Fed Continues Asset Purchase Reductions, Talks of Post-Winter Rebound

Like virtually every report documenting US economic conditions of early 2014, the Federal Reserve blamed a sharp contraction almost entirely on the historically harsh winter weather. However, that appears to be in the rearview mirror enough for its Federal Open Market Committee (FOMC) to stay the course on rates and cutbacks to its assets purchase program without a hint of hesitance.

Emerging from a two-day policy meeting, the FOMC announced plans to continue stimulus spending reductions by a total of $10 billion, as it has during recent meetings under both former Chairman Ben Bernanke and new Chairman Janet Yellen, in two areas. It will decrease from $25 billion to $20 billion per month in agency mortgage-backed securities purchases and from $30 billion to $25 billion per month in adding longer-term Treasury securities.  The Fed statement predicted it would continue the tapering should inflation conditions remain in line with expectations and employment levels maintain stability or continue to improve. The Fed continues to believe such actions will put downward pressure on longer-term interest rates and support mortgage markets, both of which “should promote a stronger recovery.”

The FOMC also left the target for the federal funds rate untouched at a range between 0% and 1/4%, noting it would stay at the historic low “for a considerable time after the asset purchase program ends.” Notably, it is the first time in several meetings that the FOMC statement was endorsed unanimously by its voting members.

- Brian Shappell, CBA, CICP, NACM staff writer

NACM's Credit Managers' Index Improves, Not Enough to Dispel Concerns

The Credit Managers’ Index (CMI) from the National Association of Credit Management (NACM), to be unveiled on the NACM website Wednesday, will show a slight upward trend in April. But it has yet to rebound to where it was in January.

Index of favorable factors improvements in April were barely enough to offset a concerning fall from among unfavorable factors categories, which are indicating definite signs of distress in the community of those receiving credit.

“Good news did not come out of the unfavorable factors and these will be the ones to watch in the next month or so,” said NACM Economist Chris Kuehl, PhD. “For the past several months, the most consistent part of the survey was the unfavorable factor index. Even as the favorable numbers slipped, there was no real evidence of mounting distress. Now there are concerns that overall business suffered a little more than expected in the last few months.” Importantly, however, overall CMI conditions remain in expansion territory. 

For a full breakdown of the manufacturing and service sector data and visuals, view the complete April 2014 report at http://web.nacm.org/CMI/PDF/CMIcurrent.pdf starting April 30. CMI archives may also be viewed on NACM’s website at http://web.nacm.org/cmi/cmi.asp.

NACM Survey: Recruiting Services Popular, but Results Mixed

The use of recruiters to fill or find jobs in commercial credit appears to be quite popular, according to NACM's April Survey. The actual results delivered by placement services, however, were decidedly mixed, with many respondents reporting both positive and negative experiences.

When asked "have you or your company ever used a recruiting service to fill a credit-related position, or have you ever been cold-called by a recruiting service looking to do the same?" 64% of participants responded "yes" and 31% said "no," indicating that for most commercial credit professionals, recruiting and job placement services are a fixture in the industry.

"I was called just recently by a recruiter," said one respondent, echoing the comments made by several participants that had been engaged by a recruiter in the recent past. "They first asked if our company was in need of any positions filled in accounting or credit. When I said no, they very professionally asked me to keep their name and number if I should find myself seeking employment or if my company needed help in the future," they added, noting that this same scenario has played out before, only with a much less pleasant outcome. "I have had calls where they were very unprofessional and end the call. If I receive calls that are professional and not a solicitor type call, I do not mind."

Others noted that the value of a recruiting service depends on the type of position a company is trying to fill. "It has been my experience, for lower level A/R positions, the candidates have been good matches," said one respondent. "However, for a position in credit management or senior collections, the screening of the candidates has been questionable and disappointing. Does the recruiter really understand the roles and what is required to be a good fit?"

Similar questions rang in other participants' ears as well. To learn more about this month's survey results, check out this week's edition of NACM's eNews. Also NACM's May Survey will be posted soon, but in the meantime, please take the Credit Managers' Index (CMI) survey, which is open until close of business tomorrow.

- Jacob Barron, CICP, NACM staff writer

Flash PMI Foretells China Switching Fates with US, EU Counterparts

Though final statistics for April will not be available until early next month, the Flash Purchasing Managers' Index (PMI) from Markit Economics and HSBC, which handles China, indicate that the world powers are going in drastically different directions.

Though the Flash China Manufacturing PMI was 48.3 in April, a slight uptick from March’s 48, the important categories of output and new orders, including for exports, showed considerable weakness. Decreases were also noted in employment, backlogs of work, stocks of purchases, quantity of purchases and supplier delivery times. Though positive news came from output/input pricing as well as the stock of finished goods, China’s risk is as apparent as ever.

The Markit Flash PMIs for the US and Europe, however, continue to paint of picture of recovery. The US PMI, which was nearly unchanged from March at 55.4, showed strengthening increases in output, new orders and staffing levels, while input cost inflation is at its slowest in about a year. Additionally, production rose at its fastest pace since early 2011. Meanwhile, the Markit Flash Eurozone PMI, up nearly a full point to 54 in April, showed business activity expansion approaching a three-year peak. Goods producers led the improvement in certain areas such as new orders. It’s the tenth consecutive month of gains within manufacturing.

Markit and its partners base the Flash statistics on at least 85% of the expected responses for a country or zone. Final statistics will be available in early May.

- Brian Shappell, CBA, CICP, NACM staff writer

Days of Japan as Super-Exporter Over?

The Japanese economy has been dependent on its export sector for decades and, in truth, this will likely be the case for some time to come. But there are changes underway that will have a lasting impact on the way the nation conducts its business.

The trade deficit last year was as wide as Japan has seen in its history. The advent of “Abenomics” was supposed to boost the economy with increased domestic demand and improve the standing of the country’s trade balance with a lower valued yen. The yen has not dropped enough and the Japanese consumer has not spent enough. At the same time, the country has been buying more and more energy to meet its needs. This is what happens when the nuclear power operations shut down and a nation devoid of gas and oil has to import more of both.

Japan wants to see the growth of the domestic side of the economy but that is going to require a cultural shift that will be anything but easy. In the meantime, the export sector has to continue to carry the load and, thus far, it has not been able to. Most of the problem is that Japan’s trade partners are weaker than they have been. That results in far slower growth for Japan’s export-centered companies.

- Armada Corporate Intelligence

Report: Money Laundering High on Radar with Company Officials

The latest KPMG Global Anti-Money Laundering (AML) survey tracking fraud and other trends that are watched closely by financial institutions indicates that the topic “has never been higher on senior management’s agenda.”

KPMG officials and analysts said financial institutions are making significant changes to its AML protocols, more so in 2014 than in prior years. Key drivers of this stem from heightened regulatory fines and actions as well as the growing threat of criminal prosecutions against banks and their staff, including the highest ranking officials. The study indicates that 88% of those polled believes its Board of Directors takes an active interest in AML. That tally is up by 26% over the last three years. Only 3% did not believe their Board of Directors takes an active interest in AML issues.

Notable within the study was that respondents believe the cost of fighting AML continues to grow among financial institutions and at a rate greater than what was predicted in 2011, the last time KPMB unveiled a study on the topic. The greatest area of such spending has been on transaction monitoring systems. However, bucking the “you get what you pay for” adage, satisfaction with such systems at present is lower than it was in 2011 or 2007, according to KPMG statistics. The study’s authors believe senior management has often failed to ask the right questions, leading to the higher spend than expected on monitoring systems: “We believe that senior management will continue to underestimate AML expenditure unless lessons are learned from past mistakes.”

Perhaps part of this comes from a gap in education. KPMG noted that more than 1/3 of those polled noted their Board of Directors does not receive formal AML training. Comparatively, 86% of front office staff receives such training to stay current, with an even higher percentage for those in North America.

- Brian Shappell, CBA, CICP, NACM staff writer
To view the study, click the following link:

EU Votes to Include Commercial Cards in Interchange Fee Limits

The European Parliament voted earlier this month to include commercial credit cards in their new statutory limits on credit card interchange fees.

Previously the proposal would've applied the limits only to consumer cards, but the Parliament's Economic and Monetary Committee (ECON) removed the exemption for commercial credit cards in February. The European Commission had representatives recommending that the exemption be added back into the proposal, but the Parliament adopted ECON's original revisions. The European Union Council of Ministers, which represents individual member states, also has to approve the regulation before it becomes law, but if it does, merchants in the EU accepting payments on a commercial credit card would see their fees capped at 0.3%.

Card networks warned corporate users that the regulation, should it ever enter into force with the commercial credit card interchange limits intact, could lead to greater fees in other forms as banks make up for the estimated 6 billion in euros that the new rules would cost them.

"MasterCard is concerned that today's vote in the European Parliament is bad news for consumers and small businesses in Europe," said the company in a statement. "While the idea of capping fees may be politically attractive, it makes little sense if consumers and small businesses end up paying more for their cards."

The EU has taken an especially strict approach to regulating the way card networks charge interchange fees, and has historically been more rigorous in its enforcement of antitrust regulations in general. Officials in the EU have repeatedly accused Visa and MasterCard, which collectively control more than 95% of the European market in terms of value, of anti-competitive behavior and that the fees themselves artificially increase prices for users.

- Jacob Barron, CICP, NACM staff writer

Fed Asks NACM Members For Help in Fraud Study

A collective of five Federal Reserve Banks is spearheading a study on challenges with payment fraud through early next month. And Fed representatives specifically targeted the NACM membership as a group that has been "underrepresented" and one it hopes to see greater representation from in its online survey.

Representatives from the Federal Reserve Bank of Minnesota, which also heads the Remittance Coalition which NACM joined as a member earlier this year, contacted NACM directly this week noting that they believe credit managers in the B2B sphere could have an important impact on this year’s payments fraud survey if more within the industry would participate in the online questionnaire. The survey is open through May 9 and is available at https://www.frbsurveys.org/se.ashx?s=3FD0ADC703792AFC. The survey addresses the various payments-related fraud experiences of financial institutions and businesses. It should take about 30 minutes to complete.

NACM strongly encourages its membership to take part in this important information-gathering venture, as the more data that is available on topics like payment fraud, the more equipped federal agencies and private businesses alike will be able to combat such problems. And to help with our tracking purposes, it is also suggested that, on page three of the questionnaire, our members note they are part of NACM by writing that in on the line marked "other." The effort also dovetails well with NACM’s involvement in the aforementioned Remittance Coalition, which is a group of organizations working to promote greater use of electronic B2B payments and electronic remittance data exchanges. Among 2014's priorities for the coalition are improved outreach to small businesses, a comprehensive B2B directory project and promotion of a remittance terms glossary. More information on the Remittance Coalition is available at www.minneapolisfed.org/about/whatwedo/remittancecoalition.cfm.

- Brian Shappell, CBA, CICP, NACM staff writer

Oklahoma Registry Bill, Lien Changes on Horizon

A state bill is expected to drop in Oklahoma this month that could set up a registration system for contractors and suppliers and call for drastic changes to the pre-lien notice statutes in the state, according to Paula Black, credit manager with Dolese Brothers Co., and James Vogt, Esq., managing partner at Reynolds, Ridings, Vogt & McCart PLLC.

Black, a member of NACM MidAmerica, said the coming proposal in its earliest form was an attempt to change lien laws to be more favorable to general contractors (GCs). At present, suppliers have 75 days from last delivery to file a lien, which GCs believe is a long time for them to be exposed. GCs also oppose Oklahoma's rare "double jeopardy" status, where sub-tier suppliers or subcontractors can put a lien on the owner or the GC if money paid to either doesn't make it downstream, said Black.

Now, a task force consisting mostly of GCs that consulted with Dolese Brothers about wording is releasing a legislative proposal that would create a registration system for all GCs, subcontractors and suppliers. It would be similar to an existing system in Utah. Black called the first version cumbersome and difficult for subcontractors and suppliers and said she hopes the proposed changes will make it into the version presented to the Oklahoma legislature. Vogt was critical of the potential changes to pre-lien notice statutes, noting "everyone was comfortable with what we had and set it up in their systems."

- Brian Shappell, CBA, CICP, NACM staff writer
NACM’s Secured Transaction Services customers can access more information on these stories and more in the News Makers section at www.nacmsts.com. Developments in and analyses of lien and bond laws for all 50 states can also be found on the website.

California Considers New Commercial Credit Reporting Regulations

A bill before the California State Assembly would impose new regulations on providers of commercial credit reports. Assembly Bill 2564, introduced earlier this year by Assemblyman Brian Nestande (R), was referred to the Committee on Banking and Finance last week and represents the most recent effort by a state legislature to extend consumer credit reporting regulations to their commercial credit counterparts.

AB 2564 closely resembles Virginia House Bill 2198, which Virginia's legislature considered over the course of 2013 before eventually abandoning it. Specifically, AB 2564 would:

(a) require a commercial credit reporting agency to furnish a source of information to the subject of a commercial credit report upon the request of a representative of a subject,
(b) require a printed copy of the report to be provided at no cost to the subject of a report,
(c) prohibit an agency, or a business affiliate of that agency, from assessing a fee upon the subject of a report in connection with ensuring the proper data is contained within the commercial credit report of the subject, and
(d) require an agency to endeavor to maintain the most accurate data possible regarding the subject of a report.

There are a few key details that separate AB 2564 from Virginia's HB 2198. Whereas the Virginia bill would have required commercial credit reporting agencies to only reveal sources of so-called "negative information," California's bill would seemingly require agencies to provide the subject of a report with a source for any piece of information at the subject company’s request. There are also uncertainties in the California bill about the definition of the phrase "furnish a source of information," and just how much detail commercial reporting agencies would be required to provide to a subject company in order to comply with their request for a source. Virginia's legislation, on the other hand, specifically referred to revealing the identity of a source of information, whereas the first line of AB 2564 provides commercial credit reporting agencies to "protect the identity of a source of information."

NACM worked successfully to defeat HB 2198 in Virginia last year, opposing the bill on the basis that requiring commercial credit reporting agencies to reveal the identity of their sources would've cooled the free and open exchange of credit information in that state, and will continue to oppose any legislation that threatens the availability of credit information on commercial customers.

For more information, contact NACM Government Affairs Liaison Jacob Barron, CICP at jakeb@nacm.org.

- Jacob Barron, CICP, NACM staff writer

Industries to Watch Flashback: Coal Company Sites Shale, Regulation in New Chapter 11 Filing

In September NACM’s Industries to Watch series spotlighted deep headwinds, such as increased government regulation and the newly booming natural gas/shale industry, facing domestic coal producers. This week, the first significant Chapter 11 in the industry since the article’s release, one expected to be part of a recurring occurrence within what is becoming an entirely “new industry,” was filed.

James River Coal Company filed on April 7 in US Bankruptcy Court for the Eastern District of Virginia (Richmond Division). James River plans to reorganize and begin operating in a vastly different manner as is needed in a new industry landscape, said Peter Socha, the company’s chairman and chief executive officer.

"Some of these changes are cyclical due to continued weakness in the real economy.  Other changes are more permanent like changes in government environmental regulations, improved methods to produce natural gas, and switching between coal basins by domestic power utilities,” he said. “We need to adjust our balance sheet and debt structure to align ourselves to the new industry.” Socha hinted it is not the only company feeling the pinch. In March, the latest Federal Reserve Beige Book roundup noted coal production among the industries posting the most significant and notable activity declines, especially in the Fed’s Eighth District based in St. Louis.  

Apparently, the decrease in demand both domestic and out of China because of the latter’s slowdown in growth is having an effect throughout the world. Chinese coal prices have dropped to a six-year low, with some industry experts and even one of the nation’s top producers telling media there that some small companies are already on the brink of insolvency. Meanwhile, Czech Republic coal outfit New World Resources has made it known that it will slip into bankruptcy soon unless it can secure of loan of nearly $150 million (USD), as a huge drop in demand led to its worst quarterly losses ever to close to 2013.

Speaking mostly about domestic issues, a lengthy list of experts warned in interviews with NACM late last summer of the potential for deep financial problems in the coal industry in the short term. This included Adam Rosen, director of PricewaterhouseCoopers LLP's financial restructuring group. Rosen called natural gas a permanent threat to coal producers and predicted it could be until mid-2015 when demand from buyers in China and Australia, among others, could inspire some pricing improvements for coal companies. Many simply don't have the capital to wait until then for better days.

- Brian Shappell, CBA, CICP, NACM staff writer

Global PMI Numbers Hit the Brakes in March

After the Global Manufacturing Purchasing Managers' Index (PMI) surged in February to levels not seen in either of the last two calendar years, its March performance hit a wall with declines in many important categories including output and new orders.

The Global PMI, published by Markit in accordance with JPMorgan, fell to 52.4 in March, down from the revised February figure of 53.2. Though the February numbers were bolstered in part by a strong performance out of the United States that continued for the most part in March, it wasn’t enough to offset slower rates of output in expansion in formerly hot nations like Taiwan, India and, most notably, China. The latter showed contraction for the second straight month and at levels not seen since a temporary slowdown in November 2011, Markit analysts noted.

The study noted the US continues to enjoy "robust improvements" in business conditions and employment. Though down from February, the latest reading of 55.5 is still the second best performance in the last 15 months by a sound margin. And, with underlying demand at a strong level, it's only expected to improve from here in 2014, Markit and JP Morgan hinted. Across the Atlantic, the Markit Eurozone Manufacturing PMI held stable at 53. However, it was a bit more of a mixed bag with multi-year highs in France, Spain and Ireland but a loss of momentum in Germany, the Netherlands and Greece, the only of these nations to have slipped back into contraction territory.

"Although growth is cooling from [some of] the highs reached at the end of last year, the picture remains one of continued expansion, suggesting manufacturing will remain a contributor to both global economic growth and job creation," said David Hensley, director of global economics coordination at JPMorgan.

- Brian Shappell, CBA, CICP, NACM staff writer
For our chart breakdown of about two dozen individual countries' Markit PMI levels and brief analysis, check out this week's eNews at www.nacm.org in the Resources section.

US Trade Deficits Trending in Wrong Direction Again

Experts expected the US trade deficit to hold steady or decrease in February but missed the mark. The US Commerce Department noted a $42.3 billion deficit in goods and services for February, up from the $39.3 billion posted in January.

The drop in exports of goods contributed to the elevated deficit, with decreases in industrial supplies/materials and capital goods leading the pace. A falloff in those categories could not be outdone by export increases in consumer goods and automotive vehicles/parts/engines. Exporting levels for goods were, however, about on part with the pace of February 2013.

In a prepared statement, Commerce officials tried to spin the positives within recent data, namely consistency in service-side exporting, which held stable from January to February. U.S. Secretary of Commerce Penny Pritzker noted the record levels for service exports, driven primarily by royalties and license fees.

Not seasonally adjusted, the biggest US deficits continue to be with China ($20.9 billion) and the European Union ($9.1 billion). Deficits also continued with both North American neighbors Canada ($1.9 billion) and Mexico ($4 billion). There were, however, surpluses, though in smaller numbers, with trading partners including Hong Kong, Australia, Singapore and Brazil.

- Brian Shappell, CBA, CICP, NACM staff writer

Interchange Fight Rages On as Wal-Mart Sues Visa

Wal-Mart, the world's largest retailer, filed a lawsuit last week against Visa, Inc., the world's largest card network, seeking damages for alleged antitrust violations in the form of inflated interchange fees. Wal-Mart estimates that Visa's price fixing cost it at least $5 billion, and since the antitrust case is being filed in federal court, the Clayton Antitrust Act permits Wal-Mart to seek three times that amount in damages, meaning a successful suit could result in a $15 billion penalty for Visa.

The case is the latest development in the fight between merchants and card networks over interchange, or "swipe," fees. After US District Judge John Gleeson approved a controversial settlement last year several large retailers opted out of the deal in order to pursue their own lawsuits. While the agreement ended an eight-year antitrust case against Visa, MasterCard and several financial institutions and granted merchants a $5.7 billion cash settlement and the right to surcharge, it also barred merchants from ever suing the card networks again for similar activity. Having opted out, Wal-Mart is now seeking what it believes is due.

Visa previously sued Wal-Mart in June in an attempt to bind them to the terms of the original settlement, after Wal-Mart "made plain" that it would file this most recent complaint.

Look for more on this story and others in tomorrow's edition of NACM's eNews

- Jacob Barron, CICP, NACM staff writer

Business Census Reveals Trends

Every five years, the Bureau of the Census takes the pulse of the business community, and the data provide some insight into longer-term trends. It takes a while to compile and interpret, so it is always a little stale by the time it is released, but the questions are designed to identify the bigger movements in business as opposed to the more ephemeral, day-to-day issues. The statistics from the 2012 report are based almost entirely on recession years and that will allow this report to become something of a benchmark in the future since it will be sandwiched between the boom years and the years of recovery (such as it is thus far).

One of the first observations is perhaps the most apparent: the US energy sector has been booming, and there is little reason to think that this expansion will slow down. Most of the predictions assert that shale oil and gas will remake the US economy in substantial ways into the future.

A second observation is not so sanguine. Manufacturing went through a significant shift in this period— especially as concerns the rate of employment. Some 2.1 million jobs were lost in manufacturing, while 173,000 were gained in the mining and extraction sector. It is obvious that the boom in the oil and gas sector is not absorbing the people who have been let go in the manufacturing community. The vast majority of the jobs lost have been due to the rise in automation and robotics. The good news has been that productivity has been improving, but the bad news is that job growth has been anemic. It should be pointed out that this Census data captures the worst of the downturn and less of the recovery to date.

Another observation is also not much of a shock, but it is not really clear whether this is a good thing for the economy long term. The health care sector is now the largest in the economy and accounts for the largest percentage of employees, some 18.6 million. That is up 11% from the number five years ago, and revenue is also up 23%. It now exceeds $2 trillion.

Finally, related to the retail community is in transition, Internet sales are growing and that means less emphasis on the brick-and-mortar stores as well as staffing. The growth in retail now is seen primarily in transportation and warehouse work.

- Chris Kuehl, PhD, Armada Corporate Intelligence