a particular challenge for cash-strapped state and local governments.”

For more information on the 3% withholding tax, stay tuned to NACM's Credit Real-Time blog, NACM's eNews, and Business Credit magazine.

Trade Gap Narrowing Overshadowed by Drop in Exporting, Surge in Pricing

The Obama administration, U.S. businesses and domestic analysts alike have been pining for a narrowing of the domestic trade gap. And, although just that occurred in February, the news was overshadowed greatly by statistics indicating the first decline in exporting activity in six months and a worrisome price spike on both exports and imports.

Newly unveiled Commerce Department statistics indicate that the trade gap narrowed in February to $45.8 billion from $47 billion. However, both importing and exporting activity were down, by $3.6 billion and $2.4 billion, respectively. The drop in exporting activity despite a doubling-down by the Obama administration to make trade more of a priority in recent months than in any stretch of this presidency came as an unsettling surprise to analysts and economists. The knee-jerk response from markets has been one of renewed uncertainty regarding the continued strength, or lack thereof, of what has already been considered a lackluster and disappointing economic recovery over recent months and years.

Meanwhile, Bureau of Labor Statistics numbers on import and export price indexes, also announced Tuesday, show higher fuel prices causing a surge in the cost of various products and materials worldwide. Import prices increased by 2.7% between February and March. The index for the important fuel category alone jumped 9%, the largest advance since June 2009, the bureau noted.

Export prices also increased, by 1.5%, from February to March, similar to the previous month’s uptick. Of particular interest is the continued rise in agricultural exports. Those increased another 2.3%, with spikes coming within the corn (9.2%) and cotton (10.5%) commodities. The bureau noted Ag prices has surged by 34% over the last year. Much of this is attributable to draughts and wildfire catastrophes in places such as Russia as well as supply damage caused by out-of-season freezes in some key growing areas. While the high prices are helpful for those producers who evaded crop damage and saw quality yields, the price surge certainly is a double-edged sword that could cut those in the small business exporting game deeply.

Brian Shappell, NACM staff writer


CICP Road Diary: Entry #5 "Two Sides to Every Story" Again

If I had waited a day, and worked my way through another module before cranking out CICP Road Diary #4, I could’ve done a massive, convoluted blog entry about how this course goes into the nature of transactions from both sides, and then goes into both sides of those both sides. Wh


Confused yet?  I know I am. Probably best then that I just wrote the last entry when I did, rather than waiting and corralling it all into one, long, plot-twisting explanation.

For those who are new or who didn’t click that link up there, in my last entry, I talked about how the CICP course will take you through both the elements of international credit and risk management at a bank, and international credit and risk management at a seller’s company. That was really only part of it though. I just got to Module 10 (fell back behind again, due to a presentation on the Credit Managers’ Index (CMI), which, hey, have you heard about it? It’s awesome) and I’m reading about financing international trade from the importer’s perspective, which is to say the buyer’s perspective.

Banks, sellers, and now buyers, the triumvirate of international business, all of them here, thoroughly discussed and analyzed.

It sometimes seems like I forget that buyers exist, which, in fairness to me, kind of makes sense. NACM is here to help people extend commercial credit, which is a function of selling really. But I may be guilty of dividing sellers and buyers up as though they were always two separate and unrelated entities. It’s probably news to no one but myself that, hey, sellers need to buy things too, and buyers need to sell things too. Pretty basic stuff here, but it’s easy, when focused on the process of credit extension, to forget that the buyer isn’t just the person who’s either going to pay you or not, they’re a person and a business, trying to make it just like you are. They have to do what’s best for them, as do we all.

The only way I can even remember addressing the plight of the importer, or buyer, is a long time ago when I mentioned in an article how sellers can sort of coach their customers into being a successful business (and by extension, an excellent customer). They can help them get organized and help them find sources for new sales and new markets (if they have the resources to do so).  It’s a noble goal; it helps establish the business relationship and enhances the chance of prompt payment and if a seller can coach its customer into growth, hopefully that customer will turn around and need even more product.

I probably didn’t include this in the article, but, internationally speaking, this kind of win-win scenario seems like it would be much easier if you understand terms and financing from the importer’s perspective; what they’re looking for and what they want, as opposed to what you’re really willing to give.  Trade financing is an especially interesting point because both buyers and sellers need it, but they often have different reasons and (often very) different preferences about how this financing is administered.

I guess what I’m saying is that the CICP course will remind you that, as it is on the dance floor, so it is in business: it takes two to tango.

And possibly three to tango, if you count the bank.

Okay, it takes more than one to tango. I think that’s a fair compromise.

Till next time,

~Jake

Columbian FTA Clears Major Hurdle

Following a meeting of leaders at the White House April 7, the long-delayed free trade agreement (FTA) between the United State and Columbia looks to be on the way to completion, much like an agreement worked out with South Korea before it. The president believes it will be a boon for small business exporting efforts.

President Barack Obama and Columbian President Juan Manuel Santos reached to an agreement on labor improvements, such as rights of those who unionize and labor workers’ safety in once crime-plagued Columbia, long seen as a significant stumbling block to completing the FTA. Perhaps buoyed by China’s attempts to build trade inroads with the nation, it’s now the second of three trade agreements started during the Bush Administration. The framework of the Columbian FTA was forged in 2006. 

“The United States has an enormous interest in the development of Latin America and an enormous interest in progress in Colombia,” said Obama. “President Santos I think is at the forefront of a progressive and thoughtful agenda within Colombia. He’s obviously initiating a whole range of reforms…This [FTA] represents a potential $1 billion of exports, and it could mean thousands of jobs for workers here in the United States. And so I believe that we can structure a trade agreement that is a win-win for both our countries, and I’m looking forward to working with President Santos to ensure that both countries benefit. And this will help me meet my goal of making sure the United States has doubled exports over the coming years and that we’re as competitive as we can be in a global marketplace in the 21st century.”

(Note: To view the White House-approved details of the now imminent FTA, see the fact sheets by clicking the highlighted link).

Brian Shappell, NACM staff writer


Third Bailout Domino Finally Falls in EU

After months of speculation, denials, finger-pointing and debate, it has been confirmed that Portugal is ready to accept a financial bailout from the European Union. It now is the third of the so-called “PIIGS” nations (Portugal, Italy, Ireland, Greece, Spain) to accept a bailout in less than one year amid crushing debt loads. Greece was the first, followed by Ireland.

The European Union issued the following brief comment on the matter Thursday: 

“The Portuguese Prime-Minister, José Sócrates, today informed the President of the European Commission, José Manuel Durão Barroso, of the intention of Portugal to ask for the activation of the financial support mechanisms. The president of the European Commission assured that this request will be processed in the swiftest possible manner, according to the rules applicable. The president of the European Commission reaffirms on this occasion his confidence in Portugal's capacity to overcome the present difficulties, with the solidarity of its partners.”

It has been speculated that such a bailout could reach upwards of $120 billion (USD) and almost certainly will come with forced austerity measures. Again, European economic stalwarts Germany and France are expected to do most of the heavy-lifting, so to speak, in footing the bill for the bailout.

Brian Shappell, NACM staff writer

CICP Road Diary: Entry #4 Two Sides to Every Story

This could just be me, and my uninitiated self, but in my experience with credit, credit managers, financial management professionals, financial management, and what have you, it always seemed like these things, and these people, were separate from banking, or bankers.

The word “silo” comes to mind.

This was a word that, before I began working here at NACM, I associated only with farming. All of the sudden I heard it used to describe the divisions of responsibility in a corporate entity, or the separation of who does what within a department or a sales organization or anything similar. 

The term itself connotes a sense of isolation, or almost loneliness, and while I didn’t realize it at first, was more often than not being used negatively. The idea that credit professionals should stay focused on their credit “silo,” wasn’t sustainable anymore, and probably hadn’t been for quite a while. Understanding the needs of sales, marketing, treasury, and everyone else was, and still is, a necessity.

To tie this back to the CICP course, and to that opening paragraph up there, I always looked at business and banks as two separate silos. Larger ones than those of credit, or sales, or marketing, or collections, or any others you care to name, but still their own unique, unattached worlds. The CICP course has changed that for me.

It could be different in domestic credit, but in international transactions, banks and their corporate customers seem to be very closely twined together. The course tips its hat to this fact by giving students a rundown of the process of international credit and risk management at a seller, as well as the process of international credit and risk management at a bank. You’re getting both sides here, rather than just the knowledge that you’d need to equip you to manage risk on only one of the two sides; banking or business.

It took me a couple modules to really catch it, but I think much of the course involves recognizing that credit management at a bank is different than credit management at a seller, then keeping your eyes peeled for the more subtle, important ways where these two things overlap. While I have no professional experience with this, I’d bet money that being aware of these items, the similarities and the differences, would help a banker better understand their corporate customer and a corporate customer better understand their banker. And that sounds pretty win-win for everyone there.

In any case, I was not expecting that from the course, at the onset, although maybe I should have. A one-sided look at the international risk management function probably wouldn’t yield results nearly as interesting as the ones I’ve found here.

Till next time,

~Jake

Trade Targets Diverge on Inflation Fighting

The central banks and governments for a pair of key targets in small business exporting took very different paths this week in fighting growing inflation. China’s central bank, concerned with its economy getting significantly more overheated than it already has, tried again to pump the brakes this week by raising interest rates. It’s a decidedly different track than is being taken in Brazil.

The People’s Bank of China announced it would raise its rates by 25 basis points, the second time this year it has opted to make such a move. The move was perhaps more surprising in its timing, very close to the last rate hike, than its inevitable appearance. China is contending with, among other things, an inflated housing bubble not too different from the one that propped up and eventually destroyed U.S. economic growth during the middle of the last decade. 

Brazil, acknowledging inflation is a real issue within the growing economy, in essence said it will a take a sort of wait-until-next-year approach to addressing the problem. Officials in the administration of new President Dilma Rousseff, who has a history of being leftist and pro-labor, this expressed concern and/or disinterest in making more significant efforts toward slowing down booming economic growth there. The central bank predicted it will usher in monetary policy tightening sometime in 2012 to curb inflation though, if it is playing catch up, may have to tighten significantly more than it would if addressing the issue this year.

“In fairness to the Brazilians, they do at least recognize the problem and have taken action (albeit with limited results) by raising interest rates twice since late December...policymakers in Brazil are challenged on a variety of fronts,” said Economist Byron Shoulton, of FCIA Management Co., a speaker/panelist at FCIB’s I.C.E. Conference in Chicago.

(Note: More on the varied approaches to inflation-fighing by China, Brazil and the U.S. in this week's eNews, available Thursday afternoon. For more information on or to register for the I.C.E. Conference, visit www.fcibglobal.com).

Brian Shappell, NACM staff writer

1099 Repeal Measure Passes Senate, Heads to President for Signature

The Senate today passed H.R. 4, a bill that fully repeals the 1099 reporting requirement enacted as part of last year's health care reform bill.  Had the repeal not been enacted, the requirement would've required all businesses to file an Internal Revenue Service (IRS) Form 1099 for every vendor from which they annually buy $600 worth of goods or services, beginning next year.

The bill's passage caps weeks of debate over how exactly Congress would pay for the repeal. In voting for H.R. 4, the Senate agreed to fund the measure as the House of Representatives originally sought to, that is, by requiring taxpayers who receive federal health insurance subsidies to repay them if they end up earning more than 400% over the poverty line.

Stay tuned to this week's NACM eNews for more details.

Global Turmoil Sacks CMI Report Optimism

This month's news is not so positive as recent world events are rippling through the U.S. economy. For the past several months there had been a consistent feeling of optimism—despite some struggling in the manufacturing sector based on solid sales—and the seeming willingness to increase trade credit. That optimism took a hit this month. There were sharp declines in sales, new credit applications, dollar collections and the amount of credit extended—all the positive factors. The overall index dropped from 64.1 to 62.2. "This is not exactly catastrophic as the index remains in the 60s," said Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and economic advisor for the National Association of Credit Management, "but the pace has dramatically slowed and that is hardly what had been anticipated or hoped for."

There were continued signs of distress in the unfavorable factors, but the decline slowed and that is somewhat better news. The overall sense of the March data is that the U.S. economy is struggling to keep pace with the events in the world that have drastically altered everything from commodity price expectations to sourcing decisions and credit allocation. "It is important to note that the ripple effects of the events in the Middle East and Japan have only started to manifest and will be factors for months to come," said Kuehl. "The Japanese catastrophe has affected supply chains all over the U.S. and Europe and that has added considerable expense to manufacturers being forced to find new suppliers or wait for weeks to get what they need from the affected region." The price per barrel of oil has jumped by almost $15 since December and that is now filtering into all sectors of the economy.

The most dramatic change in the CMI data is in the category of dollar collections. The combined index slipped back to levels not seen since November of last year, falling -0.7 from 56.4 to 55.7. Kuehl noted that the real damage here is not that the index numbers are drastically reduced—they are still holding fast in the 60s and upper 50s. The real problem is that expectations had been high and it was anticipated that these numbers would be well into the mid-60 level by now. There had been some expectation that gains would be placing these index numbers into the 70s by mid-summer, but that is no longer the most likely scenario. The gains seem to have stalled for the moment, and it is not likely they will start up again as long as the global situation remains fundamentally unpredictable.

When one looks at the unfavorable factors there is still cause to worry and there will be more concerns as prices start to escalate. The rise in oil prices has been sharp, but this is not the only sector seeing increases. The radical price hikes of all industrial metals and food inflation are as bad as they have been since the debacle in 2008 and are now moving through the economy: high oil prices have prompted higher airfares and freight rates. As businesses face these hikes, they are forced to spend more than anticipated and that puts a strain on their ability to keep pace with the other debts they owe. Many of the companies reporting on their creditors suggest that a key reason for the slowdown in payment has been the spike in operating costs.

If there is any good news in the data for this month it is that the index of unfavorable factors has not changed much as compared to the favorable factors. The negative news is the same as last month, suggesting that some concerns about credit collapse have been reduced. There were fewer bankruptcies in this period and that is good news. The other factors worsened a little, but not dramatically. "The anecdotal evidence suggests that most creditors are reacting to some short-term shocks but expect to be back to normal in the months to come—providing that the situation in the Middle East does not worsen appreciably," said Kuehl.

(Note: A link to the full report, complete with tables and graphs, along with CMI archives, is available at the eNews version of this story. It can be found at this website, nacm.org