"Amazon of the Middle East" Draws New Investment, Shines Spotlighton Increased Consumption Behavior

In the June 2010 Business Credit article titled “Unveiling Opportunity: Economic Potential Comes with Vagueness, Potential Risk in Islamic Finance,” international credit experts painted a picture in which the Middle East’s younger and more educated population wanted more consumer-based products such as iPods, smartphones and designer-brand clothing.

Feeding into such continuing trends is news this week that a growing online retailer based in Dubai, Souq.com, was selling a significant stake in its business to the South Africa-based media group Naspers. While final details remain sketches, Souq.com officials likened the deal’s scope to the significant Yahoo! acquisition of Maktoob three years ago. Naspers previously bought into ventures in China, Russia and India, as well as part of its global media market expansion.

Souq.com officials purport it is the “largest e-commerce site in the Arab world”-----one that attracts over eight million visits from online shoppers in the Middle East and North Africa regions per month-----and readily acknowledge the widely-held moniker “Amazon of the Middle East.” One look at its website and a user will find striking similarities to Amazon’s e-commerce platform, just one of those aimed at the demographic of those regions.

-Brian Shappell, CBA, NACM staff writer

Storm Impact–Likely to Be Economically Positive in the End

There is something almost perverse about the economic assessment of a natural disaster or major storm, like the one that hit the U.S. Mid-Atlantic and Northeast areas early this week. In the midst of all the painful and tragic destruction, there is the inescapable fact that people and communities rebuild after a disaster – and the richer the community the swifter that reconstruction becomes.

The storm that is ravaging the eastern seaboard will cause billions in damage. The vast majority of the businesses and people affected by this storm have insured their property against just such a development and, in the weeks and months to come, they will be receiving billions in payouts so that they can start to recover. There also will be millions more coming from the federal and state authorities. None of this aid will replace the lost memories and treasures, and it will certainly not help those who will lose loved ones in the catastrophe. However, from an strictly economic point of view, the aid will boost the regional economy.

The most immediate impact will be on industries that have been forced to shut down and lose customers that can’t be replaced. This is the transportation sector mostly – notably, airlines that cancel flights lose that revenue forever. The retailers will likely benefit in the short term as people have been stocking up—at least those that do not suffer damage and power loss. In the longer term the reconstruction process will add billions to the economy and will mean that jobs will be on offer for many months to come. The estimate is that local GDP growth will increase by as much as 1% when all is said and done.

It is the fickle nature of disaster: The damage can’t possibly be underestimated and the silver lining is not on people’s minds as they watch their lives ripped to pieces. Many of those who are being battered right now may not recover fully for years, but the region itself will come out ahead once the recovery process gets underway. At various points in history, it has been a massive tragedy that stimulates growth. For example, the utter destruction of World War II propelled the U.S. economy out a deep recession and stimulated a decade of growth.

-Chris Kuehl, PhD., NACM economist

Eleven Senate Races Key to Party Control, Next Four Years of Economy

There are some close races in the U.S. Senate for most of the political season, which is important because the real economic decision-making is in the hands of Congress. The outcome of these Senate races will determine far more economically than the outcome of the presidential contest.

Below are the races that are still judged as too close to call, even if there is a clear leader in some of them at this point. If the Democrats take five of these races and/or hang on to the ones they have a big lead in (not listed), they will retain control of the Senate. The GOP needs to take eight of these and win the ones they consider safe (also not listed) in order to win back control of Congress’ key chamber:

Arizona—Jeff Flake vs. Richard Carmona.
Connecticut—Chris Murphy vs. Linda McMahon
Indiana—Richard Mourdock vs. Joe Donnelly.
Massachusetts—Scott Brown vs. Elizabeth Warren.
Missouri—Claire McCaskill vs. Todd Akin.
Montana—Denny Rehberg vs. Jon Tester.
Nevada—Dean Heller vs. Shelley Berkley.
North Dakota—Rick Berg vs. Heidi Heitkamp.
Pennsylvania—Bob Casey Jr. vs. Tom Smith.
Virginia—George Allen vs. Tim Kaine.
Wisconsin—Tommy Thompson vs. Tammy Baldwin.

-Chris Kuehl, PhD., NACM economist

(Note: See extended version of this story in FCIB's news blast or the Executive Intelligence Brief, penned by Kuehl’s Armada Corporate Intelligence organization).

Fed Holds the Line on Rates, Asset Purchasing

Citing an economy that continues to grow at a “moderate pace,” the Federal Reserve’s Federal Open Market Committee (FOMC) broke from its economic policy meeting Wednesday with message similar to that of meetings from the recent past.

THE FOMC opted Wednesday to hold rates at a range between 0% and 0.25% and extended the pledge to continue its “highly accommodative stance” on rates through mid-2015. Most of its observations about the U.S. economy echo the sentiments it noted following previous meetings: employment growth has been slow/unemployment remains high, household spending is increasing, real estate is continuing to rebound albeit “from a depressed level.” It did note some inflationary pressure increases, mainly on energy prices, but continued to argue that long-term inflation expectations have remained stable.

The FOMC will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month as well as its program to extend the average maturity of its holdings of Treasury securities. This was a move that gained near-unanimous support among FOMC members with the notable exception of inflation-hawk Jeffrey Lacker.

Brian Shappell, CBA, NACM staff writer

U.S.-Panama FTA to Enter into Force on October 31

The free trade agreement (FTA) pending between the United States and Panama will enter into force on October 31.

Letters exchanged this week between U.S. Trade Representative Ron Kirk and Panamanian Minister of Commerce and Industry Ricardo Quijano established the date on which the FTA would go into effect, after officials in each country completed a review of laws and regulations related to the agreement's implementation.

When the FTA enters into force next week, Panama will immediately reduce or eliminate tariffs on U.S. industrial goods, which currently average 7% but can stretch as high as 81%. Furthermore, over 86% of U.S. exports of consumer and industrial products to Panama will become duty-free immediately, including information technology equipment, construction equipment, aircraft and parts, medical and scientific equipment, environmental products, pharmaceuticals and fertilizers.

"This agreement also provides U.S. firms and workers improved access to customers in Panama’s $22 billion services market, including in areas such as financial, telecommunications, computer, express delivery, energy, environmental and professional services," said Kirk. "Panama is one of the fastest growing economies in Latin America, expanding 10.6% in 2011, with forecasts of between 5-8% annual growth through 2017. That adds up to support for more well-paying jobs across the United States."

The FTA is also expected to benefit the U.S. agricultural industry, as U.S. agricultural exports to Panama currently face an average tariff of 15%, with some reaching as high as 260%. Upon entrance into force, the agreement will immediately make nearly half of U.S. exports of agricultural commodities to Panama duty-free, with most remaining tariffs being eliminated over the next 15 years.

- Jacob Barron, CICP, NACM staff writer

Controversial Solar Cells Manufacturer Sees Bankruptcy Plan Confirmed

Though fought on a number of fronts by creditors, the Internal Revenue Service, the Department of Energy and local officials near its home base in California, Solyndra has seen its bankruptcy plan confirmed in the U.S. Bankruptcy Court for the Third Circuit Third District.

U.S. Bankruptcy Court Judge Mary Walrath Wednesday confirmed Solyndra’s plan, one that will see private equity holders getting the overwhelming majority of the remaining assets and the firm itself no longer operating, even as she intimated there almost surely would be an appeal filed by detractors including the federal government. Among other objections, perhaps the most significant, Walrath brushed aside an IRS complaint that groups of investors who bought into the company as it was failing would gain an “unfair” tax benefit of upwards of $341 million. She noted that investors were doing nothing illegal and that such tax benefits were not a significant factor driving the need for bankruptcy proceedings regarding Solyndra, which thoroughly documented its problems remaining competitive against lower-cost Asian competitors and in an oversaturated U.S. solar products market suffering from lessening U.S. consumer demand.  

Solyndra remains under federal investigation for fraud and under the political campaign spotlight because of its ties to key Obama Administration fundraisers. Before going bust, the firm garnered more than $500 million in federal alternative energy grants, the bulk of which will not be repaid to the federal government. The Romney Campaign continues to air the issue, much like the Obama Administration has dogged the Republican candidate over the “Let Detroit Go Bankrupt” Op-Ed regarding automotive insolvencies.

-Brian Shappell, CBA, NACM staff writer

Japan in Trouble Over Export Freefall

Japan, already in a tenuous period at best regarding economic growth, received scary even if unsurprising trade numbers to start the week. And it could very well lead to only the second overall annual trade deficit for Japan in decades.

Japan’s trade deficit problems accelerated this month as export levels dropped 14.% in September when compared with September 2011. Like many developed economies, Japan’s growth is heavily tied to export levels and has been affected significantly by the European Union debt crisis and the recent Chinese consumption slowdown. However, complicating matters much more in Asia has been the increasingly heated row between officials China and Japan over control of some islands near both. As such, the pullback of purchasing/importing on the China has been particularly noticeable for companies based in Japan.

Of particular note are statistics for automotive exports from Japan to Brazil, down just a few points short of 50% in September. In fact, U.S. television news channels have regularly run images of anti-Japanese sentiment in China, showing itself in cases of mass vandalism at dealerships of Japanese-made vehicles, among other places. It’s all having a negative impact on all-important business confidence, especially that of manufactures. In fact, it has been reported that polls of manufacturers’ confidence levels have not been as low as the present month at any time since April 2011, the first after Japan was hit by the earthquake/tsunami/nuclear plant leak triple-disaster.

-Brian Shappell, CBA, NACM staff writer

Bernanke Defends Fed Stimulus, Takes Swipe at China on Currency Appreciation

A speech delivered this week in Tokyo found Federal Reserve Chairman Ben Bernanke defending the Fed's most recent attempt to jumpstart the economy, while also taking a thinly-veiled jab at China's currency policy.

The Fed's announcement last month to buy $40 billion worth of bonds per month to boost the U.S. raised a number of eyebrows abroad, as the program could pose some general risks to less-developed economies. "Although the monetary accommodation we are providing is playing a critical role in supporting the U.S. economy, concerns have been raised about the spillover effects of our policies on our trading partners," said Bernanke at the seminar titled "Challenges of the Global Financial System: Risks and Governance under Evolving Globalization," cosponsored by the Bank of Japan and the International Monetary Fund (IMF). "In particular, some critics have argued that the Fed's asset purchases, and accommodative monetary policy more generally, encourage capital flows to emerging market economies."

Specifically, Bernanke said that critics argue that these capital inflows cause undesirable currency appreciation, "leading to asset bubbles or inflation, or economic disruptions as capital inflows quickly give way to outflows."

In his attempt to assuage these concerns, Bernanke noted that the effects of these capital inflows on an emerging market doesn't just depend on the Fed, but also on the monetary policy of the country in question. Though he never referred to China by name, his comments seemed aimed squarely at Asia's largest economy, whose name has become synonymous with currency manipulation in the United States.

"In some emerging markets, policymakers have chosen to systematically resist currency appreciation as a means of promoting exports and domestic growth," said Bernanke. "However, the perceived benefits of currency management inevitably come with costs, including reduced monetary independence and the consequent susceptibility to imported inflation."

"In other words, the perceived advantages of undervaluation and the problem of unwanted capital inflows must be understood as a package—you can't have one without the other," he added.

Read a full copy of Chairman Bernanke's comments here.

- Jacob Barron, CICP, NACM staff writer

Face of U.S. Alternative Energy Bankruptcies Busy in Court Just Days After Solar Dumping Duties Levied

Commerce delighted struggling U.S.-based solar manufacturers – past and present – last week by levying anti-dumping tariffs reported to be between 18% and just under 250% as allegations into illegal government assistance and Chinese “dumping” (selling below cost) of solar power-related products onto the U.S. market. Solyndra, presently under federal investigation for fraud and under the political campaign spotlight because of its ties to the Obama Administration, was the first since to jump on China via lawsuits even though its assets may be liquidated in the near future.

In the last week, Solyndra filed suit against a Chinese manufacturer and its U.S. subsidiary in U.S. District Court in Oakland, CA. The suit asks for a $1.5 billion judgment against Suntech Power Holdings Co., alleging the Chinese-owned manufacturer’s conduct “constitutes an unlawful conspiracy and combination to fix prices at predatory levels and to monopolize,” thus violating the federal Sherman Antitrust Act and California’s Unfair Practices Act.

Meanwhile, Solyndra was due in court before U.S. Bankruptcy Court for the Third Circuit Judge Mary Walrath Wednesday to make arguments to approve its bankruptcy plan. Therein, its assets would be liquidated, though its parent company would reorganize and continue to operate if its plan is confirmed without revision.  Among those urging the judge to not accept the plan are the Internal Revenue Service, the Department of Energy and local officials in California.

-Brian Shappell, CBA, NACM staff writer

Majority of Named Plaintiffs Oppose Visa, MasterCard Interchange Settlement

A slim majority of the named plaintiffs representing merchants in the antitrust lawsuit against Visa and MasterCard over interchange, or "swipe," fees now officially oppose the settlement proposed this summer.

As of last Friday, a grand total of 10 of the 19 plaintiffs in the case announced that they would ask U.S. District Judge John Gleeson to reject the settlement. Affiliated Foods Midwest, Coborn’s, Inc., D’Agostino Supermarkets, Jetro Holdings, Inc. and Jetro Cash & Carry Enterprises, the National Association of Convenience Stores (NACS), NATSO, the National Community Pharmacists Association (NCPA), the National Cooperative Grocers Association (NCGA), the National Grocers Association (NGA) and the National Restaurant Association (NRA) all announced their opposition, hoping to rebuff reports that Visa and MasterCard, along with an ever-dwindling collection of settlement supporters, would ask Gleason to approve the agreement before the end of this week.

These plaintiffs join a growing chorus of other retail and merchant advocates arguing against the settlement, the terms of which allow merchants to pass on their interchange fees to their customers via surcharge. In addition to a recent majority of class plaintiffs, high profile retail groups like the National Retail Federation (NRF) and big-name retailers like Walmart, Target and Lowe's have all indicated their plans to fight the deal.

"The people asking the court to approve the proposed settlement simply do not represent the interests of most merchants, we do," said Hank Armour, president and CEO of NACS."The proposal represents a minority view and must be rejected."

Opponents have repeatedly said that the thing missing from the proposed settlement is a mechanism to allow merchants to challenge how interchange fees are set. Furthermore, the proposal would release Visa and MasterCard from several future antitrust claims and lawsuits, making it harder for merchants to mount any more efforts to fight the interchange process.

Even with preliminary approval, the process of full approval is expected to stretch well into 2013. Should Judge Gleeson side with the opposition, that process could end up taking even longer.

- Jacob Barron, CICP, NACM staff writer

Emerging Market Nations Getting Fed Up With IMF

Financial leaders of the emerging markets are trying to remind new International Monetary Fund (IMF) head Cristine Lagarde and the others within the IMF of promises not kept, particularly an increasing fixation on the European Union and little else.

In the last several months the most vocal critic of the IMF and of the central banks has been the Brazilian Finance Minister Guido Mantega, who had previously called out the U.S. Federal Reserve as well as some in the European Union for causing what he considered a currency war designed to hurt emerging nations’ trade performance. The latest objections launched at the IMF now are centered on the preoccupation with Europe. Mantega forcefully articulated that every IMF meeting essentially is focused on Europe, and there is almost no attention paid to the rest of the world. It is something Lagarde promised would not happen in the run-up to Lagarde’s ascension.

That problem is made even more pressing by the widely held assertion that what is deemed good for the Europeans is generally bad for the rest of the world. The policies of the IMF have all been about growth in the euro zone, and that means putting the euro ahead of every other currency and potentially pursuing exports/trying to block imports to some degree. The overall sense is that Europe counts for far more than the emerging economies. This is not an uncommon assertion, and it is one the IMF has been dogged by for decades. The problem now is that these emerging nations are more influential than they have been in the past, and their patience has run thin. They want to be taken seriously and now have the economic clout to get what they want.

-Chris Kuehl, PhD., NACM economist

August Exports Fall to Lowest Level in Six Months

The U.S. Department of Commerce announced this week that total August exports fell $1.9 billion from July down to $181.3 billion, the lowest level in six months. Imports also fell in August, but only by $0.2 billion, resulting in a 4.1% increase in the nation's trade deficit, which widened to $44.2 billion in August from July's revised figure of $42.5 billion.

Responsibility for the 1% decline falls solely on the goods sector, where exports decreased by $2.1 billion between July and August. The service sector saw a $0.2 billion increase in exports, resulting in a monthly all-time record at $52.8 billion. Decreases in the goods sector came primarily from fewer exports of industrial supplies and materials, which fell $1.2 billion in August, and of foods, feeds and beverages, which fell $1.1 billion.

Wider trade deficits are often considered a drag on economic growth as it indicates that U.S. companies are earning less on their overseas sales, while U.S. consumers are spending more money on products manufactured abroad. Nonetheless, exports remain at historically high levels, having grown at an annualized rate of 12.7% over the last 12 months compared to 2009. Total exports over the last year are valued at $2.173 trillion, which is nearly 37.6% above the total level of exports in 2009.

As of August's figures, the top ten buying countries with the largest annualized increases in purchases of U.S. goods, compared to 2009, were Panama (34.9%), Chile (27.8%), Argentina (26.3%), Turkey (26.3%), Russia (25.7%), Hong Kong (25.6%), Peru (25.3%), the United Arab Emirates (21.8%), Ecuador (21.6%) and Venezuela (20.9%).

- Jacob Barron, CICP, NACM staff writer

Banks Optimistic on Small Business Lending

Small business lending is expected to increase according to the most recent survey of bank risk professionals published by the Fair Isaac Corporation (FICO).

Bankers expressed widespread optimism about the small business lending sector, voting by more than a two-to-one margin that the approval rate for small business loans and the total amount of credit extended to small businesses would increase rather than decrease. More than half of all respondents predicted that the overall supply of small business credit would meet demand, although this could simply be a symptom of weak demand rather than a boost in available credit.

Notably, survey respondents were less positive about small businesses' requests for credit. In the first-quarter survey, a large majority of 61.9% of respondents predicted an increase in the amount of credit requested by small business. This figure increased to 69.1% in the second-quarter survey, but fell hard to 56.5% in this quarter's survey. This is still a positive trend, with a majority of participants expecting increased requests for credit, increased approval rates and increased credit in general, but it's not as positive as many had hoped.

Still, the third-quarter survey, conducted for FICO by the Professional Risk Managers' International Association (PRMIA), didn't leave the banking industry wanting for reasons to be anxious. Concerns in the student loan market were rampant in the survey, with a 61% majority of respondents expecting delinquencies on student loans to increase over the next six months. This marks the fourth consecutive quarter that respondents have predicted a worsening of student loan delinquencies.

Commercial credit risk managers might not have to worry about the threat of student loan defaults, unless they're their own, but the adverse effects on the economy at large from these delinquencies could be potent.

- Jacob Barron, CICP, NACM staff writer

How the Mighty (Economies) Have Fallen

Three of the world’s most important and, in the past, strongest economies -- Spain, United Kingdom, Japan -- continue to deal with various kinds of threats to their economic stability as all were reminded this week.

The headline-grabber of the bunch is Spain newly escalated bond and banking concerns as its credit rating was lowered to a level just above “junk” by one of the big-three, U.S.-based ratings agencies. Standard & Poor’s (S&P) hit the economically wobbling nation, long a European Union top four economy, with a downgrade of its long-term sovereign credit rating to 'BBB-' from 'BBB+'. It’s not a surprise given Spain’s struggles – deepening recession, rising unemployment and social discontent, banking capitalization levels, credit availability and, “the lack of a clear direction in euro zone policy.”

It would be an exaggeration to say conditions are as grim in the U.K., but it took a shot of its on this week when its Office for National Statistics (ONS) noted that its trade gap more than doubled to a level of £4.2 billion in August from the previous month. That marks the second-largest trade deficit since the U.K. started tracking such measures. But, unlike so many reports of the recent past, the ONS is not hanging its problems primarily n the struggles in the European Union. Rather, ONS noted that a global drop in demand for products manufactured in the U.K. While different, that’s far from comforting.

Meanwhile, the International Monetary Fund (IMF) reminded that the surprisingly strong economic performance of the last year in Japan has been more smoke-and-mirrors than substance. IMF noted that growth has been almost entirely tied to disaster rebuilding, which it believes almost sure to cease soon. There’s also the increasing problem of an overly strong yen, a drag on trade there, because of flight from investors away from the euro.

In addition, some at the IMF believe the escalation of government bond holdings on the part of banks in Japan could prove dangerous in regards to interest rates and inflation should there be another aggressive downturn there, a scenario that would be far from shocking.

-Brian Shappell, CBA, NACM staff writer

Beige Book Econ Roundup Finds Increasingly Mixed Messages

The latest Federal Reserve Beige Book, an economic conditions report released about eight times annually for the nation’s 12 Fed banking districts, finds a bit more of a mixed situation than the slow, yet steady growth reported for much of the year.

The Fed noted in the new Beige Book that a majority of districts remain in growth territory, but the tone seems less optimistic. Of particular concern appears to be the New York and Kansas City districts, both of which reported flat and/or softening sales. New York, notably, also had struggles to report in the real estate, commercial and residential (which showed a rare uptick again over the last six week period) as well as the all-important manufacturing sector. Also a bit off in manufacturing were the Boston and Philadelphia districts. Those reporting manufacturing improvement included Boston, Richmond, Atlanta, St. Louis, San Francisco and Kansas City. The rest essentially were middling. Whatever the district, vehicle sales continue to be supporting sales more than most product areas and, without its success, the numbers might look considerably bleaker.  

Another area more on the radar than usual is that of agriculture (noted in the previous blog entry and this week’s Thursday NACM eNews release). The drought conditions continue to impair the Minneapolis, Chicago, Dallas and Kansas City Districts -- all off from average levels -- though there has been some needed improvement in crop conditions from the last two periods. However, problems earlier this year are showing up in feed prices, which have affected businesses in half of the 12 Fed districts.

On the finance side, loan demand and credit standards held relatively stable. There were noted improvements in several districts in loan quality and delinquency rate declines.

-Brian Shappell, CBA, NACM staff writer

Chinese Espionage or Campaign Season Rhetoric?

Doing business in China has always been complicated. As much as China has embraced the principles of the market, it is still best described as state capitalism as most major companies  either are owned by the state or heavily influenced by it.

That influence can go far beyond the economy, however, and that was the focus of the Congressional investigation into some of of the country’s largest telecom players. Huawei has been accused of being part of the Chinese espionage process, and the recommendation has been made to limit its U.S. networks access.

The fact is that blocking access to the U.S. market may have some espionage implications, but there are also plenty of potentially negative economic aspects as well. This is another attack on China seemingly planned for the middle of an election season, as blocking access to the U.S. will help American companies compete with their Chinese counterparts. It is impossible to say whether Huawei or the other companies are part of the Chinese spying apparatus -- all denied involvement. The point is that that the possibility is very real and, thus, can’t be dismissed out of hand. On the other hand, the U.S. has to be cautious if it wants to continue doing business with China. The connections between the government and industry are there and much tighter than stateside.

-Chris Kuehl, Ph.D., NACM economist

NACM October Survey Asks about Credit's Biggest Concerns for 2013

NACM's annual survey of credit professionals' top concerns for the coming year is now live on NACM's website. New choices this year include concerns about fraud, competition from companies in developing countries and threat that outsourcing poses to the credit profession in general.

Respondents are invited to choose their top three concerns from the given list, and elaborate freely in the comments section. In-depth analysis of the results will appear in the January 2013 edition of Business Credit.

All participants that provide their contact information will receive .1 Road Map Points and be entered into a drawing for a free teleconference registration. Click here to participate today!

- Jacob Barron, CICP, NACM staff writer

Fourth Chapter 9 Filing in Year in CA on Deck

Barring a massive and unlikely change, it’s only a matter of time now before the fourth California community this year files for municipal bankruptcy.

Atwater lawmakers/policymakers, as expected, met Wednesday – in both closed and open session -- to discuss the possibility of declaring a fiscal emergency, a move that would circumvent the 2011 California mandate that forces municipalities to the table with creditors for a period of no less than 90 days before a Chapter 9 legally can be filed. They voted to do just that amid a more than $4 million shortfall caused by the lengthy and sizable real estate downturn there as well as the growing cost of employee/retiree pensions and other entitlements.

Though a Chapter 9 bankruptcy has not been filed on the city’s behalf yet officially, declaring the fiscal emergency mirrors the play made by San Bernardino, one of three California communities to file for municipal bankruptcy in the last year, and is as thinly veiled an indicator as possible that such a move is imminent.

-Brian Shappell, CBA, NACM staff writer

Is the Service Sector in As Good Shape As It Seems?

The latest numbers from the Purchasing Managers’ Index (PMI) are causing some mixed reactions.

On the one hand the data was far more inspiring than was anticipated: The manufacturing index was above 50, and the service index came back with some numbers that stunned the analysts. The expectation was that there would be a small gain—something that would essentially match those seen in the manufacturing data. Instead, the service data for new orders increased from 53.7 to 57.7, a major gain by most any measure. But almost immediately after the statistics' release there were experts trying to add some perspective and calm down some of the reactions.

There are a couple of caveats when it comes to the improved service sector data. The first is that the jump seems to be the result of a great many reports of flat new orders as opposed to any significant increase in the orders themselves. The questions that are posed to the purchasing managers are simple—has there been more or less or have things stayed the same. This month the responses were overwhelmingly in the “stay the same” category. This made the index look pretty good and, in the great scheme of things, it is far better to see steady performance than it is to see weaker numbers. That said, the rise in the service sector new orders index does not signal a major increase in activity—just an absence of decline.

The other caveat is related to timing. This is the point in the year where there ought to be more activity given that the retail community is gearing up for the holidays. However, there may be more weakness in retail than originally expected, and that should be showing up in the PMI numbers as it has already manifested in the Credit Managers’ Index.

-Chris Kuehl, PhD., NACM economist

Fraud Alive and Well in Business Credit, As Are Defenses

Fraud attempts at the expense of trade creditors are nothing new, and they certainly don't appear to be going away based on widespread anecdotal evidence. A case in point has been in play this year in California and underscores the importance of relying on protection tools such as NACM’s National Trade Credit Report.

We recently caught wind of an alleged California-based fraudster hitting up small- and medium-sized businesses for larger-than-usual lines of credit. The company in question, a computer/electronics wholesaler based in Montebello, went so far as to take out an active domestic corporate charter with the California Secretary of State and the valid tax permit through the California Board of Equalization. The company’s “proprietors” even took up residence in a high-end office building for several months, meeting in person with vendors’ sales and credit staffs on multiple occasions. Then, as invoices started going well past due, phones and emails started getting ignored and they vanished. The alleged scheme even caught the company of NACM member Donald Smith, director of customer accounts with Texas-based Mouser Electronics Inc.

“We wrote off $50,000, which stings a bit bigger than a bumble bee sting,” Smith said. “We would have easily lost another $50,000 or more had we not run an NACM National Trade Credit Report (NTCR) through our local NACM-Southwest affiliate and identified that this was a fraudulent scheme." Smith noted that the NTCR and the various red flags it turned up was critical in helping "stop the bleeding."

- Brian Shappell, CBA, NACM staff writer

(Note: For more on this topic, check out the extended version of this article in this week's edition of eNews, available late Thursday afternoon).

Spain Takes Important Fiscal PlungeĆ¢€”Maybe

Setting a strict budget like the one that Spain has put forward is one thing—getting it accepted is quite another. The government of Mariano Rajoy is taking a far different position than was taken by the Greeks. Within seconds of the Greek austerity plan being announced, the regime leaders were looking to wiggle out of most of it. Spain looks set to make a good faith effort to wrench the budget into shape without having to resort to the rescue demands from the European Central Bank and the euro zone.

There are no real shocks in the budget other than that it looks set to take on some of the toughest tasks without making much in the way of concessions. The public sector, where there is much bloat, will see some dramatic wage cuts, and many will lose their jobs. For those in rural Spanish areas, these jobs  often are the only ones available and, once gone, the unemployment situation will be even more critical.

On top of these will be cuts to pensions—another area that has been abused in the past, but also one that millions in Spain depend upon. This is the fundamental issue in Spain. These are long-needed cuts, but it leaves the question: How does one make these without genuinely hurting people that trusted the system would provide? The answer is that it is impossible.

This is a real moment of truth for the Spanish. The severity of the budget is designed to keep the Spanish from having to submit to the rules and demands of a bailout controlled by the ESM, but that is dependent on the ability of the Rajoy government to stay in power to implement the plan. None of this is a done deal though as unions are threatening massive strikes, political organizations are ready to protest and a majority of the population is asserting that they have no intention of paying the taxes that are going to be coming due, not to mention that the regions are on the edge of rebellion already.

-Chris Kuehl, PhD, NACM economist