CMI Preview 1: January Maintains Gains, Signaling Potential for Staying Power

The January Credit Manager’s Index (CMI), to be unveiled Tuesday afternoon, is expected to illustrate a small positive increase from the holiday-assisted December index. It’s much like the positive out of the gates found by the CMI in January 2011 – but, this time, some key statistics within seem to predict a better follow-up to the strong start than one year ago.

Chris Kuehl, PhD, National Association of Credit Management (NACM) economist, noted the parallels between this and last year, but also spelled out the potential “staying power” behind this year’s January finish that was absent by Spring 2011. New sales in January will see a bump in the not-yet-public CMI results. In fact, January’s sales numbers will show themselves to be the best in many months. That said, nothing is a guarantee going forward in this up-and-down economic recovery

 “The next few months will bear watching to see if this sales trend is repeated and sustained longer than it was in 2011,” said Kuehl. One area Kuehl seems to believe will be a harbinger of a better late winter/early spring in 2012 is a bump in new credit applications:

 “The jump from December [to January] was nothing short of spectacular,” Kuehl foreshadowed. “The trend toward more credit applications suggests a lot of new activity; it is equally encouraging that there was a gain in the number of credit applications accepted.”

(Note: The online CMI report for January 2012 contains the full commentary, complete with tables and graphs and will be available Tuesday. CMI archives may also be viewed online).

Brian Shappell, NACM staff writer

Three Not So Little 'PIIGS Nations' Slashed by Fitch Ratings Friday

The following are passages released by Fitch Ratings regarding its six-nation credit downgrade timed with the end of the U.S. business day Friday:

"Fitch Ratings has today concluded its review of the six eurozone sovereigns it placed on Rating Watch Negative (RWN) on 16 December 2011.

The rating actions on the long-term Issuer Default Ratings (IDRs) are as follows:
  • Belgium downgraded to 'AA' from 'AA+'; Negative Outlook;
  • Cyprus downgraded to 'BBB-' from 'BBB'; Negative Outlook;
  • Ireland LT IDR affirmed at 'BBB+'; Negative Outlook;
  • Italy LT IDR downgraded to 'A-' from 'A+'; Negative Outlook;
  • Slovenia LT IDR downgraded to 'A' from 'AA-'; Negative Outlook;
  • Spain LT IDR downgraded 'A' from 'AA-'; Negative Outlook;

"Today's rating actions balance the marked deterioration in the economic outlook with both the substantive policy initiatives at the national level to address macro-financial and fiscal imbalances, and the initial success of the ECB's three-year Long-Term Refinancing Operation in easing near-term sovereign and bank funding pressures. Nonetheless, the intensification of the euro zone crisis in the latter half of last year undermined the effectiveness of ECB monetary policy and highlighted the financing risks faced by eurozone sovereign governments in the absence of a credible financial firewall against contagion and self-fulfilling liquidity crises."

Source: Fitch Ratings

Obama Burnishes Business Credentials in SOTU

In his fourth State of the Union speech last night, President Barack Obama laid out his blueprint for the nation’s economy, starting with manufacturing.

“We will not go back to an economy weakened by outsourcing, bad debt and phony financial profits,” he said. “Tonight, I want to speak about how we move forward, and lay out a blueprint for an economy that’s built to last—an economy built on American manufacturing, American energy, skills for American workers and a renewal of American values.”

The president also tipped his cap to a recent trend among businesses bringing jobs back from other countries historically thought of as sources of cheap labor. As previously reported, “insourcing” is now frequently taking the place of “outsourcing.” “We can’t bring every job back that’s left our shore. But right now, it’s getting more expensive to do business in places like China. Meanwhile, America is more productive,” said Obama. “A few weeks ago, the CEO of Master Lock told me that it now makes business sense for him to bring jobs back home. Today, for the first time in 15 years, Master Lock’s unionized plant in Milwaukee is running at full capacity.”

“So we have a huge opportunity, at this moment, to bring manufacturing back. But we have to seize it. Tonight, my message to business leaders is simple: Ask yourselves what you can do to bring jobs back to your country, and your country will do everything we can to help you succeed,” he added.

Obama went on to suggest tax reforms that would incentivize companies to bring jobs back to the U.S. and relocate to recession-hit communities. Exporting, which figured heavily into last year’s speech, also received a small amount of attention, mostly as the president burnished his credentials and highlighted the success of the past year’s free trade agreements (FTAs).

In essence, the speech focused on the idea of economic fairness. “The debate now will be over what constitutes fair,” said NACM Economist Chris Kuehl, PhD. “The speech had very little to do with the current condition of the U.S. and its economy, but that was expected in an election year. The overarching message is that the wealthy should be taxed more.”

“The fundamental issue driving the two sides remains how to deal with the debt at the same time the nation has to expand economic growth,” he added. “Without more revenue, the government can’t sustain current spending. Some would have that spending curtailed further while others assert that austerity is already compromising growth. The reality is that taxation and differing concepts of fairness will be at the heart of the election for the duration.”

Jacob Barron, CICP, NACM staff writer

Want Odds of a Corporate Bankruptcy? There's an App for That

Trite as the “There’s an app for that” saying has become in the growing cultural and business dominance of smart phones and devices, a new application apparently does exist to quickly help professionals determine the likelihood of a corporate bankruptcy. And it’s coming from a source familiar to veterans of monitoring trends in bankruptcy.

New York University professor Edward Altman, known as the father of the 1968 bankruptcy predicting model known as the “Z-Score,” is up to his old tricks, but in a whole new, high-tech world. Altman has unveiled a new application (or “App” as the tech-friendlies refer to them) for iPhone/iPad, Android and BlackBerry products called the “Altman Z-Score Plus.

The app relies on the Z-score model to determine the likelihood of publicly-traded U.S. company bankruptcies, like the original model from four-plus decades ago, as well as new wrinkles including many private firms, notably in the manufacturing field, and some internationally based outfits, particularly some key ones based in China.

(Note: More on this story in this week’s NACM eNews, available Thursday afternoon).

Brian Shappell, NACM staff writer

Energy Speculation Ahead of State of the Union Address

When President Barack Obama makes his fourth State of the Union address tonight, the domestic economy will clearly be the speech’s centerpiece. In an election year when little else but the nation’s 8.5% unemployment rate seems to matter, talking about anything else would only seem like a diversion.

Specifically, however, the address may focus directly on the future of the nation’s energy sector. Following last week’s rejection of the Keystone XL Pipeline, energy independence is a newly hot topic, and the White House is keen on using the president’s annual address as a way to both deflect criticism of the rejection and change the conversation on energy altogether.

Opposition to the Keystone XL project, which would’ve constructed a pipeline from Alberta, Canada all the way to the Gulf of Mexico, wasn’t limited to the nation’s most environmentally-minded. Local economies opposed the plan on the basis that it would cost jobs in the natural gas sector, which is only just now becoming economically viable. “The shipment of Canadian oil into the U.S. is hardly conducive to the further development of gas as an energy alternative,” said NACM Economist Chris Kuehl, PhD. "Right now, natural gas is on the edge of an economic breakthrough, and issues like access to cheap oil will matter. The price of natural gas has tumbled, which is a good thing for the utilities that use it to produce power, but the price has not fallen low enough to convince power plants to abandon coal-fired operations.”

“If natural gas reaches a level that makes it competitive with gasoline as a source of energy for mass vehicle use, the sector begins to make sense economically and it now seems more apparent than ever that the White House has this in mind,” he added.

While the development of natural gas could appeal to both heartland economies and environmentalists, a comprehensive energy plan by the Administration will, in all likelihood, seek to exhaust all possibilities in the pursuit of energy independence, meaning oil production would increase along with natural gas production. “There is a very aggressive plan when it comes to natural gas development. It may even go so far as to set a goal for natural gas production that is more aggressive than anything seen thus far,” said Kuehl. “The speech will also emphasize the development of offshore oil reserves and various oil shale deposits in the U.S.”

“These are not the kind of remarks that will gladden the hearts of the environmental community, and they put the rejection of the Keystone project in a different light,” he added.

Right now, however, all of this is speculative. “The ultimate plan from the White House may not look at all like this,” Kuehl cautioned. “And the U.S. will have missed an opportunity to reduce reliance on the volatile nations of the Middle East, but if the rumors are true, this evening’s speech may do a lot for the confidence of domestic oil producers and leave the environmental community with a pyrrhic victory in Nebraska.”

Jacob Barron, CICP, NACM staff writer

Jundt Offers Unclaimed Property Insights As Enforcement Ramps Up

Budget shortfalls remain widespread in the wake of the financial crisis. One notable, and oft-overlooked, casualty of the worst recession in a generation is lax administration of escheatment and unclaimed property rules by state authorities. Where once companies could often pay little mind to local laws governing unclaimed property, now, as recent studies have shown, enforcement is ramping up as local governments look high and low for ways to fill in budget gaps.

With this in mind, Val Jundt, managing director of Keane consulting and advisory services, recently offered her best recommendations to trade credit professionals beset by this new environment, where stringent enforcement of unclaimed property liabilities is the norm, rather than the exception. “Though accounts receivable credit balances are clearly within the definition of an unclaimed property liability, it has only been within the past 5-7 years that this category of property has become a primary focus for the auditor,” said Jundt. “The responsibility of the credit manager to ensure that the identification, tracking and posting of all customer credit balances is done accurately, and completely, is critical.”

Certain obligations can be very easily overlooked by creditors and their companies, Jundt noted, and being aware of these common mistakes can prevent a great deal of troublesome penalties down the road. “For example, there are often contracts with vendors that allow for certain discounts if paid early, or legitimate offsets due to damaged goods, which could appear to be obligations from an accounting perspective,” said Jundt. “If these items are not documented carefully, the auditors often operate under an ‘assumption’ that a liability exists; often creating an estimated liability that can exceed several thousand, or even million, dollars.”

“Whether the credit is still on the books or has been reduced to a check, the auditor will carefully review this area to identify a potential liability,” she added.

For companies looking to increase compliance and protect themselves from newly-zealous auditors, Jundt offered these helpful hints to get started:

•    Confirm that your department is properly identifying and tracking customer credit balances.
•    Make sure that unclaimed credit balances are being reported as unclaimed property.
•    Follow up on customer credits early and often to resolve them where possible.
•    Document your policies and procedures—and test them to make sure they are being followed.

To learn more about trends in unclaimed property and best practices in compliance, check out Jundt’s upcoming presentation, “The ABCs of Unclaimed Property Compliance,” at this year’s upcoming Credit Congress, scheduled for June 10-13 at the Gaylord Texan in Dallas. Click here to find out more, or to register today.

Jundt will also lead a special “Added Advantage” NACM teleconference on unclaimed property in April. Click here to find out how to register.

Jacob Barron, CICP, NACM staff writer




Trade Association Fighting Appeals Court Indemnity Ruling against Subcontractors

A recent “friends of the court” brief on the part of the American Subcontractors Association and its Minnesota affiliate/chapter is seeking to overturn an appeals court decision that could leave subcontractors in a precarious spot.

A recent appeals court decision in Engineering & Construction Innovations, INC. v. L.H. Bolduc Co. Inc has overturned a previous district court and jury decision that barred a general contractor from shifting liability for damage caused during a project. The subcontractor in question alleges it had no part in the damage. ASA noted that a jury found the general contractor at fault for the damage, to a pipeline.

ASA is now urging the Supreme Court of Minnesota to uphold its interpretation of the state’s anti-indemnity law in order to protect subcontractors from such liability.

"Engineering & Construction Innovations, Inc., v. L.H. Bolduc Co., Inc. is one of those unfortunate cases where there’s damage during construction, everyone runs from liability, there’s litigation, and there’s no real clear cut answer as to who should or who is going to pay for the repairs,” said Greg Powelson, director of NACM’s Mechanic’s Lien and Bond Service (MLBS). “It doesn’t surprise me that the prime tried to push down liability, but I think the case [appeals court ruling] will be overturned. I don’t think it would be a surprise to anyone if, in the end, the subcontractor is not held liable for damages it didn’t’ cause. I believe, at the end of the day, logic and cooler heads will once again ultimately prevail, and the prime will have to pay for the damage.”

Brian Shappell, NACM staff writer

Aggressive Enforcement the New Norm for Unclaimed Property

In light of persistent budget shortfalls, states have become ever more vigilant in their efforts to collect what’s rightfully theirs. As such, local governments have tightened enforcement on everything from parking tickets, to taxes, to, as companies nationwide have begun to notice, unclaimed property.

A recent report released by the Conference Board found that states are stepping up their collection of unclaimed property, or escheatment, liabilities in an effort to shore up the capital that state government coffers so desperately need. According to an invitation-only group of 55 executives from across industries, functions and regions, U.S. business leaders are reporting that some states have begun expanding the scope and definition of property that is reportable as unclaimed property to include items such as inventory, vendor samples, unused magazine subscriptions, rebates and gift cards.

Other states have also begun to use extrapolation methods to determine liability, rather than consulting actual data, rescinded the offer of an independent appeals process, limiting a company’s dispute options, and engaged third-party auditors on a contingency fee basis, incentivizing collectors at the company in question’s expense.

“As the use of third party auditors by states continues to rise, it is important that companies are prepared to respond effectively by means of thorough compliance efforts and appropriate audit defenses,” said Joseph Blanco, a partner with McKenna Long & Aldridge LLP, the law firm that collaborated with the Conference Board on conducting the survey and writing the report.  “Failure to do so can subject a company to significant fines and penalties.”

The majority of survey respondents (64%) reported that audits conducted between 1994-2011 used contingency-fee-based third parties, and that nearly one-third of audits had look-back periods of 20+ years, which is well beyond the document retention policies of most companies.

To learn more about how to reduce your company’s escheatment liability, be sure to check out Valerie Jundt’s NACM teleconference on unclaimed property in April, and her presentation at NACM's Credit Congress, scheduled for June 10-13, 2012 at the Gaylord Texan in Dallas. For more information on Jundt's teleconference, or to register, click here. For more information on Credit Congress, click here.

Jacob Barron, CICP, NACM staff writer



Manufacturing Outlook Solid for 3-6 Months, Blurred Beyond that by European Struggles

U.S. production should continue to move forward with solid growth through much of 2012, largely on the strength of the automotive and aerospace industries, says a manufacturing trade association economist and recent study.

Dan Meckstroth, chief economist and director of research for the Manufacturers Alliance for Productivity and Innovation (MAPI) said the organizations latest measurement of the overall business outlook was essentially unchanged between November and December. Meckstroth characterizes this as an “extremely optimistic” view for continued expansion over the next three-to-six months. Granted, small businesses are somewhat less so because of its dependence of real estate values as a primary asset in most cases.

Meckstroth noted a “major driver” for U.S. manufacturing will be necessary capital spending on the part of most U.S. businesses because so much capacity shed during the downturn needs to be replaced. Other significant drivers for manufacturing, according the recently unveiled forecast, are tied to aerospace and motor vehicle/parts production, said Meckstroth, who recently appeared at a National Economists Club event. 

(Note: For extended coverage of this topic, check this week's eNews compilation available late Thursday afternoon at www.nacm.org).

Brian Shappell, NACM staff writer

Friday Marks NACM National Awards' Nomination Deadline

There are just TWO business days remaining to nominate a distinguished peer for an NACM National Award.

The awards represent the best of the best, so to speak, in the business credit profession and are unveiled annually at NACM's Credit Congress event. This year, Credit Congress will be held at the Gaylord Texan in Grapevine, TX (greater Dallas/Fort Worth) from June 10-13. The following are among awards up for nomination, which must be submitted by NACM members by Jan. 20:
  • O. D. Glaus Credit Executive of Distinction
  • Designation of Excellence Awards
  • NACM/Robert Half Finance & Accounting and Accountemps Awards
  • Mentor of the Year
  • Strength in Numbers Recognition Award
  • GSCFM Awards
Recent award winners include Michael Puccinelli, CCE; Kathy Antoine, CBA; Shera “Sheila” Roames, CCE; Shane Norman, CCE; Phyllis Truitt, CCE; Donald Kruggel, CBF and Gwendolyn Stroops, CCE. For more information on the annaul awards, click .

Obama Rejects Keystone XL Pipeline

On the recommendation of the State Department, President Barack Obama denied the application for the construction of the Keystone XL Pipeline today. While environmental and public health concerns figured heavily into the president’s decision, the rejection also served as a wrap on the knuckles for House republicans.

“This announcement is not a judgment on the merits of the pipeline, but the arbitrary nature of a deadline that prevented the State Department from gathering the information necessary to approve the project and protect the American people,” said Obama. “I’m disappointed that Republicans in Congress forced this decision, but it does not change my Administration’s commitment to American-made energy that creates jobs and reduces our dependence on oil.”

The president did, however, leave the door open for the construction of a similar, but smaller, pipeline down the road. “In the months ahead, we will continue to look for new ways to partner with the oil and gas industry to increase our energy security—including the potential development of an oil pipeline from Cushing, Oklahoma to the Gulf of Mexico—even as we set higher efficiency standards for cars and trucks and invest in alternatives like biofuels and natural gas,” said Obama. “And we will do so in a way that benefits American workers and businesses without risking the health and safety of the American people and the environment.”

As previously reported, the Keystone XL Pipeline would’ve stretched from Alberta, Canada to the Gulf of Mexico. Business groups were split, with environmentally-minded groups staunchly opposing it and others, such as the U.S. Chamber of Commerce supporting it.

“This political decision offers hard evidence that creating jobs is not a high priority for this administration,” said U.S. Chamber President and CEO Tom Donohue upon news of the pipeline’s rejection. “The president’s decision sends a strong message to the business community and to investors:  keep your money on the sidelines, America is not open for business.  By placing politics over policy, the Obama administration is sacrificing tens of thousands of good-paying American jobs in the short term, and many more than that in the long term.”

Jacob Barron, CICP, NACM staff writer

Russian Politics Leading to Shaky Ground? Fitch says Yes



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Though somewhat overshadowed by the flood of attention created by Standard & Poor’s sweeping European downgrades, fellow “Big Three” agency Fitch Ratings changed its optimistic tune on one of the vaunted BRICs nations on deepening political, rather than economic- or contagion-based, concerns.

Fitch revised the Russian Federation’s long-term foreign and local currency Issuer Default Ratings (IDR) to stable from positive. Though Russia recently was accepted into the World Trade Organization after a lengthy attempt at inclusion, political uncertainty is growing in concern. Though Prime Minister Vladimir Putin’s likelihood to regain his post as president – some would allege he never really ceded power, only title – after elections in March is essentially a done-deal, there is widespread evidence of unrest stemming from alleged deep corruption in Russian politics The growing, and surprisingly brazen unrest, not seen so publicly since the fall of the Soviet Union, could spike the risk of investor capital flight, likely putting pressure on Russian bank reserves and the ruble. 

“It is unclear how the country's leadership will respond to the unexpected wave of protests triggered by the elections to the Duma on 4 December and to the broader shift in the political landscape,” Fitch analysts noted in a statement this week. “Voters handed the ruling United Russia party a much-reduced majority, and demonstrators protested against electoral fraud. More protests are expected in the run-up to the presidential election. In the long term, democratic development that leads to better governance could be positive for Russia's ratings, but in the short term, uncertainty has increased.”

Financially, the Russian Federation performed very well in 2011, largely on above-expectations oil prices. However, Russian growth still remains dangerously tied almost solely to the oil/natural resources sector, as noted by an unexpected and sharp slowdown because of oil price changes. Additionally, faith in Russian businesses to honor their credit terms and in banks to become more transparent and trustworthy also has been slow to improve from near punch-line status. Though each of the BRICs nations (Brazil, Russia, India, China) have seen challenges voiced regarding their emerging economic strength, Russia continues to show signs that it may be in the most precarious position, not to mention being the scariest with which to do business, of the four.

Brian Shappell, NACM staff writer

Commentary: How Important Is the European Downgrade?

There was a time when the mere threat of a ratings downgrade would strike terror in the hearts of those that offer bonds to the investor community -- That was when the ratings agencies had not damaged their reputations with some very bad assessments during the boom years and before the entire investment community did not already know what they were going to say before they said it.

The downgrades in Europe took nobody by surprise given all the financial and economic chaos that has gripped the region. It essentially was confirmation, as opposed to information. Not that the markets didn’t react -- they did. While the downgrade was not shocking, it reinforced the fact that there is still no plan to pull Europe out of this mess. Without a plan the financial chaos just stretches out and creates more panic.
 
Still, it is well-known the ratings agencies have always struggled with the assessment of national debt. The country has options that a company does not have, but there also are limitations that companies lack. A company in distress can slash costs to the bone if that is what is needed to turn the thing around, but an elected government can only go as fast as the electorate will allow.

The raters have also been known to try to use the system to cajole and persuade nations to do what the agencies' analysts think appropriate -- that generally means putting austerity at the top of the list of strategies, even if that means that a country risks social chaos and  government upheaval. It will be the rare set of leaders that will seek to please the ratings agencies instead of making the voter happy. As a matter of fact, the governments in Europe have been calling for restrictions on the ratings agencies long before Friday's mass downgrade. This latest set of assessments will add fuel to the fire.

Source: Chris Kuehl, PhD, NACM economist



S&P Downgrades France, Among Others

Standard & Poor’s (S&P) threw fuel onto the Euro fire today as the agency stripped France of its formerly pristine AAA credit rating. The country now has a AA+ rating, a single notch lower than the top-level AAA.

In addition to downgrading France, S&P took other ratings actions on 15 other members of the eurozone: the long-term ratings on Cyprus, Italy, Portugal and Spain were lowered by two notches, the long-term ratings on Austria, Malta, Slovakia and Slovenia were, like France, lowered by one notch and the long-term ratings on Belgium, Estonia, Finland, Germany, Ireland, Luxembourg and the Netherlands were affirmed.

The reason for the downgrades was uniformly related to lackluster policy reactions on the part of the continent’s leaders. “Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone,” said S&P in their announcement. “In our view, these stresses include: (1) tightening credit conditions, (2) an increase in risk premiums for a widening group of eurozone issuers, (3) a simultaneous attempt to de-lever by governments and households, (4) weakening economic growth prospects and (5) an open and prolonged dispute among European policymakers over the proper approach to address challenges.”

While the downgrades are by no means appreciated by the ailing eurozone, the S&P noted that the ratings still remain at comparatively high levels, with only three member nations below investment grade (Portugal, Cyprus and Greece).

Outlooks for the 16 countries considered in this batch of ratings actions were largely negative, with 14 of them suffering from a one-in-three chance of another downgrade in 2012 or 2013. Only Germany and Slovakia’s ratings outlooks were changed, both of them upgraded from negative to stable.

Jacob Barron, CICP, NACM staff writer

Treasury Reports SBLF Success

The U.S. Treasury reported this week that the Small Business Lending Fund (SBLF) seems to have done its job. Institutions involved with the program significantly increased their lending to small businesses by $3.5 billion over a $35.9 billion baseline, which describes the average lending reported in the four quarters before the program began.

Enacted in 2010 as part of the Small Business Jobs Act, the SBLF is a dedicated investment fund designed to encourage lending to small businesses by providing capital to qualified community banks and community development loan funds (CDLFs) with assets of less than $10 billion. The program encourages lending to smaller firms with a dividend or interest rate incentive structure, which lowers the rate as the participating institution increases its small business lending. Rates also increase above the 5% base level if the bank fails to increase its lending in the first two years of the program.

Luckily, it seems as though most participating banks and other lending institutions don’t have to worry about such an increase. More than 60% of SBLF participants increased their small business lending by 10% or more, and, to date, 78% of community banks and 80% of CDLFs have increased their small business lending overall.

Treasury invested more than $4 billion in 332 institutions through the program, including $39.1 billion to 281 community banks and $104 million in 51 CDLFs. According to participants, these increases show no sign of stopping provided the program remains in place: in lending plans submitted with their applications, these institutions projected that they would increase their small business lending over baseline levels by $9.3 billion in the next two years.

The SBLF generated some controversy in the summer of 2011 as the nation approached its debt ceiling, and the Treasury continued to make disbursements under the program. Although the fund appears to have functioned as well as one could hope, it expired in September of last year, and its future remains uncertain.

Jacob Barron, CICP, NACM staff writer


Fed Beige Book: Economic Recovery Picking Up in Several Districts

From Federal Reserve:

"Contact reports from the 12 Federal Reserve Districts suggest that national economic activity expanded at a modest to moderate pace during the reporting period of late November through the end of December. Seven Districts characterized growth as modest; of the remaining five, New York and Chicago noted a pickup in the pace of growth, Dallas and San Francisco reported moderate growth, and Richmond indicated that activity flattened or improved slightly. Compared with prior summaries, the reports on balance suggest ongoing improvement in economic conditions in recent months, with most Districts highlighting more favorable conditions than identified in reports from the late spring through early fall.

Consumer spending picked up in most Districts, reflecting significant gains in holiday retail sales compared with last year's season, and activity in the travel and tourism sector expanded in most areas. Demand strengthened further for nonfinancial services, including professional and transportation services. Manufacturing activity generally continued to expand, although the pace of growth has slowed for selected subsectors such as technology products. Agricultural producers and extractors of natural resources reported generally robust conditions. Activity stayed sluggish in residential real estate markets, and conditions in commercial real estate markets remained somewhat soft overall but showed signs of ongoing improvement in several Districts. Reports from financial institutions generally indicated a slight uptick in loan demand by businesses, along with improvements in overall credit quality.

Upward price pressures and price increases remained quite limited for most categories of final goods and services, as the effects of prior increases in the costs of selected inputs have eased. Upward wage pressures were modest overall, although a few Districts noted substantial compensation increases for workers with specialized skills in selected sectors and regions."

Source: Federal Reserve

Chinese Exports at 2-Year Low; Harbinger of Problems to Come?

Chinese statistics indicate annual export growth was 13.4% in December, the lowest more than two years. It’s indicating that problems with lackluster growth in the United States and the debt-fueled financial mess in the European Union might be busting previous assertions that China and other BRICs nations were somewhat shielded from problems outside of the emerging economies block.

Moreover, there are a slew of problems (property asset bubble, insufficient power production, poor transportation infrastructure, qualified labor shortages) facing the Chinese as they look to stabilize the narrowing importing and exporting activity as well as inflationary pressures.

“None of this is to say that China or any the BRICs are heading back into obscurity or even that their economic challenges will be any worse or better than those facing the U.S. and Europe,” said Kuehl. “It is simply to point out that no set of nations finds itself immune from the vagaries of the global economy.”

Brian Shappell, NACM staff writer

Template for Municipalities?: Judge Gives Nod to Chapter 9 with Retiree Haircuts



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In what could catch the attention of municipalities struggling with entitlement costs throughout the nation, a judge has approved a deal between public employees and a small Rhode Island city that was largely encouraged by a Chapter 9 filing in mid-2011.

U.S. Bankruptcy Judge Frank Bailey has approved a deal forged by Central Falls and many of its retired employees to voluntarily reduce the level of benefits they are receiving. The judge also approved a new collective bargaining agreement where current police and fire employees there are taking a haircut on future benefits.

Retiree benefits/pensions obligations were the overwhelming cause for Central Falls to file in 2011 as communities throughout the country fret about escalating costs for retiree health care and pensions.  Though unable to negotiate concessions beforehand, the Chapter 9 inspired public workers and retirees to take significant voluntary cuts because it, in theory, means they will keep more than if the benefits were slashed to the proverbial bone during the bankruptcy reorganization. It is estimated the newly forged deal will help the city save more than $1 million this year, which has been characterized as critical for Central Falls to resume any semblance of operational normalcy.

With more cities struggling with a host of financial challenges, most significantly entitlements, the issue could likely become increasingly common in the 26 states that allow municipal bankruptcy through Chapter 9 filings. While few believe Chapter 9 will become an epidemic, it certainly bears watching given the state of budgets out there.

“There are big problems for a lot of these municipalities, especially the collective bargaining agreements that have built in generous retirement obligations,” said Bruce Nathan, Esq., of Lowenstein Sadler PC. “I think you will see this continue and increase well beyond this year. If state laws can be complied with, why wouldn’t [struggling municipalities] do it if this is an option for them to deal with their financial problems?”


(Note: More on this topic and the court cases of greatest important to credit professionals will be featured in the upcoming, February edition of Business Credit Magazine. Look for it in about two weeks).


Brian Shappell, NACM staff writer

IIF Report Questions Social Breaking Point in European Cuts

The Institute of International Finance, in some respects the trade association for the central banks and notable investment banks, in its latest report intimates the respective social systems of nations badly in debt can't withstand too much more in the way of cuts, even if the numbers indicate they are needed. Continued, or even increased levels of civil unrest could, in their estimation, cause the now limited interest of investors to evaporate completely.

For all intents and purposes the IIF is calling the euro zone bluff by asserting that nothing that currently has been put in place is going to be enough to solve the basic problems. This essentially means that excruciating austerity decisions made thus far have not been enough to get ahead of the debt and deficit. That leaves only a more draconian policy or a reversal in focus, one that tries to kick-start the economy back to growth. The latter, however, risks making the debt challenge insurmountable.

Greece is going to miss its austerity targets by a wide margin, meaning they will have the near impossible tast to renegotiate the debt they have sold. The Greeks also have no place to turn for more money other than the Germans, the EU and perhaps the IMF. All three have made it clear that no more rescue is coming until Greece pushes more austerity. But he population of Greece is at the breaking point already and further pressure will almost certainly result in open revolt. Serious talk of a coup circulates in Athens now, but most still assert that this is just the Greek rumor mill.

Spain is faced with trying to reduce their deficit significantly at the very same time the nation seems to be slipping rapidly back into recession. The unemployment rate remains above 20% at the national level and, in many parts of the country, one-third of the working population is out of a job. The housing crisis in Spain makes the US situation pale in comparison. The new government is faced with imposing another round of austerity to bring the budget in line, but there is no resilience left in the economy.

Italy has been testing the bond market, as they have to finance more than $560 billion of debt this year. Despite the fact that Italian bonds are being purchased by the ECB, the yields have remained very high at more than 7%. Investors are slightly more confident in the Italians’ ability to get hold of their situation under Mario Monti. Still, they seemingly all know that the issues in Italy go far beyond the weakness of the prior prime minister. The Italians seem to have some wiggle room left, but that is only if the overall growth prospects for Europe improve as Italy concentrates the bulk of its export activity on Europe as opposed to new markets in Asia and Latin America.
 
Source: Chris Kuehl, NACM economist

Half-Dozen Lien Laws Went Active on Jan. 1

With the new year came a handful of changes to construction lien laws, mainly in the western United States:
  • Texas' H.B. 2093: Dramatically limits the ability of other parties on a private or public construction project to transfer risk to subcontractors when subcontractors are not at fault. The law bans broad-form indemnity clauses in private and public construction contracts and mandates that "a consolidated insurance program that provides general liability insurance coverage must provide completed operations insurance coverage for a policy period of not less than three years." The law also makes additional insured requirements in construction contracts "void and unenforceable," except on consolidated insurance programs and for personal injury claims.
  • Texas' H.B. 1456: Creates statutory lien waiver forms, both conditional and unconditional, for progress payments and final payment on construction projects. As a result, subcontractors and their clients will not have to manage an unpredictable patchwork of lien waiver forms.
  • California's S.B. 293: Effectively caps retainage on subcontractors at 5% on state and local public contracts entered into through the start of 2016. The new law improves prompt payment law by requiring upper-tier contractors on public projects to pay lower-tier contractors within seven days of receiving a progress payment.
  • Oregon's S.B. 384: Intended to be a "clean up" of the private prompt pay statutes, and is not meant to make any major substantive changes to this area of law. The bill helps clarify the circumstances in which attorney fees for claims for "payment of interest" can be recovered and corrects an omission in which the established time for final payment, the fourth of the four established prompt payment deadlines, did not have an opt-out provision.
  • Oregon's S.B. 382: Changes the notices that construction lien claimants must send to lenders. First, it defines the term "mortgagee" to be only those persons whose names and addresses appear in the county's real property records. It can also include an assignee, but only if the assignee's name and address are shown in the county's real property records. The bill was proposed in part due to the issues surrounding the Mortgage Electronic Registration System. The bill also clarifies that a construction lien claimant needs to send statutorily required notices only to those mortgagees whose names and addresses are shown in the county's real property records.
  • Alabama's H.B. 56: Requires companies with state contracts to begin using the federal E-Verify system to confirm employees' legal status to work. It also provides that companies will have their business licenses suspended after a first violation and permanently revoked after a second violation of the law.

No New Countries Added to List of AGOA Beneficiaries

U.S. Trade Representative Ron Kirk announced last week that no African countries would be removed from the list of countries eligible for benefits under the African Growth and Opportunity Act (AGOA) in 2012, but no new ones would be added either. Currently, 40 sub-Saharan African nations are designated as AGOA beneficiaries, and that list will remain the same for the foreseeable future.

“President Obama’s determination today is good news for the people of these African nations, as well as for the American businesses and workers trading with these countries,” said Ambassador Kirk. “We are proud to announce, after a thorough review by the Obama Administration, that all 40 of these important U.S. trading partners will continue to receive benefits under the African Growth and Opportunity Act—a vital and growing pillar of U.S.-Africa trade policy.”

The president made the decision not to make any new countries eligible for benefits under the legislation following an annual review of whether current AGOA designees are complying with the Act’s eligibility criteria. Countries benefitting from the legislation’s array of trade preferences must establish, or make continual progress toward establishing, a market-based economy, a rule of law, economic policies to reduce poverty, the protection of internationally recognized worker rights and efforts to combat corruption.

AGOA was signed into law under President Bill Clinton in May 2000, with the intention of providing sub-Saharan African nations with trade preferences and better integrating the region into the global economy. Although the Act was primarily designed to allow African companies to export to the U.S. duty-free, it has also benefitted U.S. exporters by creating tangible incentives for African countries to implement economic and social reforms and forging stronger commercial ties with the region.

Previously, only 37 countries were eligible for AGOA benefits, but President Obama signed a proclamation last October adding Côte d’Ivoire, Guinea and Niger to the list. U.S. exports to the region have recently experienced an uptick, increasing by 13% from 2009 to 2010.

Jacob Barron, CICP, NACM staff writer



Construction on the Mend...Kind of

November construction spending statistics tracked at $807 billion, a 1.2% increase over the revised number from a slightly disappointing October. The figure also rivals that of November 2010, and the growth trend appears to be one that will continue. However, “improvement” is a relative term and, in this case, the rebound is expected to be fairly slow over the next 12 months at least.

“Construction spending may take a dip from here for a month or two, but certainly for 2012 we expect recovery in the construction numbers, but a slow recovery,” Moody’s Analytics Senior Economist Andres Carbacho-Burgos told NACM. “Things are more likely to take off 2013, especially with fairly strong growth expected in residential. Mainly, as the economy starts to recover and unemployment is reduced, you’ll get better income growth which will release pent-up housing demand.”

Commercial real estate, while not likely to crash, likely will lag behind the expectations of housing activity and could be several years out from a hot recovery, said Carbacho-Burgos. The pent-up demand existing in residential simply hasn’t come to fruition yet because commercial’s boom-bust cycle occurred a couple of years later and most larger metropolitan areas still show above average vacancy rates. Still, the forecast for commercial real estate likely has fewer
volatile factors to change the segments direction than its counterpart on the residential side.

(Note: See more analysis on this topic in the coming edition of NACM eNews, out late-afternoon Thursday. Check for it at www.nacm.org or, if an NACM member, in you e-mail box).

Brian Shappell, NACM staff writer

Commentary: Bloom Off the Emerging Market Rose?

The place to be for the last 10 years has been the emerging market as the notion of the BRICs (Brazil, Russia, India, China) was the motivation for many an economic and investment decision, but this last year was anything but kind to the nations that were once at the forefront of financial activity.

There was a brief moment in the middle of the last decade when some asserted that the emerging nations would be able to disconnect from the travails of the developed nations and base their growth on interactions with each other. That has turned out to be a real pipe dream. The commodities and manufactured goods upon which these states depend had to be sold to those traditional markets and, without them, there was little growth.
 
The question for 2012 is whether these nations can regain their momentum. The bets are that there will be a more profound division between the haves and have-nots this year. India seems set to recover some of that momentum, but Russia could suffer a severe reversal unless there is a major hike in the price of oil. Brazil could struggle to handle the inflation that came with growth, a dilemma many other Latin states will face. The Asian states that live and die with exports will have to wait for the United States and Europe to come back to life -- that will be a while. The investor interest that provided financing has slowed and nothing suggests that it will recover any time soon.

In any case, the BRIC nations risk looking more like BRICK nations these days, as they have been weighed down by inflation, low rates of productivity and inadequate demand for their output.

Source: Chris Kuehl, PhD, NACM economist