Late Business Payments Rising Again, Foreshadow GDP Growth Hit

Payment habits for US businesses worsened in the third quarter, but the performance differed markedly between various industries, according to a report unveiled this week by Euler Hermes.

Global trade credit insurer Euler Hermes released its latest “Economic Insight” showing a 2% increase in the average dollar amount of past due payments to US businesses through the first three quarters of 2014, as compared to the same period one year prior. Although Euler noted its Severity Index, that tracks long-run averages of payment behavior, remained in positive territory overall, the latest data suggested a drag on the horizon for overall economic growth in 2014’s final quarter.

“While the dollar amount of past due payments has improved by 60% since 2008, the current figures suggest that we can expect to see slower GDP growth for the balance of the year,” said Dan North, chief economist for Euler Hermes North America. “We have found a strong correlation between payment behavior and GDP, including an increase in past due payments in 2007, as the recession approached and a decrease before the recovery began in 2009.”

The best performing industries according to Euler’s Receivables at Risk (RAR) metric of late have been the automotive and energy industries, though the latter is often subject to greater unpredictability than most other segments. Both are expected to post positive fourth quarter results. Retail, to a lesser extent, also looked strong heading into the fourth quarter, though that is almost a given considering the expected annual holiday shopping boost.

Those with the worst RAR rating changes between this year’s second and third quarters were the commodities and electronics industries. Euler analysts characterized the commodities payment behavior change (a 71% decrease in performance) as particularly worrisome because of the unexpected and low frequency of delinquencies coupled with the high value of the losses. The industry encountered problems such as over-capacity and weakening global demand, which are unlikely to improve drastically before 2015. Reasons behind the slowdown in electronics payment behavior proved difficult to identify, Euler admitted. The agriculture and chemical industries also skewed weaker in predictions for the fourth quarter, but not nearly to the disappointing levels of those previously mentioned.

- Brian Shappell, CBA, CICP, NACM staff writer

Japan Slides Back into Recession

The Japanese economy has now contracted for two consecutive quarters and that is the classic definition of a recession. This should not come as a shock, but there is still apparent consternation in the planning rooms.

For many observers this slide seemed inevitable the moment the decision was made to push the national sales tax from 5% to 8%. The commentary at the time of the tax hike was that this looked like trying to floor the accelerator while jamming one’s foot on the brake. At the same time that people were being asked to spend Japan out of the doldrums as part of “Abenomics,” they were being smacked with higher sales taxes. One has to ask what the government thought would happen.

There was a rush to buy things prior to the arrival of the tax at the start of the year and, after the sales tax hike went into effect, that spending stopped almost entirely. The impact was worsened by the promise of another tax hike later in the year.

The tax was expected to be a minor thing. What policy makers seem to consistently forget is the impact on the psychology of the consumer. They look at an item and see the price and the retailer then shows them the price with tax, which adds quite a bit. The extra fee reduces desire, especially if the tax is unrelated to the quality of the product. Retailers have been jolted by the tax and had been pleading with officials not to add the next tax, to no avail.

- Armada Corporate Intelligence

Industries to Watch: Defense Coming Around Amid Turmoil

Less than two years ago, product and service providers in the defense industry were facing headwinds that looked to present huge obstacles to growth, or even continued solvency, for some companies. That seems to have changed pretty dramatically, as tensions in the Middle East and Eastern Europe appear unlikely to fade or even remain at current levels into 2015. Thus, like aerospace earlier this fall, the changed outlook on defense has landed the industry on NACM’s Industries to Watch list for positive reasons.

Z-Score bankruptcy prediction model creator Ed Altman, the Max L. Heine Professor of Finance at the New York University (NYU) Stern School of Business and director of research in credit and debt markets at the NYU Salomon Center for the Study of Financial Institutions, told NACM that defense contractors and their suppliers have not been affected as much as he predicted in a May 2013 edition of Industries to Watch. Then, the industry and suppliers downstream were threatened by the government spending sequester and overreaction from investors who saw government cuts coming for other reasons like military troop withdrawals. But with the Islamic State waging war in Iraq and Syria, instability remaining in other Middle Eastern nations like Egypt and the ongoing Ukraine-Russia border standoff, buzz words like “drawing down” are no longer bandied about as much as last year. 

“There are always new places in the world where wars break out that we (United States) are involved with,” said Altman. “We’re bringing troops home at the same time we are escalating other activities. So, defense has not suffered much even with last year’s cuts in Congress.”

Trade creditors were concerned, and with good reason, that mid-market defense players would have to lean much more heavily on B2B credit. That and potential insolvency isn’t as big an issue in the current landscape, according to Altman. Also less likely is potential for a spike in mergers within the defense contracting industry, which would have been apparent if a number of mid-market companies began to exhaust their cash positions. While due diligence continues to rule the day for granting credit to those tied to defense activity and spending, there is reason for credit managers to be more at ease heading into 2015 than there was in mid-2013.

- Brian Shappell, CBA, CICP, NACM staff writer

Bankruptcy Plan in Largest Chapter 9 in US History Approved

The bankruptcy plan for long-beleaguered Detroit to emerge from the largest municipal bankruptcy case ever filed was approved Friday, about 16 months after its initial filing, by US Bankruptcy Judge Steven Rhodes.

Detroit’s exit from Chapter 9 protection will be completed within 180 days, according to reports. The plan included the city ridding itself of nearly three-fourths of all debt it owed to unsecured creditors. Larger financial creditors took haircuts in deals struck earlier in the process as did most labor unions and representatives of retirees seeking to keep their benefits as in tact as possible. Those that continued to voice objections to Rhodes were unable to sway the judge’s belief that the city was indeed insolvent and in desperate need of the restructuring to function going forward.

The complexity of the case, as well as a mountain of objections and court actions from unions and creditors trying to maximize returns rendered Rhodes’ original timetable of a summer conclusion impossible. Still, the case came to resolution in a relatively quicker and much more decisive manner than several Chapter 9 cases filed by California municipalities prior to the Detroit declaration. Now, attorneys, municipal leaders and perhaps some creditors begin the deep-dive analysis on the case, especially in municipalities rumored to be heading toward insolvency. The outcome could have a significant impact nationally because of potential implications for many cities struggling with escalating debt problems tied primarily to retiree benefits such as pensions and health insurance, which were among the core issues in play in the Motor City. Of course, decades of perceived government corruption and an expanding blight that forced well-to-do residents from the city in droves also played significant roles in Detroit’s financial deterioration.

- Brian Shappell, CBA, CICP, NACM staff writer

Trade Gap Widens


Unlike many of its European counterparts, the United States has enjoyed enough of a rebound in domestic demand that the export decline in September just outlined by the Department of Commerce is not necessarily a growth-killer.

The Commerce Department announced that the US trade deficit surged to $43 billion in September, up $3 billion from the previous month. With notable economic problems returning to parts of Europe as well as newer concerns in Asian and Latin America, export demand dried up as the summer came to a close. It was notable in decreases in industries like capital goods and automotive. Export numbers were still higher in September 2014 than the previous year, however, according to Commerce data. Imports fell in large part due to a continuing reduction in demand for foreign petroleum and energy products. There was, however,  also a noticeable surge in imports of consumer products, particularly electronics,  with Apple being a winner in that regard.

Still, the widening gap and the reduced exporting activity haven’t seemed to emerge as major concerns yet. But as has become almost customary, problems at the Port of Los Angeles seem to be again percolating at a time when retailers and the suddenly export-deficient economy can ill afford them. And it could have an impact on retailers at a time when they can least afford problems.

- Brian Shappell, CBA, CICP, NACM staff writer
For more on this story, including a look at the brewing problems at the critically important Port of Los Angeles, check out this week's edition of eNews, available late Thursday afternoon via email and at www.nacm.org. 

Midterm Election Results: Where is the Business Community in All This?

The business position on politics is that most vote pragmatically, with an eye towards what the next Congress would do to make doing business easier. The comments from Mitch McConnell, likely the next Senate Majority Leader, included a commitment to expanding trade—that may be an area of common ground between the White House and Congress. He also focused on tax reform plans that would make the US more competitive, infrastructure plans that would both serve as an economic stimulus as well as bring the US system back to world standards and plans to develop the energy opportunities in the US. All are considered urgent needs by business community and the hope is that attention starts to focus on these areas.

The first area of compromise is the trade issue that the president has publicly supported. Now there may be more pointed interest in salvaging the Trans-Pacific Partnership multilateral free trade agreement as well as the stalled pact with Europe.

The issue of tax reform may be another place for some compromise and cooperation. The corporate tax rate in the US is among the highest in the world, but the tax take is often offset by a welter of complex tax breaks and incentives. These tend to distort the system and favor the bigger companies at the expense of the small and mid‐sized operations. There is nothing to suggest that reform will be easy, but there seems to be support for a serious attempt and one that elements of both parties could get behind.

A third area of compromise might be immigration. The business community generally supports some rationalization of the immigration system, as there is a need for the workers who are already in the US and those who would like to come to work. The labor shortage in the US is acute and grows worse as the population grows older.

One of the more interesting areas of potential compromise has been infrastructure development. For the last few years, there has been no money for these projects amid constant budget battles. There is hope that the need to boost the economy and provide jobs will trump the concerns about debt and deficit to a degree and that both sides will be able to get behind some additional projects to bolster the nation’s infrastructure.

The majority of those who have been elected to office are experienced legislators from the US House of Representatives or state legislatures. There is hope, though possibly faint, of renewed cooperation and an end to gridlock.

- Armada Corporate Intelligence