Federal Reserve Compromises on Final Swipe Fees Rule

In what is being greeted as a major capitulation to financial institutions and the lobby representing outfits like Visa and MasterCard, the Federal Reserve Board issued a final rule establishing debit card interchange fee caps that are almost double what the independent agency pushed for originally.

The Fed’s rule is setting the cap for electronic debit transaction interchange fees, also known as swipe fees, at 21 cents per transaction with the possibility for multipliers of about 5 basis points. It appears the maximum interchange fee, per the mandate, could be as high as 24 cents on the average debit card transaction with add-ons related to areas such as fraud-prevention measures. That’s double what the Fed had proposed throughout the process that followed sweeping financial reform ushered in by the Dodd-Frank Act. The new swipe-fee cap goes into effect on Oct. 1.

The Fed estimated that merchants were charged, on average, 44 cents per transaction, and that revenue from those fees comprised somewhere between $12 and $16 billion for the financial industry in 2009 alone. The Fed noted the proposed regulations would establish standards that are more "reasonable and proportional to the cost incurred by the issuer for the transaction." But amid pressure from lawmakers and the powerful banking lobby, the Fed buckled, opting to postpone the original deadline to have the final swipe fee proposal written, late April, and eventually doubling the amount companies like Visa and MasterCard could charge merchants when customers use debit fees at their establishments.

The Fed’s full statement is available

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Brian Shappell, NACM staff writer

CMI Falls Flat as Caution Rules the Markets

The overall economic narrative in the country for the last month has been a question as to whether the latest run of bad economic news is a temporary phenomenon or is the harbinger of much worse to come. As many analysts have asserted that this is all attributable to the earthquake and “Arab Spring” as those who assert a double-dip recession is setting up for as early as the third quarter. Most of the economic community is somewhere in between, but much of the interpretation lies within the latest run of data, and the National Association of Credit Management Credit Managers’ Index (CMI) for June suggests the temporary impact position has some validity.

The dramatic collapse reflected in the May CMI eased up a little in June. The index numbers bounced around, but these variations were obscured somewhat by the fact that the index as a whole was flat. Considering this month, it is very apparent that the devil is in the details. The overall index number was exactly the same as it was in May—54.2—but there were significant changes in the combined sub-indices for favorable and unfavorable factors.

“The most distressing news comes from the number of credit applications received and the amount of credit extended,” said Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and NACM economic advisor. Many businesses seemed more cautious in the last month or so. Part of this is still related to the issues in Japan and the fear of higher commodity prices, but there is also some growing unease regarding political games. “Few really believe that the United States would put $100 billion at risk in its securities market by not raising the debt limit, but there is intense fear that Congress will take the game too far and provoke a reaction in the markets before it reaches an agreement,” Kuehl said. “It appears this trepidation is affecting the willingness of businesses to expand and seek additional credit. The good news is that sales have risen during this period; in the past, expanded sales usually beget more credit requests and more credit extended.”

The bad news in favorable factors has been balanced out by good news in some of the unfavorable factors. Many signs of distress weakened a little. There were fewer disputes and fewer dollars beyond terms. While there were also fewer bankruptcies, there were still concerns about the number of credit applications rejected and the number of accounts placed for collection. “The overall impression is that there is some separation taking place between those companies that have weathered the last few years and those that had been counting on an economic breakthrough to help salvage their financial position. This is a development we’ve referenced before and the pattern is still evident,” said Kuehl.

As the recession gives way to a slow recovery there is a series of expected moves from the different players in a given industry sector. The market leaders start to anticipate the end of the downturn, and they are ready to ramp up and make an attempt to grab market share from rivals. The best-prepared companies make the first moves forcing competitors to try to keep pace. Some do, but others begin to falter as the business they expected to cover their investment fails to materialize. Right below the market leader category is the market challenger and they are looking for the weak link among the market leaders. They push with their own expansion schemes in an attempt to supplant them. If they calculate correctly they make the jump; if they do not they fall back and start to struggle with cash flow. Right behind the leaders and the challengers are the market followers and they are waiting to see how the bigger battles play out before they choose which approach to emulate.

“Right now the economic recovery is waiting for the market followers to make their move. This is the biggest category of business—and the most cautious,” said Kuehl. The CMI data suggest that this sector is starting to have more active sales activity, which generally provokes more credit demand. The majority of credit requests have been coming from either the most important customers with the best credit or from those struggling on the bottom tier. “When the middle levels start to get earnestly engaged is when there is potential for more general overall economic growth.”

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

Greece Approves Austerity Plan as Athens Burns

Greek lawmakers officially approved an austerity plan today, as rioters clashed violently with police just outside of parliament.

A barely-there majority of Greece’s 300-member parliament voted in favor of a five-year package that will include spending cuts to public services and tax increases. It will also, perhaps most importantly, meet the terms demanded by the European Union (EU), European Central Bank (ECB) and International Monetary Fund (IMF) as preconditions before allowing Greece access to $17 billion it will need in lending to survive the summer. Work on a second bailout will also begin again, now that the austerity plan has been approved.

A second vote on the implementation of the country’s $112 billion package of cuts, taxes and asset sales is scheduled to be held tomorrow.

“With today's approval by the Greek Parliament of the revised economic program, the country has taken an important step forward along the necessary path of fiscal consolidation and growth-enhancing structural reform. But it has also taken a vital step back

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from the very grave scenario of default,” said European Commission President José Manuel Durão Barroso and European Council President Herman Van Rompuy in a joint statement following the plan’s approval. “This was a vote of national responsibility.”

Jacob Barron, NACM staff writer


About NACM




The National Association of Credit Management (NACM) is the advocate for business credit and financial management professionals. NACM and its network of Affiliates take great pride in being the primary learning, knowledge, networking and information resource for commercial creditors nationwide. NACM  was founded in 1896 to promote good laws for sound credit, protect businesses against fraudulent debtors, improve the interchange of credit information, develop better credit practices and methods, and establish a code of ethics. Members of NACM are credit and financial executives, primarily representing manufacturers, wholesalers, financial institutions and varied service organizations.

When you join NACM, you become a part of a network of credit professionals grounded in the industry. You will gain incredible insight through our various educational offerings—seminars, conferences, online courses, webinars, self-study courses and audio conference calls.

NACM provides additional specialty memberships to credit specific groups such as the Asset Protection Group,  the Government Business Group, International Business Credit–FCIB, and Credit and Finance–CFDD.

There is also great knowledge to be gained from NACM publications like eNews, our weekly news email, our monthly Business Credit Magazine,  and the extensive NACM Resource Library, which come with your membership.

Click below to learn more about NACM.












 





 

Obama White House, Congressional Leaders Agree on Trade Agreements Amid New Rift

Tell us if you’ve heard this one before: three long-delayed free trade agreements (FTAs) finally appear ready for Congressional votes this summer. Key Congressional lawmakers from both sides of the aisle and the Obama Administration reported Tuesday that they have forged a deal to put up the FTAs up for House and Senate floor votes. However, a late inclusion from President Barack Obama in the form of a renewed assistance program could threaten the deal’s safe passage.

A push by several Democrats to include an extension of the Trade Adjustment Assistance program, designed to provide aid and unemployment benefits for workers affected by increased foreign competition, apparently was a sticking point for some in getting the FTA’s to a vote. Though many hard-line Republicans are said to oppose this, key GOP figures compromised on the issue. Lawmakers including Senate Finance Committee Ranking Member Orrin Hatch (R-UT) warn that the decision to attach the assistance program onto the FTA vote could jeopardize GOP support despite its longtime interest in passing the trade pacts, especially one with fast-emerging South Korea.

The FTA's are key to Obama's stated goal to double U.S. exporting levels by 2015.

Brian Shappell, NACM staff writer

Conference of Mayors Sees Double-Digit Unemployment in Metro Areas by 2012

Cities will eventually regain their pre-recession employment numbers, but only after a long, slow climb.

That’s what the U.S. Conference of Mayors (USCM) forecasted in its most recent U.S. Metro Economies report, released earlier this week at its annual meeting in Baltimore, MD. While the USCM’s job outlook was foreboding, the report wasn’t all bad news: assuming that Congress raises the debt ceiling without any disruptions, the USCM projected a jump in growth from the sluggish 1.9% in the first half of 2011 to 3.5% for the second half.

Still, the report also found that it would take until December 2014 for over half of the nation’s metro areas to return to their previous peak employment levels.

Of the 363 metro areas counted by the USCM, 75 of them are expected to have double-digit unemployment rates by December 2011, and 48 of them aren’t expected to reach peak employment until after 2020. “It's time for Congress to get on with the serious business of legislating short and long-term solutions to our jobs crisis. We need to stand for a new world order in federal spending. It's time to bring our investments back home,” said USCM President Los Angeles Antonio Villaraigosa, adding that the seriousness of the nation’s unemployment issue should drive lawmakers to end U.S. involvement in foreign conflicts. “We can't be building roads and bridges in Baghdad and Kandahar, and not Baltimore and Kansas City. Not when we when we spend $2.1 million on defense every single minute. Not after nearly $1.2 trillion spent and over 6,000 lives lost in Iraq and Afghanistan.”

The USCM also cautioned deficit hawks and lawmakers hungry for spending cuts, noting that other, more pressing matters are at hand for the U.S. “Federal officials need to bear in mind that although the economy needs a credible long-term deficit reduction plan, it does not need an immediate dose of austerity,” said the report. “Aggregate demand is too fragile.”

A full copy of the report can be found here.

Jacob Barron, NACM staff writer

Fed Stays the Course Despite Slowing Growth Rate

The Federal Reserve’s message coming out of its latest two-day economic policy meeting Wednesday was similar to two others in the last three months: that the economic recovery is continuing at a “moderate” pace, though it’s one that has slowed from that of earlier this year and late in 2010. And it’s certainly off from the more optimistic forecasts from 2009 and early 2010 for a robust recovery by this point.

The Fed’s Federal Open Market Committee (FOMC), as expected, left the target for the federal funds rate unchanged at a range between 0% and 0.25%. It continued to say the “exceptionally” low rate continues to be warranted for an extended period into the future as the economic recovery continues to fail in its attempt to kick into a higher gear. What was more of a debate by analysts heading into the announcement was whether the Fed would stay the course on its assets purchases. Chairman Ben Bernanke and co. did commit to finishing its stated plans; but the Fed also did not unveil any new stimuli, either. 

“The committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings,” the Fed’s announcement noted. “The committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”

The Fed blamed the slowdown to the still expanding growth rate on the obvious factors: higher food and energy prices as well as supply chain disruptions tied to the Japanese disaster. However, the Fed hailed the return of household spending and business investment as well as stable expectations for longer-term inflationary pressures, though it admitted there has been an increase regarding the latter in recent months.

Brian Shappell, NACM staff writer


Brazil Earns Another Credit Rating Upgrade

One of the so-called Big Three ratings agencies took time out of what has been a busy year of finger-wagging at the United States and several European nations over debts levels it remains uncomfortable with to give another upgrade to one of the world’s most noted emerging economies. And despite fears of inflationary pressure and widespread hints of a forming credit bubble, the outlook for Brazil looks “positive.”

Moody’s Investors Service upgraded the government bond ratings of Brazil, to Baa2 from Baa3, as well as the nation’s foreign currency ceilings. It also gave the nation a “positive” ratings outlook.

Moody’s noted Brazil presently carries strong fundamentals that are no more than moderately susceptible to financial event risk (such as the aforementioned credit boom similar to the one that eventually leveled the U.S. economy), has a perceived willingness from officials “to reverse expansionary policies and adopt a conservative policy stance” and demonstrates declining government debt ratios. 

“High economic strength stems from large and relatively diversified productive and export bases,” according to Monday’s announcement. “Policy continuity as well as a government debt structure associated with moderate exchange rate, rollover and interest risks are integral elements of Brazil's sovereign credit profile. Prospective elements are encouraging. Our baseline expectation is for relatively favorable and more sustained economic growth in coming years.”

Brian Shappell, NACM staff writer



Bellwether Study Finds More Signs of Shrinking Manufacturing Sector Optimism

A regional study tracking manufacturing activity indicators in the Mid-Atlantic that is often used to predict future conditions for the national picture took a surprising and sharp tumble in June, adding to recent concerns for the previously strong sector.

The Philadelphia Federal Reserve’s Business Outlook Survey fell to its lowest reading in 31 months (down to a level of -7.7 from 3.9 just one month ago) on concerns over labor markets as well as costs of transportation in the form of surcharges, commodity price-hikes and energy bills. Only 14% of those polls reported employment increases or a need for them in the near future.

The findings are not surprising following the Federal Reserve’s national picture painted by Beige Book earlier this month. The study found in most of its 12 districts that the economy was still growing, but the pace of what was already small growth has fallen off dramatically, partly on the inability of the manufacturing sector to carry other categories as it has been doing.

NACM’s breakdown of all 12 Federal Reserve districts in the latest Beige Book is available by clicking

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Brian Shappell, NACM Staff Writer

Extended Credit Congress Coverage, Photos Now Available Online



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Annual coverage of NACM’s Credit Congress, as usual, will play a big part in the upcoming July/August edition of Business Credit Magazine. However, for those credit managers and professionals who don’t want to wait, a slew of wrap-up articles and photographs from the 2011 edition of the event, held at Nashville’s opulent Gaylord Opryland resort, now are available.

Everything from summaries of the General and Super sessions to analysis of educations sessions to coverage of more fun pursuits like golf and the wildly fun Closing Night Session concert with Nashville’s own LoCash Cowboys has been uploaded to the Credit Congress website. You can access it now by clicking here.

Days After Greek Credit Rating Dropped to Worst in World Over Likely Default, Crisis Boils Over

Everyone seemed to know this was coming, and most were somewhat shocked that it had taken this long to manifest. The decades of mismanagement placed Greece in a position where no government could survive. The latest attempt to get control of the economy with another round of austerity measures was the final straw for the unions, and the riots started. Within hours they became violent as tens of thousands of angry demonstrators took out their frustration on the police. There is nothing to suggest this ferment will end any time soon. The society of Greece is utterly broken, and it is not at all clear that anything can fix the underlying issue.

This is what has the financial community in a panic. There appear to be no good options left for the Greeks. The public wants an end to these austerity plans and a return to the good old days. This is the Greece that doesn’t pay its taxes, where union members work 10 months and get paid for 14 and where people retire with full pay and benefits at 55. This is the Greece that lived off debt and the largesse of others, and this is the Greece that can no longer be sustained.

Fears regarding the impact that this Greek collapse will have on the rest of Europe and the world caused the markets to swoon this week, and there will be more carnage to follow. The yields on Greek debt have reached levels not seen outside sub-Saharan Africa, and that has caused the yields of other nations to rise to astronomical levels as well. The price-per-barrel of oil stumbled by more $6 within one day, and the euro slipped by 1.9% against the dollar, marking its biggest decline in years.

There remains a very slim chance that Greece can be rescued if the Germans and the European Central Bank reach agreement on the terms of a bailout. If there is no rescue, the Greeks run out of money in less than a month. It is at this point that the crisis deepens fast.

Greece likely will default and the financial pain will spread like wild fire. Many of the European banks are heavily exposed to Greek debt, and their solvency will come into question. Governments will lose money as well. The Greeks are very likely to bolt from the European Union altogether so they can drastically devalue their currency and try to survive at the expense of their neighbours. If they leave there will be others that will follow, renewing doubts about the euro zone.

Source: Armada Corporate Intelligence

Small Business News: Optimism, Access to Credit Sputtering

Though overall business optimism has appeared to remain on a small upswing or at least level, that of small businesses continues to wane as the slow economic recovery has repeatedly failed to demonstrate signs of a quick acceleration. Meanwhile, some of those same small business owners take issue with more recent mainstream media and analysts’ suggestions that credit has been easier to come by for companies.

This week, the National Federation of Independent Business’ (NFIB) Small Business Optimism Index slipped for the third straight month in May by a slight 0.3 points. NFIB characterized the present index reading (90.9) as that of a ‘recessional-level reading.”

The results corresponded with the decline found in the Wells Fargo/Gallup Small Business Index for the first-quarter, released earlier this spring, which found small business owners positions shifting from slightly-to-moderately positive to neutral.

Wells Fargo followed that up this week with a report that small businesses still are finding it exceedingly difficult to access credit with any kind of favorable, or even perceivably fair, terms. The firm’s study found that at least 30% of responding company representatives found credit hard to come by during the last year, and 36% believe it will be increasingly difficult to do so. Despite economic growth, albeit tepid, conditions changed little in the Wells Fargo study from the first-quarter to the second-quarter. The peak in actual difficulty was slightly more than 35%, reported in Q1 2010, according to Wells Fargo statistics.

Businesses did, however, get at least one piece of somewhat good news this week…sort of. The Producer Price Index (PPI) statistics for May showed a 0.9% increase, mostly tied to increases in food and energy costs. The good news was that experts had expected the PPI to increase at a much higher rate.

Brian Shappell, NACM staff writer

Fed Beige Book: Economic Growth Rate Easing Again

(Updated 6/10/11 -- hyperlinks to district breakdowns at bottom) Though the Federal Reserve’s newly released Beige Book economic summary found an economy still slowly growing on aggregate over the last six weeks, the pace continues to decelerate in key bank regions including New York, Philadelphia and Chicago.

Even the once mighty manufacturing sector, responsible for much of the growth measured in the last year, is starting to see its expansion rate slip in several areas and concern creep in, according to Beige Book. Part of the problem is the aftermath the Japan earthquake/tsunami/nuclear crisis is having on the supply line of automotive parts. It’s an especially notable problem in districts including Cleveland and Richmond, among others.

Conditions deteriorated for most districts in the areas of agriculture and materials prices, as well. However, overall, commercial real estate and banking seem to be about on part with recent Beige Book reports with some scattered signs of tepid improvement on the horizon.
One of few districts reporting a noticeable ramp-up in the pace of overall growth, perhaps partly because of its ties to the oil industry, is the Dallas district that encompasses all of Texas.

For analysis from each of the 12 individual Federal Reserve districts, click

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here.

Brian Shappell, NACM staff writer

Swipe Fee Delay Legislation Gets Its Day in Senate

(Updated 4:25 PM) It appeared the powerful and well-funded banking lobby was on its way to yet another victory, this time on the long-debated “swipe fee” issue. However, an effort, which had been gaining traction, to delay implementation of caps on interchange fees was turned back in the Senate Wednesday to the surprise of some.

Though mandated as part of the sweeping Dodd-Frank Act’s attempts at financial reform, the Federal Reserve’s plan capping interchange fees placed on retailers who accepted card payments appeared well on its way to facing a 12-month delay, at minimum. Following an intense lobbying effort from the banking sector that flipped several senators who voted for the caps initially, legislation by Sens. Jon Tester (D-MT) and Bob Corker (R-TN) that would delay the caps’ implementation, as well as require a six-month economic study to weigh issues such as unintended consequences on smaller banks and credit unions, came up for a vote. However, the Senate voted 54-45 to defeat the effort Wednesday, making it possible for the caps to go into effect this summer.

The mere attempt infuriated Sen. Richard Durbin (D-IL), who spearheaded the swipe fee cap legislation as an amendment to the Dodd-Frank Act last year before it was passed and inked into law. He characterized the move as capitulation to the mega-banks and credit card companies. 

As part of the Dodd-Frank Act, the Fed unveiled a proposal that would set a maximum cap on 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 somewhere between $12 and $16 billion for the financial industry in 2009 alone. The Fed noted the proposed regulations would establish standards that are more "reasonable and proportional to the cost incurred by the issuer for the transaction." But amid pressure for lawmakers like Tester and Corker, the Fed was forced to postpone the original deadline to have the final swipe fee proposal written, late April.

Capping swipe fees is seen as a significant victory for small businesses that saw the fees as unfair and a serious financial burden. Subsequently, the move, at best, would leave uncertainty at corporations such as Visa, MasterCard and backing financial institutions and, at worst, would have a severely negative impact on their revenue streams. For what it’s worth, the thinly-veiled message from the financial titans continually has appeared to be “We’ll get that money in one way or another.”


Brian Shappell, Staff Writer

NACM National Trade Credit Report Draws a Crowd a Credit Congress

The Expo hours at the 2011 Credit Congress found large crowds mulling about and among the most common questions fielded at the National Association of Credit Management booth was “Where can I find out more about that new national credit report thing?”

NACM proudly unveiled the National Trade Credit Report, featuring credit scores and “days beyond terms” statistics among tools designed to provide specific trade payment data drawn from a database of more than seven million trade lines, during Credit Congress’ packed Super Session. Though already available, it was the first major public announcement of the evolved product. What followed was a steady stream of credit professionals looking for a demonstration and to ask questions about it. 

Said Bill Meeker, president of NACM Tampa: "We’re bringing this report out emphasizing the trade. When you get to talk about trade groups, you’re talking about pure industry trade, how they’re paying in their own industry. While it’s important to see other trades, the first need is ‘I want to see how they’re paying in my industry.’

(Note: To find an affiliate in your area that provides industry credit reports, visit http://web.nacm.org/asp_aps/Affiliates/location/mmbr_map.asp. More information about the creation of the NACM National Trade Credit Report and the importance of reliable credit rating information is available in the new, June Business Credit story “Industry Credit Reports Continue to Demonstrate Credibility; Take a Big Step” on page 30).

Brian Shappell, NACM staff writer

China, Brazil, Chile Subjects of Credit Congress International Business Sessions

The series of Credit Congress educational sessions focused on international business did not stop with those on Canada and South Korea, covered in NACM's blog last week during Credit Congress. A trio of session, presented in conjunction with FCIB, covering three other key nations also drew interested audiences and rav ressions.

Like the session on South Korea, Kyle Choi, Esq. of Bluestone Law Ltd. also led the “Doing Business in China” session focusing on opportunity, cultural nuances and the often overlooked yet critical topic of population breakdowns. “Some people are worried about not having enough population growth,” said Choi, noting that this is a remarkable sentiment to be felt in a country comprised of 1.3 billion residents. Referring to China’s one-child policy, he quipped, “in 10 to 20 years, we’re going to have huge aging population issues.” Choi went on to warn that China’s meteoric growth could soon become a thing of the past as the nation tries to grapple with inflationary concerns.

“Doing Business in Brazil,” was especially well-attended session under the direction of native Brazilian Octávio Aronis, of Aronis Advogados. The interactive session included significant discussion on collections in Brazil, a topic that has frustrated many companies and credit professionals involved in Latin America’s hottest market. “Based on collecting over there, I think it’s much better if you hire somebody in Brazil to do your collections,” said Aronis. “This is the best procedure. You send them to the local professional, and he knows the law. I wouldn’t be wasting my time with overseas collectors.”

Hiring a local also became a hot topic during the final session of the five-part series, one focused on Chile. Christian Laborda Mora, of Laborda Abogados & Asociados LTDA, said credit professionals/businesses who do not sweat the small stuff when dealing with Chilean businesses often simply don’t get paid.

“Basically, the bank executive will not provide you information if you have a problem; Also, culturally, you’re likely to offend when the bank tells the representatives from the company that you were investigating them,” he said, noting it’s part of why employing someone who knows the business and communications culture there is a near necessity. “You probably should hire a Chilean lawyer. There are often good results even when we just send a letter. People don’t like receiving a letter from the lawyer and, if they see the letter is coming from Chile, they know you’re serious and think ‘I could face problems.’”

More coverage from the “Doing Business In…” series will be featured via a variety of NACM platforms including the summer edition of the FCIB newsletter and the July/August edition of Business Credit.

Brian Shappell and Jake Barron, NACM staff writers

Big Drop in Sales Numbers Leads Decline for Both Manufacturing and Service Sectors

The bottom seemed to drop out of the economic recovery in May. The first signs of trouble started to manifest in the April, but by the end of May these threats had become very real and the economy took some steps backwards. The Credit Managers’ Index (CMI) data in April had hinted at the problems with declining numbers in areas like sales, credit extension and dollars beyond terms, but by May these areas and others showed definite strain. “The momentum of the economic rebound has been reversed for the time being and for reasons that should not come as a shock to many,” said Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and National Association of Credit Management economic advisor.

The biggest drop in May was in sales. The 59.4 reading is the lowest since September 2010, and this decline was felt in both the manufacturing and service sectors. There is widespread concern that the consumer was retreating from spending again as retail numbers in general have been tepid. The only reason for an increase in retail activity is due to the hike in gas and food prices. These have forced more spending on the part of the consumer, but this spending has come at the expense of almost every category of retail.

“The CMI data reflects the decline in demand at the manufacturing and wholesale level, and it is very likely that consumer retail numbers will dip correspondingly in June,” said Kuehl. “The CMI data generally presages activity in the consumer sector as it reflects the activity in the commercial sector.”

There are other trouble areas showing up in the data this month. Dollar collections dropped to a level last seen in August 2010 as many companies found themselves in trouble as they were forced to start contending with inflation even as their business opportunities remain limited. This started to show up in April and has since accelerated. As companies start to exit the recession, they often face some severe competitive pressure, as there is nearly always a market leader ready to put pressure on a given industry. As the market leader starts to become aggressive and goes after market share, other competitors in that sector have to keep pace—even if they are not ready. They start to spend more despite limited resources as they fear losing their market position. Add in an inflation surge and there will be some real consequences. Within a very short period of time there will be cash flow challenges unless the expected demand manifests—and as has been pretty obvious that demand has yet to manifest. The inflation that is complicating the financial situation for companies is also hitting the consumer and having a negative impact.

The index of favorable factors had been as high as 64.1 just three months ago in February. Now that index has fallen to levels not seen since October of last year. The index shows that there is still some growth in terms of credit applications and that bodes well for the future assuming that conditions improve and the rate of approvals starts to grow again. Right now there is still a sense that conditions will improve as the threat of inflation fades, but if the threat continues to advance there is likely to be another wave of negative responses.

“The most dramatic changes in the overall index represent an early warning of some bad times ahead if conditions do not improve on the inflation and growth fronts,” said Kuehl. As recently as January all index categories were above 50 and that suggests expansion. Today, there are three important categories that have slipped into the 40s and that creates concern. The biggest drop was in dollars beyond terms—a slide from 50.7 to 46.5. Overall, the combined index fell 1.6%, from 55.8 to 54.2. Many companies are having problems staying current as the costs of inputs rise while their markets remain moribund. Kuehl said that, thus far, there has been little increase in areas like disputes, accounts out for collection and bankruptcies, but if the past is any pattern these areas will reflect the strain in the months to come as business customers continue to grapple with cash flow.

The inflation hike is not solely responsible for the problems manifesting in May, but it is playing a significant role for sure. The plain fact is that most businesses have not seen a return of previous demand as yet and that leaves them very vulnerable to higher costs. The big hike in gas pricing has worked its way through the economy and will be having an impact for the next few months and beyond if its march upward resumes.

The online

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

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