NACM’s Credit Managers’ Index for September Plunges

The September report of the Credit Managers’ Index (CMI) from the National Association of Credit Management, which is now available, shows the lowest reading in nearly two years. Though still in growth territory, this was not a good month and that brings a great many concerns to the forefront.

“This was not a small reversal of fortune by any stretch of the imagination,” said NACM Economist Chris Kuehl, PhD. “This could be termed a collapse…The numbers this month are almost shocking and there will be intense interest in what the index reports in the next iteration as this will determine whether this is the start of a depressing trend or just one of those anomalous months.” 

There is some hope that August and September are typically difficult to get an accurate read on “given the vagaries of the summer break and the return to school.”
Most of the distressing news in the CMI will be found in the unfavorable factors, which could indicate some real business distress. That index is dangerously close to slipping into contraction territory due to struggles in disputes, dollar amount beyond terms and bankruptcies. All in all, these numbers are bad and signal more distress to come. It is also hard to determine just what the issue is given that much of the other economic data of late has been good.

 For a full breakdown of the manufacturing and service sector data and graphics, view the complete September 2014 report at CMI archives may also be viewed on NACM’s website at

US Steady Trade Growth Not Enough to Sway WTO from Prediction Downgrade

Strong economic headwinds on at least three continents appear too strong to be offset by continued US trade growth through at least the next 15 months, according to suddenly pessimistic World Trade Organization (WTO) economists.

The WTO announced this week it had significantly lowered its forecasts for world trade both in 2014 to 3.1% (down from a 4.7% prediction in April) and to 4% in 2015 (5.3% previous forecast). The main culprits for the outlook included a weakened China and lower import demand from resource-rich regions like South and Central America as well as European stagnation.

Euler Hermes Economist Dan North, who will be speaking during the “Keynote Address/Global Economic Update” of FCIB’s 25th Annual Global Conference in Baltimore next month, said with those concerns coupled with the fear of European deflation and increased instability, lingering effects of Japan’s “remarkable policy blunder of an increased consumption tax” and ongoing US employment and real estate instability, it’s “no wonder trade gets marked down.”

The WTO also expressed concern that tensions between Russian and the West over the Ukraine border dispute could result in widened trade sanctions and those in the Middle East could create a spike in oil prices or availability. It also mentioned the difficulty to date in containing the deadly outbreak of Ebola in West Africa. “The presence of several such low probability/high cost risk factors has made the trade forecast particularly difficult to gauge this year.”

The WTO did appear encouraged that US trade growth remained steady, even if increasing at a somewhat slow pace, and is primed to shake off lingering effects from “idiosyncratic factors” like its early 2014 harsh winter. Luis Noriega, ICCE, vice president at JPMorgan Chase Bank, said US growth expectations’ previous volatility may leave some dependent markets somewhat hesitant to react to each bullish American data point with an activity surge right away. But if any nation can move the needle, it is the United States.

“US economic data surprises can have a global impact beyond its just over one-fifth share of global GDP,” said Noriega, who is serving as a moderator on a “Sanctions”-themed panel at the Global Conference. “Surprises on US data can lead to surprises in other economies, and upgrades on US growth, similarly, lead to upgrades in others. Only emerging market, Asian economies can boast a similar lead relation to other countries' growth.”

- Brian Shappell, CBA, CICP, NACM staff writer
For more information on FCIB’s 25th Annual Global Conference, being held Oct. 12-14, or to register, visit FCIB’s website.

Elsewhere in Europe, Success Stories Being Overshadowed by Scotland, ECB, Conflicts

The news in Europe has been dominated by the doings in Scotland for the past several weeks, and that is understandable given the implications had it voted for independence from the United Kingdom. But the surprising and positive, if underplayed, story of the last few months has been in Ireland.

It was not so long ago that Ireland was a charter member of the highly criticized, high in debt PIIGS (Portugal, Italy, Ireland, Spain and Greece). Now the Irish are growing at an 8% rate, as there has been a general recovery in some of the more downtrodden sectors of the economy. The construction sector was absolutely hammered a few years ago as the boom turned to bust and the banks collapsed as they had become too embroiled in the crisis. Ireland righted the ship fairly quickly, and the construction sector is back to normal or at least a semblance of normal. There has also been a surge in exports and a major improvement in the country as far as basic manufacturing. One of the advantages that developed in the last year has been that Dublin is getting a reputation as a destination for companies in the US looking to make tax-related moves. There have been some high profile inversion decisions made that moved US company headquarters to Ireland for tax reasons as well as being a cheap way to gain access to the rest of Europe.

The news has not been as good for much of the rest of Europe, including the European Central Bank, nations struggling with austerity measures or anyone hoping for a quick and relatively peaceful end to the standoff along the Ukraine-Russia border. Overall, the European situation is not getting much better, and that worries a great many people throughout the world. It is not just because the world needs the market that has long been provided by the EU, but also because there are implications for policy throughout the world. The problem is that Europe needs the kind of boost that can only come from the government, and there is no desire to provide it.

- Armada Corporate Intelligence

Scottish Stay with UK, Avoid Massive Separation Pains for International Business

Even for businesses not exporting to or importing from Scotland directly, the public vote to reject independence (roughly 55%-45%) and stay with the United Kingdom this week is probably the most settling outcome for companies in the manufacturing and services industries, especially those in credit. Social fallout, Mel Gibson movies and romanticism aside, there were a number of significant economic issues that could have arisen with the birth of an independent Scotland.

One of interest for businesses would be that of the European Union reaction. Though the United Kingdom is not on the euro as a currency, the relationship between England and the EU is obviously a close one. This, along with the potential boost this could give populations notoriously unhappy with the nations they’re a part of (e.g., Spain and Italy), could persuade some decision makers of the EU to be recalcitrant to opening their arms to the newly independent state. That last thing the EU wants or needs during a slow recovery and problems to the east is more volatility. Scotland, in a case where it is neither on British sterling or the euro, would find itself with a currency held in nearly no regard internationally, which is far from safe territory.

There was an argument, perhaps a strong one, that Scotland’s gas and oil holdings could make it an eventual energy power in Europe and that alone was compelling business reason for the split from the UK. It is especially appealing, theoretically, in the long term when considering how much  out-of-favor Russia supplies energy to EU nations, all while holding it over their heads during the disputes. However, in the short term, production and, even more so, distribution capabilities are nowhere near where they need to be to become such a player in the next few years. That would be somewhat unlikely until perhaps the 2020’s. 

Finally, an independent Scotland would find itself scrambling to forge free trade agreements it doesn't have and, again, they almost certainly wouldn’t be getting much help from the UK or EU. As for an FTA with the United States, the American track record for quick passage and enactment of FTA’s, even ones that appear to be no-brainers, would rarely be described as anything but poor. Consider the still-languishing Trans-Pacific Partnership or near-decade of delays before completion of bilateral deals with South Korea, Panama and Columbia.That doesn't even factor in nations' complaints of the US, like most economic powers, pushing for lopsided trade pacts.

Though a few analysts predicting Scotland would rival a third-world country if suddenly independent may be presenting an overly harsh, worst-case scenario, the absence of change means international businesses don’t have add it to the already crowded list of global uncertainties at present.

- Brian Shappell, CBA, CICP, NACM staff writer

Have the Currency Wars Started Up Again?

There are many ways that an economy can be boosted—at least according to theory. The time honored techniques include lowering interest rates (check), increase government spending (not so much), lowering taxes (not this time) and then there is lowering the value of one’s currency. This latter approach means that exports benefit as they are essentially on sale. Other nations have to spend less to buy your products and as a bonus, the products that one’s consumers buy from overseas are more expensive and that shoves them back toward domestic options. This is effective to a point, but desperately unpopular in the global context. Some blame the severity of the 1930s recession on this "beggar thy neighbor" policy and most nations treat this as a last resort.

It would appear that more of the larger economies are starting to pull this tactic out as an option. In previous years, it was the developing and emerging markets that opted for this approach, but now it is the more advanced states that seem bent on reducing the value of their currency. Japan has forced the yen down to six-year lows in order to boost the moribund export economy and now Europe seems to be pushing the value of the euro down. This is all coming at the expense of the US dollar as it has been gaining against the world’s basket of currencies for the past year. Since the start of the year, the dollar has tracked higher than it has since the recession started and that has begun to take a bite out of the US export market. At the start of the year, the US saw a drop of almost 10% in terms of exports and now the dollar is even stronger. That does not bode well as far as exports are concerned. The rest of the world is broke and US goods are more expensive than ever in the global market.

- Armada Corporate Intelligence

Federal Reserve Outlines ‘Normalization’

The Federal Reserve’s Federal Open Market Committee broke Wednesday from its two-day economic policy meeting with no changes to interest rates or the pace at which it is decreasing securities holdings. But the Fed did give clearer indications than any time perhaps since it enacted stimulus measure more than three years ago about its plans to “normalize” its activity.

The Fed noted it would take a measured approach to eventually raising rates from historically low levels or detaching itself from Treasury securities purchases, saying none of its recent statements "imply that normalization will necessarily being soon.” The FOMC then stated it plans to raise the target for the federal funds rate, left at a range between 0% and 0.25% again by a majority vote, with the following actions in mind:
  • “When economic conditions and the economic outlook warrant a less accommodative monetary policy, the Committee will raise its target range for the federal funds rate.
  • The Federal Reserve intends to move the federal funds rate into the target range set by the FOMC primarily by adjusting the interest rate it pays on excess reserve balances.
  • The Federal Reserve intends to use an overnight reverse repurchase agreement facility and other supplementary tools as needed to help control the federal funds rate. The Committee will use an overnight reverse repurchase agreement facility only to the extent necessary and will phase it out when it is no longer needed to help control the federal funds rate."

Addressing the amount of its agency mortgage-backed securities and longer-term Treasury securities holdings, the FOMC announced it will also continue the policy of lowering the amount of agency mortgage-backed securities (to $5 billion per month) and longer-term Treasury securities (to $10 billion) by $5 billion each, consistent with decisions made during several consecutive meetings dating back to former Chairman Ben Bernanke’s tenure. The bigger news was the announcement Wednesday that a reduction in securities holdings would occur “in a gradual and predictable manner," highlighting the following points:
  • "The Committee expects to cease or commence phasing out reinvestments after it begins increasing the target range for the federal funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve.
  • The Committee currently does not anticipate selling agency mortgage-backed securities as part of the normalization process, although limited sales might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public in advance."

Interesting, two FOMC members voted against Wednesday actions on rates and securities purchases, one because he believes the language used doesn’t reflect the considerable economic progress shown throughout the last year and another over concerns with continuing such accomodative rates well into 2015, as is being hinted.

- Brian Shappell, CBA, CICP, NACM staff writer

Global Economy's Progress 'Solid' in August, But Consistency Hard to Find

The JPMorgan Global All-Industry Output Index (aka: the Manufacturing & Services PMI), produced along with Markit Economics, showed another increase in August to 55.5, up from the 55.1 registered in July. It is the third-highest reading since early 2011. But it would not be accurate to characterize things as anything near consistent regarding various industries and regions.

Gains were found both in manufacturing and services, but the latter provided a noticeably bigger boost to the global economy. A deeper dive into the data shows big differences between regions doing well, including the United States and United Kingdom, and those with "muted performance," like much of Asia and Europe.

"The national data still point to widening diverges between the regions," said JPMorgan Director of Global Economics Coordination David Hensley. He added that "steady progress" in overall growth is expected heading into the fall and "solid gains in new business alongside an increase in backlogs of work also suggest that pipelines are sufficient to at least partly offset any increase in demand headwinds in the short term."

A global sector breakdown showed the biggest one-month PMI gains occurring in commercial and professional services, technology equipment and construction materials. The biggest declines, by sector, between July and August were in the categories of real estate, software and services as well as household and personal use products. Notable, by region, were the steep declines in areas like forest and paper products and construction materials in Asia, while the EU sectors having the worst one-month charge were in banking and finance, tourism and recreation as well as household and personal use products. Both continents are finding rough going in the metals and mining sector as well.

The recovery in the United States, despite the various political wrangling and finger-pointing going into a big election year, appears to be continuing well, according to data. The Markit US Manufacturing PMI reached its highest level since April 2010 (57.9). Though the Markit Services PMI slid slightly to a still very high 59.5 from a red hot July number (60.8), the outlook for services is as strong in the US as it has been at perhaps anytime this decade.

The following are other interesting notes from data released this month from Markit Economics:
  • The Markit Eurozone Composite PMI remained in expansion territory, but dipped in August. The impressive all-sector output growth rebounds in Ireland (a 168-month high) and Spain (an 89-month high) could not counter disappointment in Germany and Italy, both tracking at their lowest points since late last year, or France, which remains in contraction territory despite being Europe’s second biggest economy. Tensions in the Ukraine are putting a major drag on a rebound with which people were just starting to finally trust.
  • The Markit/JMMA Japan Manufacturing PMI reached a five-month high, in part because of strong exporting activity. But the service sector PMI fell slightly and resides just below the index mark that divides contraction and expansion (50).  
As for emerging markets:
  • The HSBC Brazil Manufacturing PMI saw operating conditions improve for the first time in five months, though little optimism is being reported for continued improvements. Its service-side PMI also fell for the fifth consecutive month. 
  • The HSBC China Manufacturing PMI saw operating conditions improve at the slowest pace in the last quarter, with weaker expansion of both output and new orders as well as intensified staffing cuts.
  • The HSBC Manufacturing PMI for India in August fell only slightly short of matching July’s 17-month high on robust growth in new business from abroad and a noticeable easing of inflationary pressures, which have been an ongoing issue there.
  • The HSBC Mexico Manufacturing PMI saw solid improvement for Mexico on the best output growth and staffing increases in about three months. The short-lived drop in manufacturing activity in July is thought to be a blip, and confidence remains high on strong incoming new orders. 
  • The HSBC Turkey Manufacturing PMI finally started to stabilize in August and reentered expansion territory, with output growth and orders from export markets rising. Analysts, however, believe that subdued growth in the EU and growing unrest in the Middle East will stymie any kind of rapid improvement in foreign demand into early 2015.

Brazil on Downgrade Watch

The view on Brazil from economic growth and creditworthiness perspectives has continued to take hits throughout this month, and prospects for improvement appear somewhat dim.

US-based credit ratings agency Moody’s Investors Service changed Brazil’s rating outlook to “negative” from “stable,” though it affirmed the nation’s “Baa2” bond rating for now. The three main factors cited by analysts at Moody’s were as follows: a sustained reduction in economic growth with few signs of a “return to potential” in the coming months, a marked deterioration in investor confidence and its effect on capital formation, and new fiscal challenges that are making government debt reductions increasingly difficult.

Brazil, only a couple of years ago still an economic success story on the global stage, is now considered much more vulnerable than other major nations to “sudden changes in global risk appetite.” Moody’s did compliment Brazil’s resilience to financial shocks through its reserve buffers and the underlying credit benefits that are part-and-parcel with an economy of its size and diversity. Of help, if predictions by the ratings agency and others analysts are true, is that a coming change in political regimes could usher in a more market-friendly business environment, boosting growth potential over its current realistic capabilities.

The Moody’s outlook downgrade came about a week after the HSBC Brazil Services Purchasing Managers’ Index fell to a two-year low of 49.2, in what is become a less rare dip into contraction territory (below 50). “The business expectations index slumped back to the lows of April and May after registering much more favorable levels during the FIFA World Cup, said HSBC Chief Economist for Brazil Andre Loes. And despite an sizable increase in the HSBC Brazil Manufacturing PMI to 50.2 in August, “new orders remain flat relative to the last month, suggesting that the outlook for the sector remains weak,” Loes noted.

- Brian Shappell, CBA, CICP, NACM staff writer

Ex-Im (Temporary) Reprise on the Way

The Export-Import Bank of the United States may be getting a long-awaited reauthorization, albeit a short-term one, in the coming days or weeks.

House Speaker John Boehner (R-OH) said publicly this week that some of Ex-Im’s key GOP critics appear willing to allow a temporary reauthorization of the Bank, though he gave no indication exactly how long that would last. The extension is most likely to be included in a spending measure aimed at preventing a government shutdown in just over three weeks.

Critical to a reauthorization of any period for Ex-Im is flipping some ardent opponents in the House, like Reps. Kevin McCarthy (R-CA) and Jeb Hensarling (R-TX). Boehner singled out Hensarling when noting a newfound, yet tepid, support for reauthorization, but only if it is short term. Other Republicans hinted at supporting an extension of the charter through early in 2015. Democrats want a multiyear reauthorization, according to widespread reports, and have criticized the GOP for blocking votes on the matter.

A number of conservatives have argued that it isn't the government's place to offer Ex-Im what in their view amounts to a form of corporate welfare for the nation’s largest companies to do business abroad. Ex-Im supporters have noted that its closure would actually benefit foreign producers overseas and would result in the loss of domestic exports and, thus, manufacturing activity and jobs at home. Ex-Im, through fees it charges those who use the service, typically generates a surplus and has not relied on taxpayer money to cover its activity in more than five years. The last time there were regularly occurring losses of significance at Ex-Im were a couple of stretches in the 1980s and 1990s.

- Brian Shappell, CBA, CICP, NACM staff writer

Nevada Rules on ‘Work of Improvement,’ Delivery Location in Pair of Lien Cases

A pair of Nevada Supreme Court decisions clarifying lien laws could be of help to suppliers, subcontractors and materialmen. In Byrd Underground, LLC v. Angaur LLC, the Nevada Supreme Court clarified that some pre-construction work, such as clearing and grading, work on a structure could be considered a "work of improvement" under existing state mechanic’s lien statutes. The Court deemed it a fact question for another court, a bankruptcy court, to consider what rises to “work of improvement” in this specific case.  Much of that comes down to whether the work is visible, said Nathan Kanute, an associate at Snell & Wilmer LLP.

Some previous rulings reviewing lien claims over work like erecting an architect’s sign stated the opposite about clearing and grading. However, “nothing in these provisions excludes preconstruction activities from the definition of ‘work of improvement,’” the Byrd ruling read. The Court also found that construction contract and permit issue dates “are irrelevant” when evaluating delivery of materials, performance of work and/or visible commencement of construction, though judges noted the dates may be helpful in assisting the determination of the scope of the work performed.

The Court also ruled in Simmons Self-Storage Partners, LLC v. Rib Roof Inc. that a materialman's lien can be established by showing evidence that the materials were supplied for use on or incorporated into improvements to the property. The materialman “does not need to prove the materials that he supplied were used or incorporated into the property or improvements.” That impetus of proof therein, rather, is on the owner or general contractor. The court also deemed delivery to a "specific location" unnecessary. The reasoning is that claimants must be protected from others trying to circumvent their lien rights by having materials for a contracted job sent to a secondary location, “such as preparation or storage sites.” 

The Simmons ruling, particularly, may have “lowered the burden of proof that should make it easier for suppliers and materialmen to establish a lien,” Kanute said. 

- Brian Shappell, CBA, CICP, NACM staff writer

Report from the Steel Industry

The most interesting aspect of the steel business is the close relationship it has with the overall economy—it would be nearly impossible for there to be economic growth without corresponding growth in this sector. This is an industry that is at the very center of the economy, not only for the US, but also for many nations in the world. What happens in the steel sector drives much of what happens in many other industries, and there is a lot of flux in the steel market these days.

There were perhaps three major takeaways during the annual Steel Summit put on this week by the group at Steel Market Update. The first is that steel consumption is, as noted, remains a great proxy for the overall status of the economy. Right now, there is solid demand for steel used in the production of cars and other vehicles as well as for appliances. The drought in demand is for steel used in construction, the single biggest sector for the steel industry. The construction gains that have been noted in the residential community have not had much impact on steel, as this is not the building material of choice.

The second takeaway is that the steel industry worldwide continues to be heavily influenced by politics. Today, past government subsidies and protections are nearly all gone, but the US competes against countries that invest heavily in making certain their steel output continues to accelerate. That leads to dumping of steel on the market and other measures that create a very uneven playing field.

The third takeaway is that there is not a great deal of sympathy for the producers among those who consume it. Manufacturers want that steel as cheap as they can get it and don’t shed many tears if producers’ profits are meager.

- Armada Corporate Intelligence

Fed Beige Book: Economic Growth Rate Continues

Pending on one’s optimistic or pessimistic disposition, one could say the latest economic data unveiled by the Federal Reserve shows growth staying consistent with statistics collected earlier this summer or, instead, becoming stagnant and underwhelming at a time when a surge was expected.

The Federal Reserve’s Beige Book economic roundup of conditions in its 12 districts noted that data collected through August 22 found growth continuing throughout the country with no distinctive shift in the pace, overall. The tone coming in from reports in the district still carries strong hints of optimism of future growth through the end of 2014 and beyond. This is especially so in the Atlanta, Kansas City and Philadelphia districts. The latter, along with several other markets including Dallas noted record-levels in auto sales, which has become manufacturing’s pace-setter in recent times.  Manufacturing, overall, did stand out as one of the most mixed sectors during the mid-summer weeks, with positive news relegated almost entirely to those in the East Coast.

Also failing to show a consensus was credit, according to the Beige Book. Though credit standards were largely unchanged, credit quality improved while delinquencies fell in only half of the districts.

There were consistent, solid improvements throughout the country in the nonfinancial service, tourism and agricultural sectors. The latter included forecasts of improved crop turnouts and increased domestic energy production (oil and gas, but not coal).

- Brian Shappell, CBA, CICP, NACM staff writer

To view the Federal Reserve’s most recent Beige Book in its entirety, visit  

Fitch: EU Dependent on Russian Gas for Decade(s)

To say the economic ramifications and diplomacy around Russian force’s apparent violation of the Ukraine border/sovereignty is complicated may be the understatement of this decade. The behavior of Russia has become a sanction-worthy concern, at least in the minds of European leaders, there are reasons much of the EU is in such a precarious position. It all spells bad news for Ukraine and could impact the confidence of adjacent states.

A Fitch Ratings Report, “Living Without Russian Gas - Part 2: Replacing Russian Supplies in the Long Term,” argues Europe likely will be unable to significantly reduce its reliance on Russian natural gas for at least the next decade. Just as unlikely is a major reduction in demand because of a (hoped) European economic recovery will require more energy resources, not less.

As far as energy alternatives go, Fitch paints a bleak picture. Russia supplies more than one-quarter of all coal used in the EU and is the sole supplier of fuel rods used in nuclear-power generation, according to Fitch. Fitch analysts believe that green energy options, while held in high theoretical regard in many EU nations, are not near-sufficient enough to pull away from Russian gas. And, unlike the recent boom in the United States that is making it more independent and even a destination for manufacturing for the first time in decades as a result of cheaper energy, shale isn’t in line to be a saving grace for the EU either.

“European shale gas remains in its infancy, and we believe it will take at least a decade for production to reach meaningful volumes,” Fitch noted. “By that point, it would probably only offset the decline in production form Europe’s conventional gas well.”

In short, Russia will continue to be the power broker of energy in that part of the world. EU countries, notably Germany, taking a hard-line stance against Russian separatists or even Putin-led aggression in Ukraine face the real possibility of retaliation or worse, significant restrictions on the supply Russia releases to Europe. This obviously will play on the minds of European leaders should Russia continue to push its weight around in Eastern Europe.

- Brian Shappell, CBA, CICP, NACM staff writer