GDP Worse Than Expected; Debt Negotiations Continue

Real gross domestic product (GDP) for the U.S. only grew at 1.3% in the second quarter of 2011. That’s according to the latest from the U.S. Commerce Department’s Bureau of Economic Analysis, which released the data in a report that read like a litany of bad economic news. Private sector analysts had expected a reading of 1.8%.

Perhaps even more devastating than the second quarter’s disappointing GDP numbers was the Commerce Department’s revision of the previous quarter’s growth rate; although it was previously pegged at 1.9%, Commerce revised first quarter 2011 growth down to 0.4%, a devastatingly slow pace that’s only a hair away from economic contraction.

Despite the anemic growth in the first half of 2011, Commerce noted that GDP has grown for eight consecutive quarters now. A possible explanation for the lagging recovery could be found in another one of Commerce’s negative revisions announced today, which showed that the percent change in real GDP for all of 2009 was actually 0.9% lower than originally reported. This means that the now-ended recession was even more severe than originally thought, and left the economy in a hole to crawl out of that was deeper than first believed.

Commerce Secretary Gary Locke used the numbers to ratchet up pressure on recalcitrant lawmakers unwilling to make a deal to raise the nation’s debt ceiling. If the ceiling is not raised by next Tuesday, the U.S. may default on its debt, which many believe would usher in another recession.

“Today’s first look at GDP in the second quarter confirms what we already knew: the economy isn’t growing as fast as it needs to. And every day that we fail to act to lift the debt ceiling and inch closer to default, we threaten our economic progress and job creation,” said Locke. “Experts have repeatedly warned that if this uncertainty continues, our economy will pay the price. We can’t afford to return to the same failed policies that brought us here. We must build on the progress we’ve made over the last two years and reach a balanced compromise that will reduce our debt and at the same time strengthen our job-creating ability and global competitiveness for the future.”

Negotiations on the debt ceiling continue. Last night, a vote on a short-term budget deal proposed by Speaker of the House John Boehner (R-OH) was delayed due to a lack of support. The proposal, which only raises the $14.3 trillion debt ceiling by $900 billion and would require another increase before the end of the year, may see another vote today.

Jacob Barron, NACM staff writer

‘Wait and See’ Approach Persists for Third Month in July CMI

The best that can be said about this month’s Credit Managers’ Index (CMI) is that things did not get appreciably worse. The latest data suggest a third month of slump, and it appears the economy is languishing in a state that is not quite in crisis but which isn’t showing energy either. For the third month in a row, the overall index was slightly over 54. The fact that it went up by .4 is nothing much to cheer, as the overall index had been over 55 for the six months prior to May’s slip. “If there is anything to be somewhat encouraged by it is that manufacturing improved over the really down month last July, but at the same time there was weakness in the service sector that didn’t appear the previous month,” said Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and economic advisor to the National Association of Credit Management (NACM).

Very little changed as far as favorable factors were concerned. Sales were essentially flat at 60—slightly down from 60.8—but that is a pretty solid sign given the declines noted in other areas. “It appears sales numbers have started to stabilize and are not that far from the highs reached a few months ago when they crested at 66.3,” said Kuehl. The biggest decline was in dollar collections—from 58.1 to 56.2. There have been other signs that collection activity has been slowing, which is consistent with the overall assessments of the economy of late.

“In comparing the CMI readings to other indices, it is apparent the economy has still not committed to either continued growth or a real decline,” said Kuehl. “There have been some positive signs from the latest set of leading economic indicators released from the Conference Board, but there have also been renewed signs of distress as far as consumer confidence is concerned. Not surprisingly there is a sense that much has stalled in the economy as uncertainty has been the rule of the day.”

Unfavorable factors don’t show signs of increased stress and there isn’t a lot to suggest much panic—at least not yet. There was a pretty solid improvement—from 50 to 55.6—in the dollar amount of customer deductions. This was accompanied by modest improvements in the number of rejected credit applications, which improved from 50.9 to 51. There was also improvement in the number of disputes, from 49.3 to 50. “These are not major shifts by any stretch of the imagination, but at least they are not trending downward any further,” said Kuehl.

The overall index barely changed and the manufacturing and service sectors have simply swapped positions again as far as stress is concerned. The CMI numbers for the last three months show a general slowdown in business activity. There has been a slump in sales, a reduction in the number of new credit applications and a slowdown in the collection process. The economy is essentially stalled and the question is whether this is a reaction to something short term or a reflection of some greater underlying trend. The CMI data hint that the situation is temporary and related to uncertain factors gripping the economy. Much of this information is more anecdotal than anything that can be pinned onto hard data. The majority of the information from the banking sector suggests there is money to borrow. There is available trade credit according to most sources. Businesses are sitting on more cash than they have in a long time and most companies are not having issues paying their bills. The problem is that almost everybody is worried about contingency plans and are sitting back as they wait for something to change.

The demand needed is not there yet and nobody is quite sure why. The jobless situation is certainly a worry, but the fact is that 91% of the workforce is employed. They are nervous about spending and as long as they stay on the sidelines, the manufacturing community does as well. “There are few in the mood to leverage themselves until they have a better sense of what to expect from the government and from the economy as a whole. Everything is more or less in place for expansion, but there has been no trigger thus far and there is plenty to make people more nervous about the future,” said Kuehl.

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

Fed Beige Book: Slower Pace of Growth Becoming National Tren

The Federal Reserve’s latest of roundup of economic conditions in the nation’s 12 regions sings a familiar tune to reports from the last three or more months: that growth is still occurring in the U.S. economy, but at a noticeably slower pace.

Slow and modest growth is the name of the game, said the latest edition of the Federal Reserve's Beige Book, unveiled Wednesday. Part of the reasoning for the lasted moderation of the growth pace, especially in the middle of the country, was concern over political disruptions in the run-up of the debt ceiling debate and shutdowns of some governments entirely, particularly Minnesota. Also in play in many of the central region is wrench that unpredictable weather has thrown into matters in the agricultural sector.  Those in the agriculture industry who did see their crops survive did enjoy high prices for their commodities. However, such higher costs because of weather-related supply reductions and the aftermath of the previous six-week period’s gas price spike, mean businesses around the nation had to contend with higher costs of doing business. One light at the end of the tunnel, however, is the belief/hope among Fed contacts that falling gas/oil prices during the latest six-week tracking period will continue in the coming months, providing a boost for growth.

Manufacturing remained steady in most districts, though some slowing of growth levels was reported. An uptick in auto production returned as Japanese supply-chain disruptions finally started easing. Granted, auto producers still are playing from behind, so to speak, and the back-up could lead to slower automotive and auto-parts sales for a bit longer.

Credit conditions have changed little, through there were some reports of the cost of capital dropping amid inter-bank competition for well-regarded business borrowers (Richmond, Atlanta, Chicago, Dallas, San Francisco). Commercial real estate was about split down the middle between the have’s reporting improvement and the have not’s continuing to report weak conditions.

To view the full 12-region Fed Beige Book report, click

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Brian Shappell, NACM staff writer


What Really Happens If Debt Ceiling Deadline is Missed?

The rhetoric among U.S. lawmakers regarding the debt ceiling issue is as intense as anything heard in recent memory, as all sides are trying to put as much drama into this debate as humanly possible. The problem is that nobody really knows exactly what will happen if the debt ceiling agreement is not reached by August 2, as this is unprecedented. The reactions will be hard to predict, and there will be lots of choices to be made should the debt limit prohibit the U.S. from issuing any more securities as a means to pay its obligations.

In reality, the US will have much of what it needs financially regardless of the decisions on the debt ceiling over the next several weeks. Then it becomes a matter of setting priorities. Much has been made of what happens should the U.S. default on its debt obligations to those holding securities, but it is nearly certain that these obligations will be paid first. The most likely decision will be to delay payments to those doing business with the government. All contractors will be at risk—and for an extended period of time.

Much has been made of the reaction expected from the investment community but, in truth, there have been mixed signals. The bond yield would have been expected to rise sharply if the market thought that a real default was imminent, but it has remained stable until very recently. Even the recent increase has been modest. The assumption on the part of the bond market is that the U.S. is going to make sure that investors are paid and its credit rating will be preserved. There is always the chance that confidence will slip and the bond yields will spike, but, thus far, this is not taking place.

If the bond market doesn’t react, the interest rates will not spike. The US may yet see its sovereign credit rating downgraded [as threatened most recently by “big three” ratings agency Standard & Poor’s] though, and that could have an impact. Much will depend on what the ratings agencies think about US intentions. At the moment, they are reacting to the rhetoric in the U.S. and have to figure in a default. But, as soon as the U.S. shows its desire to pay creditors the ratings groups will likely leave the rating unscathed—but with all manner of strict warnings.

But here are threats that go beyond the debt ratings though, and these constitute a bigger risk but one that is even more unpredictable. Many who assert that the economy is too fragile for this kind of hit for thousands of businesses and individuals. The bottom line is that nobody really knows what the impact of the shutdown might be, but nobody assumes it will be benign.

Source: Armada Corporate Intelligence

Greece Bailout 2.0 Given Go-Ahead

Following a deal struck between stable European Union powers Germany and France, Greece is going to get their second bailout so that they have a little more time to see if the European recovery will become robust enough to save them. The foot-dragging by the Germans and the European Central Bank (ECP) finally ended for a while, and a compromise was worked that is better than inertia though it really doesn’t satisfy anymore.

Still, the deal is a significant one in a lot of respects. The “selective (temporary) default” is the first time there has been a default of any kind on Eurobonds, and that is somewhat likely to weaken this market, as well as the sovereign credit rating of neighboring nations, for a long time. The Europeans have also now committed to an open-ended rescue of Greece, meaning taxpayers in the other EU nations could be fronting the Greeks for years. These latest loans will not be the last. The real work starts now for Greece, the worst off of the debt-hobbled "PIIGS nations," as these loans only stave off the inevitable unless something changes to make Greece competitive.

The global markets were expecting that a deal would be reached, as they could not conceive of the Germans presiding over the destruction of the euro zone. But in the current political climate, nothing is certain and the markets have been wavering for weeks. Yesterday, there was a sigh of some relief, and the response was robust. Now global markets are waiting for the other shoe to drop. Will U.S. lawmakers pull the fat out of the fire at the last minute and make a deal on the critical debt ceiling issue? Most think one is imminent, but there are still some very substantial obstacles in the form of political leaders that are ready to fall on the sword over the issue of the debt and deficit.

Source: Armada Corporate Intelligence.


Breaking: Borders Liquidation Plan Approved

(Updated) A U.S. Bankruptcy Court judge has approved a plan for Borders to liquidate its assets following failed attempts to find a buyer.

Stung as a deal fell through at the last minute, struggling book-retailer Borders announced early this week that a potential bankruptcy auction would not go forward earlier and that the end of former giant through liquidation essentially was unavoidable.

Borders, whose Chapter 11 bankruptcy filings were made in February, had submitted to bankruptcy court a previously-announced proposal from Hilco and Gordon Brothers to purchase the store assets of the business and administer the liquidation process. Borders presently operates 399 stores, which employ more than 10,000 people. As many as three dozen stores and 1,500 Borders jobs could be saved as negotiations still are ongoing for retailer Books-A-Million to those locations over, which was predicted by Wanda Borges, Esq., of Borges & Associates LLC, in an interview with NACM earlier this week. 

"A notice has been filed that says 'the debtors received a bid from a non-insider to purchase the inventory, furniture, fixtures, equipment and leases for approximately 30 stores for which the debtors reserve the right...to seek approval in connection with the sale hearing...to be held on or about July 21, 2011...if the bid becomes a qualified bid.' This week could still prove interesting in the Borders case -- we may yet see a continued business operation," Borges told NACM.

Products such as the Kindle and other growingly popular electronic book-reader products hit significantly at Borders’ business model, and both they and top competitor Barnes & Noble have been trying to break into the more techno-friendly niche. However, both have been playing from behind, so to speak.

"The big box retailers have suffered from internet sales -- books are now becoming really an alternative to electronic media," said Credit Management Association's Mike Joncich about the shifting industry paradign. "Borders took a wrong turn while people like Amazon and Barns & Noble took a right turn to embrace the electronic delivery method." Joncich added that he believes "the age of the big box retailers may be coming to an end." 

Foreshadowing of Borders' demise into bankruptcy gained steam through late 2010 and, increasingly, throughout January. The big-box book retailer intimated twice in as many months that it would have to delay payments to creditors and/or vendors in an attempt to bolster its capital position. In additions, it was widely reported that Borders was trying desperately to renegotiate terms with financiers at Bank of America and General Electric, among others. These developments all helped tank a stock that was already trading below $0.50. A late 2010 poll conducted by The Street found that more than two-thirds of respondents believed a Borders Chapter 11 filing was likely. At least one major publishing company reportedly stopped all shipment of books to Borders for a time, fearing this week's announcement was an inevitability that would arrive sooner than later.

Brian Shappell, NACM staff writer

IMF Report Finds Chinese Currency Undervalued, Not as Much as Thought by U.S., Brazil

A newly unveiled report from the International Monetary Fund (IMF) on China’s economy and monetary policy indicates there is good reason to believe the Asian nation’s currency is purposely undervalued and that it’s a problem that needs to be addressed for its long-term economic health. However, IMF analysts downplayed the significance of claims that a quick revaluation of the Chinese currency would lead to gains in nations where officials have been turning up the rhetoric about the perceived currency-based trade advantage.

IMF’s report centered around growing economic risk in China because of factors such as high inflation stemming from concern over food prices and supply as well as a real estate bubble and a decline in credit quality during the inevitable post-expansion era. IMF staff predicted China’s trade surplus actually is on the downswing and downplayed some firmly help speculation that the currency undervaluation, rather than factors such as longtime cheap wages and solid infrastructure for manufacturing, lead to the nation’s trade superiority from partners like the United States and Brazil. Still, IMF undervaluation “is holding back progress in areas that would help safeguard against near-term risks and promote economic rebalancing.”

Based on the findings, Armada Corporate Intelligence Managing Director Chris Kuehl, NACM’s economic advisor, speculated that, even if China quickly allowed its currency to appreciate by 20%, the United States likely would only receive a 0.5% bump in economic growth.

“The IMF report will not be welcomed by those who have made it their business to attack the Chinese for all the economic ills in the US,” said Kuehl. “The loss of manufacturing output to China over the last 20 years was only partially accelerated by currency policy. The biggest factor was China’s low-cost production capabilities, but these are the advantages that have started to erode in China.”

Brian Shappell, NACM staff writer

Updated: Harrisburg Still Mulling Bankruptcy Despite PA Run on Chapter 9 Options

The city council of debt-hobbled Harrisburg, PA voted down a debt-restructuring plan suggested by the state and reportedly continues talks with bankruptcy efforts despite the state’s move to make filing a Chapter 9 much more difficult, not to mention painful.

After months of rumors regarding a possible Chapter 9 bankruptcy filing necessitated largely by massive debts from a trash incinerator project in Pennsylvania’s capital city, Harrisburg lawmakers voted on a debt-recovery plan on Tuesday. By opponents won out, saying tax payers had to carry an unfair share of the pain compared with investors/bondholders. Pennsylvania political experts have noted that bankruptcy is an option that still remains on the table, even as the state passed a new law seeking to stymie such a move.

State lawmakers hurried in recent weeks to pass legislation, S.B. 907, that would strip any third-level city – Harrisburg fits into that distinction – of state funding if it files for bankruptcy before July 2012. Though more than 50 Pennsylvania cities would be affected by this, it was a thinly-veiled attempt to prevent Harrisburg, specifically from filing amid its massive problem with getting debts under control. Among the concerns would be the sullying of the capital city’s reputation and, by default, that of the state. That’s not to mention the subsequent concern likely on the part of investors and bondholders, thus making it more expensive for other third-class Pennsylvania cities to borrow even if they’re much better off than Harrisburg fiscally, which most are.
 
The legislation is the latest, and strongest, political action taken by state governments hoping to prevent municipalities from more frequently going the bankruptcy route when its financial situation grow difficult to control. Other states where actions, albeit slightly less direct, have been taken in the wake of damage caused by the ongoing low economic recovery include California, Rhode Island and Michigan. The question remain is whether or not more states will take bold moves to nip the municipal bankruptcy issue in the bud, so to speak. Stay tuned…

(Editor’s Note: Is Chapter 9/municipal bankruptcy a topic on which you’d like to hear more about, primarily in the form of a teleconference hosted by one of NACM’s top legal experts? Please let us know what you think by e-mailing traceyf@nacm.org. Please put “Chapter 9 teleconference” in the subject line of your response e-mail.)

Brian Shappell, NACM staff writer

U.S. Treasury Mandates E-Invoicing from Bureaus and Suppliers

The U.S. Treasury announced yesterday that it is mandating that all Treasury Bureaus implement electronic invoicing by the end of the 2012 fiscal year. Moreover, in fiscal year 2013, the Treasury will require all of its commercial vendors to submit their invoices using electronic means only.

The government’s invoice processing solution of choice will be the Internet Payment Platform (IPP), which has been in use among several other federal agencies like the Small Business Administration (SBA) and, most recently, the Social Security Administration (SSA), since November 2007.

In the announcement, the Treasury noted that saying the e-invoicing mandate will apply to the department means that it will apply to the Treasury itself and to its many bureaus. IPP is actually supported by the Treasury Financial Management Service (TFMS), a bureau existing beneath Treasury’s umbrella, but now, IPP will be adopted by the department’s remaining bureaus, which are the Alcohol Tobacco Tax and Trade Bureau, the Bureau of Engraving and Printing, the Bureau of Public Debt, the Financial Crimes Enforcement Network, the Financial Management Service, the Inspector General, the Treasury Inspector General for Tax Administration, the Internal Revenue Service, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the U.S. Mint and the Departmental Offices. All of these will have to implement IPP and begin processing invoices electronically by the end of FY 2012. Suppliers and sellers to these bureaus and agencies will have to submit their invoices via IPP by FY 2013.

“Electronic invoicing will mean lower costs for taxpayers and faster payments for private sector companies doing business with the federal government,” said Deputy Secretary of the Treasury Neal Wolin. “Treasury is continuing to move forward to identify innovative ways to use technology to cut waste and improve efficiency.”

IPP, as both an invoicing tool and a processing tool, offers the federal government the same advantages that a similar electronic system would offer to a company and its customers. IPP is expected to reduce Treasury’s invoice processing costs by 50% and save approximately $7 million annually, while offering vendors who use IPP the advantage of quicker payments for their services, greater assurances that their invoices are received and processed accurately and immediate online access to their invoice status for all agencies using IPP.

"The U.S. Treasury's announcement today is another positive step as we work toward improved government efficiency and transparency, and overall better governance," said Sen. Tom Carper (D-DE), chairman of the Homeland Security Committee’s Subcommittee on Federal Financial Management. "As we work to rein in our massive federal debt and deficit, we have to look in every nook and cranny of the federal government to find ways to save taxpayer money while still delivering the services that Americans need and expect from the government.”

Jacob Barron, NACM staff writer

Small Businesses Face Painful Transition from GAAP to IFRS

Small businesses could face severe regulatory challenges as the U.S. continues its effort to converge its generally accepted accounting principles (GAAP) with International Financial Reporting Standards (IFRS).

The process of creating a singular global accounting standard has been ongoing for several years now, but at a recent roundtable hosted by the U.S. Securities and Exchange Commission (SEC), no matter how regulators choose to go about imposing the new standard on the nation’s public companies, the smaller of them will face technical and financial difficulty.

“I see no benefit to IFRS at all,” said Shannon Greene, a panelist at the roundtable and chief financial officer and treasurer of Tandy Leather Factory, Inc., a small leather and leatherworking supply company based in Fort Worth, Texas. “All it’s going to do is cost us money.”

Greene noted that while her company is looking to expand internationally, as many other small companies are in a time of booming export opportunities and low domestic demand, there will be no real way to escape the cost of implementing and abiding by the new standard. “I think it’s just going to be painful for a small company,” she noted, adding that while regulators often cite increased comparability as a benefit afforded to companies that switch to IFRS, Tandy Leather Factory’s unique position and industry renders this benefit largely non-existent. “For comparability purposes, we don’t really have any competitors,” said Greene. “I don’t even get the benefit of my financial statements being comparable to someone else’s financial statements for investment purposes, for banking purposes, for capital investment purposes, et cetera.”

“Anytime you ask us to spend money that doesn’t help us sell more product, you get a lot of flak from the senior management team,” she added. “I don’t have anything really positive to say from our company’s perspective. Personally, I get it, but I just can’t see how we get from where we are to where we want to be.”

Jacob Barron, NACM staff writer


Ireland Credit Rating Deemed 'Junk' by Moody's

Despite meeting all of its austerity targets to date, Ireland saw its credit rating cut to junk as part of what appears to be Moody’s Investors Service’s summer of slashing.

Moody’s downgraded Ireland’s foreign- and local government bond ratings to the undesirable level of “Ba1” and stressed the nation’s outlook continues to be “negative.” Fueling the decision to cut the rate is Moody’s belief that the nation will need further assistance from the European Union and International Monetary Fund after the present aid program runs its course in 2013. 

“The prospect of any form of private sector participation in debt relief is negative for holders of distressed sovereign debt,” Moody’s statement noted. “Although Moody's acknowledges that Ireland has shown a strong commitment to fiscal consolidation and has, to date, delivered on its programme [sic] objectives, the rating agency nevertheless notes that implementation risks remain significant, particularly in light of the continued weakness in the Irish economy. The negative outlook on the ratings of the government of Ireland reflects these significant implementation risks to the country's deficit reduction plan as well as the shift in tone among EU governments towards the conditions under which support to distressed euro area sovereigns will be made available.”

Brian Shappell, NACM staff writer


Oil Prices Driving Near Record Trade Deficit

At nearly every opportunity of late, the Obama Administration tries to reiterate its commitment to trade and goal to double exporting levels by 2015. Unfortunately, those efforts appear to be doing little to stem the tide of a trade gap increasingly beholden to volatile commodity prices that again reared their ugly heads in May.

Little could be done to put a positive spin on the trade statistics for May, unveiled Tuesday by the Commerce Department: the trade deficit increased as a near-record $225.1 billion in imports was logged in May compared to exporting $174.9 billion, and the $50.2 billion deficit stands as the second worst on record. Exporting of goods actually decreased by $1.4 billion in the month, while importing of goods jumped by $5.3 billion. And the small exporting increase on the services side ($0.4 billion) was largely erased by the services’ imports uptick ($0.3 billion).

The key driver of the widening deficit for the month was high oil/fuel/petroleum-based product prices. The surge in said prices was felt by nearly every U.S. industry. In fact, Commerce Department statistics illustrate that the U.S. trade deficit to OPEC alone rose to $11.3 billion from the previous month’s $9.6 billion. It was the second largest increase behind that of China, which rose to $25 billion from $21.6 billion in April.

However, one somewhat positive point is that some tightening in the deficit could be expected for June or July, as oil/petroleum prices eased considerably as the U.S. summer began. In addition, the United States maintained trade surpluses with the likes of Hong Kong and Australia while lowering its deficits or keeping stable with levels with key trade partners in Germany, Japan, Ireland and Nigeria, according to Commerce department states.

(For full Commerce Department trade statistics for May 2011, click

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Brian Shappell, NACM staff writer

Who Picks Up the Slack if Inflation-Fighting China Downshifts?

The latest signal that domestic issues matter far more to the Chinese than global considerations comes as the Bank of China elected to hike interest rates to 6.56%—the fifth time that rates have been raised in eight months in an effort to curb growing inflationary pressures.

There is a perfectly rational decision given the domestic concerns in China, but this action isn’t helping the global economy much. China is highly worried about inflation, and that trumps any concerns about pulling Chinese demand away from the struggling economies of the world. The reduction in Chinese manufacturing has been cited as a prime reason for the decline in export volume for a number of nations.

Overall inflation has risen to 6%, and that is almost 4% higher than the Chinese government would prefer to see. This inflation surge is already causing reactions in China, notably from the critical middle class. They anticipate higher prices, especially on food, and that causes them to buy now when possible. The fact is that this activity triggers a cascading set of reactions that only accelerate the problem. The fear is that the Chinese will start to hoard as they have in the past, and that is a very serious threat as far as much higher pricing is concerned. The nation has significantly less control over pricing than it has had in the past, and it is not clear that the state could impose price controls even if it wanted to.

Analysis: The rational for the Chinese action is understandable and not all that different from the decisions that have been made by the European Central Bank as it worries about inflation, but the Chinese focus has shifted in the last few years. That has implications for the rest of the world. If China is not the engine for global expansion at some point, then what nation is going to pick up the baton? The United States is mired in its own slow recovery and there is nothing to suggest that its consumers are ready to resume their role. Europe is waist-deep in the Greek financial mess and isn’t about to expand suddenly. Japan struggles with its 12th year of deflation and a never-ending set of prime ministers who seem to last in office for less than six months. India is not ready to play that role and so on. The Chinese are the dominant player in this game and, when they start to pull back, the rest of the world worries. It isn’t suggested that they will withdraw altogether. They can’t do that as long as they need the world to buy their output. They still have to find jobs for 3 million people per month -- that can’t happen if they shrink too much and too fast.

Source: Armada Corporate Intelligence


(Editor's Note: Armada's managing director Chris Kuehl is NACM's economic advisor).

Portugal Credit Rating Cut to Junk

Moody’s Investors Service continued its world tour of tearing into sovereignties by taking another hack at Portugal’s already troubled credit rating. But the drop seems to have more to do with the debt mess in another European Union member nation more than its own.

Moody's Investors Service downgraded Portugal's long-term government bond ratings to Ba2 from Baa1 and assigned a negative outlook. Two key factors drove the decision, according to a Moody’s announcement Wednesday:
  1. The growing risk that Portugal will require a second round of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a pre-condition.
  2. Heightened concerns that Portugal will not be able to fully achieve the deficit reduction and debt stabilization targets set out in its loan agreement with the EU and International Monetary Fund (IMF) because of requirements such as reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system.

However, beyond those statements, it appears Moody’s outlook on Portugal may be most impacted by the collateral damage caused by the need for a second bailout package by Greece, whose prospects of getting out of debt by conventional means seems to trail nearly every nation on the planet, save some Sub-Saharan African nations. Moody’s noted the following:

“European policymakers have grown increasingly concerned about the shifting of Greek debt held by private investors onto the balance sheets of the official sector. Should a Greek restructuring become necessary at some future date, a shift from private to public financing would imply that an increasingly large share of the cost would need to be borne by public sector creditors…Although Portugal's Ba2 rating indicates a much lower risk of restructuring than Greece's Caa1 rating, the EU's evolving approach to providing official support is an important factor for Portugal because it implies a rising risk that private sector participation could become a precondition for additional rounds of official lending to Portugal in the future as well. This development is significant not only because it increases the economic risks facing current investors, but also because it may discourage new private sector lending going forward and reduces the likelihood that Portugal will soon be able to regain market access on sustainable terms.”

Brian Shappell, NACM Staff Writer

SBA Responds to Allegations that Small Business Scorecard Misleading

As noted an eNews story last week (link at bottom of story), a small business trade association took issue with the U.S. Small Business Administration’s declaration that nearly 23% of government contracting dollars went to small businesses, calling the statistics “misleading.” In a subsequent interview with National Association of Credit Management, which occurred after this week’s eNews deadline, the SBA is firing back saying its statistics are legit.

The new federal “Scorecard” on small business contracts for FY2010 included statistical findings that nearly $100 billion, 22.7% of all federal contracting dollars, went to small businesses. However, the American Small Business League (ASBL) alleged that 61 of the top 100 recipients of the so-called small business federal contracts in 2010 were, in reality, large firms. The association calls the Obama Administration’s assertions “dramatically inflated” and alleges some of the “small business” recipients in FY2010 included Lockheed Martin, AT&T and Hewlett-Packard.

Michele Chang, SBA’s senior advisor for government contracting and business development, told NACM that agencies have gone through painstaking processes to ensure the data is “clean” and free of data anomalies such as “miscoding.” She said SBA stands by the 22.7% number originally released and said an allegation from ASBL that only 5% of those receiving federal contracts were, in reality, small businesses simply was “not true.”
“We have a comprehensive data-quality process that ensures accuracy,” said Change. “We’re confident this is the cleanest data we’ve had and the cleanest it can be.”

However, when asked if Lockheed Martin, AT&T and Hewlett-Packard received money classified under small business allotments, Chang said she “can’t comment on them specifically.” Change noted that, sometimes, a smaller firm awarded an ongoing contract sometimes expands and becomes a mid-sized or large business or gets bought out/taken over by a larger firm; but she placed the onus on the businesses to report the happenings to SBA within 30 days for classification. When pushed, Chang admitted none of the aforementioned businesses would have been considered small business for a number of years and again declined to comment on whether any were classified among small businesses for the purpose of this year’s scorecard.

The original eNews story posted Thursday is available

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here.

Brian Shappell, NACM staff writer