Home Prices on the Rise in United States

Prices of homes in the U.S. for October saw an increase of 5.2% from the previous year, according to the latest S&P/Case-Shiller U.S. National Home Price Index released on Dec. 29. The 10-City and 20-City Composites both showed year-over-year improvements as well, rising 5.1% and 5.5%, respectively.

“Generally, good economic conditions continue to support gains in home prices,” says David M. Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices. “Among the positive factors are consumers’ expectations of low inflation and further economic growth as well as recent increases in residential construction, including single-family housing starts.”

Among the 20 cities surveyed, San Francisco, Denver and Portland reported the highest year-over-year gains. Phoenix had the longest streak of year-over-year increases, while 12 cities reported higher price increases in the year ending October 2015 compared to the year ending September 2015. After a seasonal adjustment, the National Index reported month-over-month increases for all 20 cities surveyed.

The recent Federal Reserve increase, Blitzer explains, are leaving some to wonder if mortgage interest rates will rise. Between May 2004 and July 2007, the Fed rate increased from 1% to 5.25%, and over the same time frame, the mortgage rate increased from 6% to 6.75%. According to the latest economic projections, the Fed will increase its current rate of 0.5% to 2.6% in September 2017. “These data suggest that potential home buyers need not fear runaway mortgage interest rates,” Blitzer added.

- Jennifer Lehman, NACM marketing and communications associate

CMI to End 2015 with Modest Improvement

NACM’s Credit Managers’ Index (CMI), which will be unveiled Friday morning, is expected to show slight improvement from November to December, but ultimately fell short of making any impactful change.

“It is not quite a gift of the holiday season, but the latest numbers are a little better than last month,” said NACM Economist Chris Kuehl, Ph.D. “The bulk of the change seems to be due to the retail sector and its response to the consumer this time of year.”

The manufacturing sector took a harder hit, with the subcategories of sales and amount of credit extended expected to show dramatic declines. The index of unfavorable factors should show slight improvement, but still remain in the contraction zone. The service sector, however, has appeared to be on the rebound with positive activity occurring in the retail and construction industries.

A more in-depth look into December’s CMI will be included tomorrow’s weekly NACM eNews. The full CMI report, which contains detailed manufacturing and service sector data, will be available tomorrow at 9 am at www.nacm.org.

- Jennifer Lehman, NACM marketing and communications associate

China’s Direction the Story to Watch in 2016

The last two decades have been dominated by the story of Chinese transformation into the manufacturer to the world. But as so often happens, there is a price to pay for success.

Other emerging states noted the Chinese path to growth and emulated it to the point China has lost some of that low-cost advantage that allowed much of that rapid growth. Now China is entering yet another phase, one characterized by slowing down growth rates. But the world is no more ready for that development than they were for the growth that preceded it.

The 2016 version of China is going to be a big challenge, as there will continue to be slow growth and transition. The events of 2015 illustrate the way that China has increased its influence in the global economy—for better or worse. This was the year that a stock market collapse in China was enough to pull the U.S. Federal Reserve to change its course and delay its rate hike by several months. Given the Fed rarely reacts this strongly to global events, this was significant. China mishandled the currency devaluation and has seemed ill-equipped to be part of the global system given their desire to keep control. The learning curve is steep, but the Chinese are not going to get much opportunity to get it right.

The major issue is whether China is going to be able to stay on track with the economic reforms they launched a few years ago. China grew as fast as they have on the back of an export-centered economy offering a low-cost environment for manufacturing. To keep that system intact means to keep costs (re: wages) low. That also means people will not get paid much and that will make them less than aggressive consumers. Conversely, the new idea in China has been to develop the consumer and let them take the lead. This means wage hikes and that erodes the ability of the country to sell at a low price.

China has regained a little growth momentum in the last few months, but it has come at the expense of the new plan. The export sector is back in vogue, but it clashes with that effort to raise wages. This begs the question: What will China do now?

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence

NACM’s Industries to Watch: Small Exporters

The Obama Administration tried for years to shake the notion that it was anti-business by promoting initiatives and programs to inspire significantly more exporting activity out of U.S. businesses, large and small. Many followed that gentle nudge. But in a global economy that is reeling from oil price problems and foreign exchange volatility, smaller companies that put too many eggs in the exporting basket may be flirting with liquidity disaster.

“It won’t affect the big, international companies that already have facilities around the globe too much, but smaller U.S. manufacturers that have increased their global presence and are heavily leveraged, those companies can get hurt,” said Martin Zorn, president/CEO of data research firm Kamakura Co. Zorn believes three significant problems await such firms in the new year: the lack of demand for the bevy of products related to the oil and petroleum industry due to pricing problems, the fact that collectors converting foreign currencies into U.S. dollars for customer payments are coming up with less than they had planned and the potential difficulty for companies facing debt maturities to borrow as cheaply in the new era of rising Federal Reserve rates.

Customers that fall into one or more categories bear closer monitoring by credit managers in the near term. “I think the biggest thing I look at right now and will be interesting to see are industries sensitive to foreign exchange or those highly leveraged companies facing some disruption to the credit markets.”

- Brian Shappell, CBA, CICP, NACM managing editor and government affairs liaison

Tips to Improve Cash Flow Through Invoicing

No matter how big or small, cash rich or cash poor, or how much or how little debt a company carries, a business simply survives on its daily bread. Daily revenue not only sustains a company and helps it pay its bills and operating costs, but it also helps a company maintain a healthy credit profile with the banks. Invoicing is a vital aspect of cash flow. Essentially, invoices are how a company bills its customers for the goods and services it provides.

Losing track of billing is a sure way to lose track of cash flow. It hurts the company in two ways: First, it creates uncertainty about how much cash is available and, secondly about where that cash is now or is coming from. An automated, consistent, and reliable invoicing system can create a big picture along with a daily snapshot of income source and available time-frame.

The following are some tips to improve cash flow from invoices:
  1. Offer discounts for early payments. To improve cash flow of any business, the customers need to pay on time. If they are not paying on time, then they need to be motivated to pay sooner. But what could you do with the cash if customers paid early? A normal payment duration is 30 days, but companies offer a 2% discount if customers pay within 10 days. You can develop a policy and offer a similar discount.
  2. Penalize late payers. As for penalizing late payers with interest, they may not always pay the interest. However, the penalty will send the message that your company is firm and serious about the payment policy. This may encourage customers to pay outstanding invoices to avoid the interest charges
  3. Estimate cash flow. Companies often face a cash flow crisis because they do not have a good grip of the future expenses versus income. They want to expand but have not planned for the expenditures. A 12-month cash flow forecast is a best practice to forecast your cash inflows and plan for expansion cash outflows. A cash flow forecast will allow you to compare sales, cash income from accounts receivable, normal expected expenses, and when growth can be internally funded.
- Pamela McDaniel, Dynavistics managing director

The full version of this article is available by clicking here.

Will Anything Break the Oil Glut?

The price per barrel of oil is as low as it has been in over a decade and there is nothing that seems temporary about it. The impact on the world has been mixed, with real strain in the energy producing regions and some cautious optimism among those enjoying the low costs of that fuel. The big question is as it has been all year: is there anything that will end the glut?

There are basically four ways that an oil glut is reduced. Two are production related and two are consumption related. The most obvious would be a reduction in output from the oil producers and that has always been the tried and true technique. This is not happening at present, as all the producers are competing for market share and waiting from somebody else to make the first move. The second production issue would be some kind of interruption due to weather or a geopolitical event. This has not happened in a while, but next spring is forecast to be more intense as far as tropical storms are concerned.

The two consumption issues are related. The first is that countries will go back to their normal use—the United States for the most part already has returned to consumption of some 20 million barrels a day. Europe and Asia remain far from their usual consumption numbers. The consumer has to get involved with transportation again. The second consumption issue is connected to weather to some degree. This has been a mild winter and that has reduced demand on utilities. Some still use heating oil, and there has been less demand overall. The overall situation right now mitigates against increased oil consumption and that will keep prices far lower than the previous norm going forward.

- Chris Kuehl, Ph.D., NACM economist and Armada Corporate Intelligence co-founder

Spanish Election May Result in Big Change

A new political era may begin in Spain depending on the results of this Sunday’s election, which is among four candidates who represent differing parties and political views. Current Prime Minster Mariano Rajoy, leader of Spain’s conservative People’s Party, is being challenged by leaders of the Socialist Workers’ Party, Podemos Party and Ciudadanos Party.

The country has been through the economic ringer over the last year and a large majority of the voting population remains uncertain, explained NACM Economist Chris Kuehl, Ph.D.“The current government has recovered some of its popularity as the economy has returned to some growth, but there are many who were once supporters of the [People’s] Party who have drifted away to centrist and leftist alternatives,” he said. “The real frustration seems to be with the corruption that has dogged the main parties and an ongoing impatience with the pace of growth. Spanish voters are sick of being the weak sister in Europe and are seeking anyone who promises something different.”

In November, the Catalonia parliament voted to adopt a resolution supporting its independence from Spain—a move that is unlikely to happen, yet exhibits the frustration that many people feel. “Clearly, the origin of the problem is linked to the sharp crisis suffered in Spain, intensified since 2010,” Joaquin Rodriguez Cazalla, credit manager for Holcim, S.A., in Madrid, explained to NACM in November. “The weakness of governments in the Mediterranean area has brought about different kinds of responses and a radicalization process of alternatives.”

Kuehl added, “The Spanish are angry—and that is something they share with most of the voters in Europe and the U.S. They want something to change and they are about ready to accept anything as long as it isn’t the status quo.”

- Jennifer Lehman, NACM marketing and communications associate

Breaking: Fed Raises Rate, Foresees 'Gradual' Increases

The Federal Reserve raised the target range for the federal funds rate to 1/4% to 1/2%.
(For immediate release) Information received since the Federal Open Market Committee met in October suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that under-utilization of labor resources has diminished appreciably since early this year. Inflation has continued to run below the Committee's 2% longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; some survey-based measures of longer-term inflation expectations have edged down.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen. Overall, taking into account domestic and international developments, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced. Inflation is expected to rise to 2% over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely.

The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2% objective. Given the economic outlook and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4% to 1/2%. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2% inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2% inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations and readings on financial and international developments. In light of the current shortfall of inflation from 2%, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.

Source: Federal Reserve

Australian Prospects Downgraded Again

Those who live by the commodity seem to die by the commodity as well. The Australian economy was surging in recent decades on the back of the insatiable demand for iron ore, coal and other commodities produced by the Australian mining companies. But as Chinese demand has started to dry up, the Aussie economy began struggling.

For the second time this year, the government has downgraded economic expectations. The rate of growth is now seen as less than 2.5% and there is an expectation of a far larger budget deficit than had been planned before. The Aussie economy has often been compared to an airplane that has a jet engine on one side and a propeller on the other. The mining sector has ruled for many decades and even now, when global demand is weak, it is the mining companies that are the drivers.

The manufacturing sector is very weak, and services are barely holding their own. The isolation of Australia makes competing in sectors other than commodities hard. Transportation costs can be prohibitive, limiting the markets available to those in the “near north." These nations are not generally in great shape either. The country that Australia most depends on to consume these mining outputs continues to be China, which is lowering demand it contends with its own slower economic growth levels.

The retreat on the budget expectations will trigger some intense debates on what the national priorities, such as spending, should be. The ruling Labor Party made a lot of promises that it will be hard pressed to honor at this stage and that could spell another bout of government collapse and restructuring.

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence

U.S. Interest Rate Hike May Hurt Some Emerging Markets

If the Federal Reserve raises the U.S. interest rate as predicted this week, it is not expected to lead to a global financial crisis. However, some emerging markets may be impacted, especially those that are struggling with the slowdown in China, low commodity prices and increasing geopolitical risks, according to a Dec. 14 report from Atradius.

“Concerns about the creditworthiness of companies in emerging markets especially is a rising concern because they have borrowed heavily over the past decade. Increasing business failures are therefore to be expected,” states the report, U.S. Interest Rate Rise: Emerging Markets at Risk.

The most vulnerable countries are Turkey, Indonesia, South Africa and Malaysia, which all have high external financing. As a result, “these countries are less able to deal with the impact of the normalization of U.S. monetary policy on external financing: making it more difficult and more expensive,” according to Atradius. Brazil and Russia are also susceptible due to companies that have borrowed externally without sufficient hedging as well as pressure from a shrinking economy.

The rate increase is part of the normalization process of U.S. monetary policy. In 2008, the Fed lowered interest rates after the housing market crash, which resulted in an “upward pressure on emerging countries’ currencies, rising equity and bond prices and falling interest rates,” reads the report. “Lower interest rates, both external and domestic, in turn boosted borrowing and economic growth.” 

Earlier this year, the Fed began preparing to raise the interest rate, which has been extensively communicated and long anticipated by markets. “The emerging markets in general are better equipped to withstand an interest rate hike,” Atradius says.

- Jennifer Lehman, marketing and communications associate.

Turkey’s Economy Likely to Stay Volatile in 2016

Real gross domestic product (GDP) in Turkey grew stronger than expected in  third-quarter 2015, yet analysts say its economy will likely remain vulnerable for the foreseeable future. While Turkey experienced high rates of growth prior to the 2008 global financial crisis, the country faced political and financial challenges in recent years.

“A return to those heady rates of growth will be hard to achieve without stronger rates of investment spending,” states a Dec. 10 Wells Fargo report. “Yet, acceleration in investment without a corresponding increase in the national savings rate will simply make the economy more imbalanced via larger current account deficits.”

Real GDP in Turkey grew 1.3% in Q3 compared to the previous quarter and increased 4% on a year-over-year basis. In the past two years, the Turkish lira depreciated by about 40% and boosted the country’s inflation rate. Wells Fargo also notes that Turkey’s national savings rate has trended lower over the past 20 years, and the International Monetary Fund (IMF) does not expect a rebound in the near future. “A lower rate of national savings means that Turkey likely will continue to incur current account deficits, leaving the country dependent on foreign capital inflows and vulnerable to the whims of foreign investors.”

Euler Hermes Chief Economist Ludovic Subran has a slightly more optimistic outlook on the Turkish economy and writes, “After a rough 2015, Turkey seems to be heading toward a modest recovery in 2016. But a few glitches are expected: corporate bankruptcies may increase by 6% next year; days sales outstanding (DSO) will remain stable, but still 15 days above world average.”

The lira will further depreciate next year, and volatility will likely remain high, Subran explained, acknowledging another worry includes the mix between weak growth prospects and a high dependency on external financing.

- Jennifer Lehman, NACM marketing and communication associate

Nothing Expected to Block Fed Now

Job numbers announced Friday were as expected and strong enough to ensure the Federal Reserve will raise rates next week. The total job gain was 211,000; that is on top of some upward revisions of the last few months—sufficient to meet the job creation goals set by the Fed. This doesn’t mean the Fed is now set on a course for much higher interest rates in the months to come. Thus far, there is still no signal from the traditional motivators for Fed action.

The Fed’s position has been noted over and over again: This has been a very unusual period of time for the central bank as it has been shoved into the role of solo economic motivator since the recession. Issues such as inflation and money supply have earned secondary status as the Fed has had to worry about the overall growth of the economy and the strength of employment numbers. The Fed has been far looser with its rate policy than it normally would have been, but it has been far from alone as other global central banks have been engaged in the same policies.

Now that it is almost a certainty that Fed rates will come up next week—by a miniscule quarter point—the pressing question is: What happens from here? Will rates keep coming up every time the Fed meets? Will the hike cause a reaction in the markets? Will the dollar value increase and further damage the U.S. export community?

It is unlikely the Fed is planning to embark on a strategy of frequent rate hikes. There is still no inflation for it to react to and no burning need to hike rates. The most likely strategy at this point is one of continued caution—a small rate hike followed by a wait-and-see attitude to determine if the country’s economy handles it well enough. But remember, this year’s Federal Open Market Committee had three doves from the regional banks and only one hawk—next year is just the opposite with members such as Esther George, James Bullard and Loretta Mester generally voting as hawks and only Eric Rosengren defined as generally dovish.

Markets should not be all that upset by this move—they have been expecting this for over a year. There will be a knee-jerk reaction at first. Investors that have been counting on cheap money will be forced to retreat, but few expect this to be a major disruption in the markets for any length of time.

The biggest worry will be over the value of the dollar. The strength of the U.S. currency has had nothing to do with efforts by the U.S. to bolster it and everything to do with weakness on the part of the other world currencies. This will be the first thing to really make the dollar stronger, and that will have a negative impact on the U.S. export community. The Fed will not hold rates down simply to boost exports, but it will be a consideration going forward.

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence

President to Sign Bill that Revives Ex-Im Bank

After prolonged debate about whether or not Congress should or would revive the Export-Import Bank of the United States (Ex-Im), a five-year highway bill that includes the measure awaits President Barack Obama signature today. Both the Senate and House of Representatives overwhelmingly approved this bill, voting 83 to 16 and 359 to 65, respectively.

The U.S. export community desperately needs the re-authorization of the Ex-Im Bank, said NACM Economist Chris Kuehl, Ph.D. Otherwise, the export industry will have trouble competing with the strong U.S. dollar and economic slowdown from competing nations. “The burst of cooperation seems to be motivated by a united front in business that made the case that it was not going to be able to contribute to an economic recovery without some real help and a change in political attitude,” Kuehl said.

The Ex-Im Bank enables companies to sell products to foreign-based buyers that otherwise have insufficient borrowing options. Supporters say that if left unfunded, U.S. companies may need to move operations another country. Opponents, however, claimed the program amounts to some sort of corporate welfare.

- Jennifer Lehman, NACM marketing and communications associate

Beige Book Reports a Beige Economy

The latest edition of the Fed’s Beige Book report could not be more aptly named. This is the collection of reports that comes from the 12 districts that encompass the U.S. Each one assesses economic activity that takes place in its region. The collective analysis gives some clues to what is happening in the economy as a whole.

Although the report’s beige cover is the inspiration behind its name, the current edition also could be referred to as beige because the data itself is almost bland. Nothing in it suggests that the economy is in real distress, but there also is nothing suggesting the economy is on the verge of catching fire either. It has been described as a report outlining moderate growth.

This is the last version to be released prior to the Fed’s December meeting, and some had hoped that it would have provided definitive proof of the economy’s state—one way or the other. It really doesn’t; although given the comments by the Fed chair, it would seem that only a really negative report would have had much impact on the proposed rate hike.

The latest comments from Janet Yellen suggest an intention to hike rates unless there is some major and compelling reason not to. For the past year, the majority of those watching the Fed have indicated a small bias toward raising rates as the economy has been doing reasonably well. Nothing, however, suggests the economy is robust so when issues surface, the Fed backs off. The December rate hike looks more secure given that nothing suggests a major concern even though the most recent releases of data have been less than encouraging. The reports from the 12 Fed districts have not altered this perception as they have been mildly positive.

It is always a challenge to make assumptions about the economy’s strength. The United States has a massive and complex economy with each state having a GDP similar to a country. General statements made about the nation can apply in some states but not in others—at least not to the same degree.

Overall, four or five sectors have seen improvement, albeit not at a breakneck pace. Consumer spending has picked up in most of the districts, and this is certainly good news given the importance of the consumer to the overall pace of economic growth in the U.S. These reports are encouraging, but there is some contrast within the reports coming from the retail community. Thus far, the holiday spending season is slow despite improved consumer confidence surveys. Dissecting the data a bit shows that consumers are mostly spending on new cars and not on some of the more traditional products of the season such as clothing, toys and jewelry.

The reports also show some growth in housing and commercial construction, although variations between parts of the country exist. The fastest growth has been in multi-family housing and senior living facilities. The commercial sector has seen diverse growth depending on the part of the country, but most of the expansion has been in health care, warehouse and distribution facilities. The market for general office space has been sluggish, and there has been relatively little demand for new retail. For the past few years, the slowest sector for construction has been public. And although infrastructure needs to be addressed, there is no money. That may be about to change as against all odds, Congress has passed a five-year plan to spend $300 billion on repairing the national infrastructure. This is far short of the one trillion dollars that most assert is needed to bring things back to respectability, but it is a start.

An increase has been reported in loan demand, and that is certainly a good sign. The Fed has been frustrated in its attempts to bolster the economy through lower interest rates as few companies have been asking for money; therefore banks have not been lending. There is now some sign that lending is making something of a comeback; that is backed up by the fact that applications for credit have been somewhat stronger according to the Credit Managers’ Index. There has also been some tightening on the labor front. The U-3 unemployment rate is now at 5%, and in many parts of the country, labor shortages exist. The problem is that this labor shortage is due more to a lack of needed skills than the pool of available workers.

The two most negative observations coming from the Beige Book are by now pretty familiar. The impact of the export decline has been severe and is only expected to get worse. The stronger dollar has been a big part of this decline, but the fact is that many of the countries the U.S. sells to are in financial distress and would be unlikely to buy much from the U.S. even if the dollar were weaker. The energy sector continues to be very weak, and that has affected many parts of the U.S.—even those that have not been directly engaged in the oil and gas business. The manufacturers that supplied the sector are all over the U.S. and have missed the business they once had. The farm sector has been affected this year by a whole variety of issues. The good harvest drove prices in general down, but some sectors of the country received too much rain and that affected yields. The problems were not severe enough to drive the commodity prices up—only select states had problems

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence

NACM’s Credit Managers’ Index Returns to a Negative Trend

November’s economic report from the NACM continued its roller coaster ride, as both the manufacturing and service sectors declined this month, according to the November report of the Credit Managers’ Index (CMI). The combined CMI index dropped more than a point, from 53.9 in October to 52.6 in November.

“This month, the trend has returned to the stress of the last few, and the timing is not as it should be,” explained NACM Economist Chris Kuehl, Ph.D. “This is the time of year that the consumer comes to the rescue, but it doesn’t appear that will happen this time.”

The respective favorable and unfavorable index factors in NACM’s combined CMI both dropped from the previous month. Every subcategory within these indexes also lost ground, with four out of six unfavorable categories now in contraction territory (below a level of 50).

“Given all the data that has been emerging as far as the economy’s overall strength, this is not a big surprise, but still a disappointment,” Kuehl noted. “It seems that companies are struggling at this point in the year and that is not a good sign given that this is the time when these companies are expected to make the bulk of their money for the year. This really applies mostly to retail, but the manufacturers respond to that retail drive.”

For a full breakdown of the manufacturing and service sector data and graphics, view the complete November 2015 report at http://web.nacm.org/pdfs/CMIcurrent.pdf.

Ethiopian GDP Growing Strong

Ethiopia’s gross domestic product grew on average 10.9% from 2004-14. The growth spurt—attributed mostly to agriculture and services sectors—moved it from being the world’s second-poorest nation to becoming a middle-income country by 2025, according to a new World Bank Group report, Ethiopia’s Great Run: The Growth Acceleration and How to Pace It. The country’s “growth strategy stands out for its uniqueness in focusing on promoting agriculture and industrial development with a strong public infrastructure drive,” the bank said.

“Ethiopia began to see accelerated economic progress in 1992, and it shifted to an even higher gear in 2004, pulling millions of people out of poverty and leading to improvements in other areas like improved life expectancy and reduced child and maternal mortality,” said Lars Christian Moller, the firm’s lead economist for Ethiopia and lead author of the report. “To continue the impressive run, Ethiopia needs to modernize the policy framework to further strengthen the foundations of its economy.”

A decline in military spending as a part of a restraint on government consumption facilitated high public infrastructure investment. “A strong rise in exports, greater trade openness and an expansion of secondary education were some of the additional enabling factors that supported the economic boom and facilitated a substantial decrease in poverty from 44% in 2000 to 30% in 2011, measured by the national poverty line,” World Bank stated.

The report highlights three policy recommendations:
  • Continued infrastructure investment, sustainably financed through new ways such as raising tax revenues, encouraging private sector involvement or improving public investment management and less dependence on debt financing.
  • Supporting and sustaining the private sector through credit markets and private investments. (“Ethiopian firms are more credit constrained than peers and exhibit poorer performance as a result,” the bank said.)
  • Tapping into the growth potential of structural reforms. Ethiopia has liberalized its merchandise trade and “can make further progress by gradually reforming the services sector, including domestic finance,” the bank stated. “In doing so, it can benefit from the lessons of early reformers and tailor reforms to its own circumstances.”

Argentina Gets a Center-Right President

It is the end of an era; one that most in Argentina will not look back on fondly. The current president’s handpicked Peronist candidate—chosen to carry on the legacy of the Kirchners—was defeated despite having a solid lead just a few months ago. The new leader, Mauricio Macri, the mayor of Buenos Aires, is the son of an Italian immigrant who built a substantial construction empire. He has been a consistent thorn in the side of Cristina Fernandez as he used his position as mayor of the nation’s largest city to thwart some of her plans. The man he defeated, Daniel Scioli, is head of the province of Buenos Aires and a close confidante of Fernandez.

Macri may soon regret winning this election as he faces a host of issues that will test this new government severely. For the last 12 years, the populists of the Peronists—Nestor Kirchner and subsequently his wife when he died unexpectedly—have governed Argentina. Kirchner came to power when the country was on the verge of collapse after the economic meltdown in the early 1990s. The currency fell; creditors were closing in; and the governments couldn’t find a way to stay in power longer than a year. Confrontations with the international community punctuated his rule, and soon Argentina became something of a pariah state. The country defaulted on its debt obligations to bondholders and has been in the courts ever since. Under Fernandez, populism expanded; there were endless confrontations between the business community and the government. Laws that were supposed to ensure cheap food for the urban poor by restricting food exports backfired as farmers refused to produce it for prices less than it cost to plant and harvest. The second-largest economy in Latin America is now a shadow of what it once was and much of the investment that once flocked to Buenos Aires has fled.

Macri will still have to deal with a legislature that is chock full of Peronists, and they will be in no mood to assist him. Massive economic issues are not going to be dealt with easily. The good news is that he may get some breathing room from institutions that have been battling the Fernandez government, as they may finally see some progress on debt repayment.

Among the issues he faces right away include a widening deficit, double-digit inflation and a severe currency crisis. The country has had no access to speak of when it comes to foreign currency and especially dollars. This was the impact of the default in 2003. The central bank just ordered the banks in the country to sell two-thirds of their foreign currency reserves to support the grossly overvalued Argentine peso. Macri declared during his campaign that he would lift currency controls as soon as he took office and that would be part of a very steep devaluation of the currency. Such a move would affect inflation as well, but it will hammer the population hard—the majority of the population will see the value of their money collapse. The reality is that much of the population is already poor and essentially living a hand-to-mouth existence so it may not make all that much difference to the bulk of the population.

There will be opposition to this move and that could challenge his government almost from the start. The expectation is Macri will start talks with the banks that Argentina owes as well as the International Monetary Fund (IMF) and the bondholders that were stiffed at the start of the Kirchner regime. The country is in no position to pay these obligations right away, but Macri needs to unlock support and aid from the IMF and others so he is expected to make some promises and issue assurances to those that were burned over 10 years ago.

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence 

More Evidence of Consumer Caution

The housing sector has always been a vital part of economic growth and for a variety of reasons. There is the obvious impact of buying a home—the largest investment that most people make in their lifetime. Then there is the process of furnishing and landscaping it. We all know the costs of maintaining a home and that supports a great many people and businesses.

Additionally, people accumulate value in their home through the equity they build over time. That equity is what has traditionally allowed people to borrow and spend money on everything from projects to vacations or some other acquisition. At the very least, the equity in the home makes owners feel wealthier than they were before and thus more likely to spend.

Data show that people now have more equity in their homes than at any time since the recession. There are fewer underwater mortgages than there have been in more than 20 years. In many communities, home values have reached pre-recession levels and beyond. There has been 45% more access to equity than last year, but this is still less than a quarter of the access that took place prior to the recession starting in 2008. Today’s homeowner is far more cautious and that affects the impact of that accumulated home equity.

This is yet another example of the paradox of economics—what is good for the individual is not necessarily good for the economy as a whole. People are saving and guarding their financial position, which is a good move for the majority of the population. Nobody seeks a return to the days of being leveraged to the hilt and then suddenly plunged into crisis by some kind of financial reversal. All of this caution, however, robs the economy of much of the vitality needed to avoid that financial reversal in the first place.

Analysts assert that many homeowners are now becoming aware of how much equity they actually have and that they are starting to relax about the state of the economy. In many cities, the price of homes has risen substantially from the lows of just a few years ago. It is now far easier to sell at a profit and that equity is beckoning. The expectation is that many will start to use that equity again, and when that takes place, the economy will get a substantial boost. The trick will be for consumers to access that equity without putting themselves in the position they were in a few years ago.

It seems there is always a pendulum swing between overly cautious behavior and the recklessness that characterized the period prior to the recession. The mood of the consumer thus far remains careful, and there doesn’t seem to be a desire to become profligate again, but conditions can change rapidly. Right now, the consumer is still wary about job growth, and generally speaking, election years depress the overall population.

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence

BPO: New Payment Method of Future?

Bank Payment Obligation (BPO) is a relatively new financial instrument that falls somewhere between a letter of credit and an open account.

“A BPO is sometimes referred to as the ‘Goldilocks’ solution,” said David Hennah, global head of trade and supply chain finance for Misys, during an Oct. 27 FCIB webinar. “A letter of credit in some cases can be regarded as too hard [and] an open account too soft. BPO sits in the middle and is just right.”

A BPO is a legally binding undertaking given by one bank to another bank. It confirms a payment will occur on a specified date after electronic data submitted by the seller and the buyer is successfully matched. “When that’s the case, shipments will be made and documents will be sent directly to the buyers and the sellers, remaining outside of the banking system,” Hennah said.

Buzz surrounding BPOs has indicated they could become the preferred method of payment in the future for business-to-business transactions. Typically, new instruments such as BPO follow a trend of relatively low adoption in the beginning that picks up, Hennah explained. “I think at this point in time, the BPO has not yet crossed the chasm, and it is at that kind of tipping point now where it is dependent on wider market adoption in Europe and in the Americas.”

For more information on BPOs, check out FCIB’s Week In Review on Nov. 27, or download the complete webinar here.

- Jennifer Lehman, NACM marketing and communications associate

Individual Surety Bond Control Awaits President’s Signature

Subcontractors and suppliers on federal construction projects are closer to having their payments protected. Legislation that sets minimum standards for individual surety bonds currently awaits President Barack Obama’s signature.

Obama, who vetoed an earlier version of the bill due to a dispute over funding, is expected to sign the revised legislation.

Section 874 of S. 1356, the National Defense Authorization Act for Fiscal Year 2016, stipulates what assets are acceptable and requires that the individual surety deposits those assets with the federal government. The federal Miller Act requires a prime contractor on federal construction to provide performance and payment bonds on contracts more than $150,000. “Most such bonds are provided by corporate sureties, which are required to submit detailed financial information to the U.S. Department of Treasury, which verifies that information and monitors the performance of the sureties,” the American Subcontractors Association (ASA) said in a weekly news bulletin. “However, the Federal Acquisition Regulation also allows the use of individual sureties, which are not as heavily regulated.”

An individual surety pledges to make good on the contract if the prime contractor fails to perform or fails to pay its subcontractors or suppliers. “These new requirements, when enacted and implemented, will improve payment assurances for subcontractors and suppliers on federal construction,” said ASA Chief Advocacy Officer E. Colette Nelson.

The law is expected to take effect one year after enactment so that the Federal Acquisition Regulatory Council and the U.S. Small Business Administration time to develop and publish a regulation. “ASA will participate in the rulemaking process,” the association said.

Builders Start to Lose Confidence Again

The decline is not all that significant—at least not yet. The level of confidence as measured by the National Association of Home Builders fell three points from the high registered last month. It is now sitting at 62, which is pretty close to historical highs. As with most of the surveys of this type, any reading over 50 is considered expansionary and numbers below 50 indicate contraction.

The levels are still clearly confident, but the trend is a bit worrying. One of the major issues weighing on the minds of builders is the potential Fed rate hike. A quarter-point hike in the federal funds rate is not likely to send mortgage rates soaring, but they already have risen a bit and will likely go up a little more when, and if, the Federal Reserve pulls the trigger.

There are good and bad aspects as far as the impact of the hike. Mortgage rates will be impacted, and that could push some out of the market. Banks, however, will likely make more loans as their profit margin improves a little. The problem is that nobody really knows how this will affect buyers. Those seeking bigger homes will not be put off that much, but the first-time buyer may struggle.

The long-term worry remains as far as new homebuilders are concerned. They are still seeing far more demand for the multi-family unit than for the single-family home within the Millennial generation. It has become evident that this generation is starting to take an interest in home buying but not until they have reached their 30s. Those who are still in the ranks of the twenty-somethings are not yet ready to settle into the patterns of their predecessors and that can be a long term challenge.

The old pattern was for people to buy a starter home in their twenties and then progressively move up to bigger quarters as they had families. The pattern now seems to be to wait on most of these decisions—they have been slow to leave school and that has generally meant they are leaving with more debt. They are then slow to start families and thus slow to buy homes. They are even slow to settle on a career and a location to settle in. That translates to fewer home purchases in the course of their adult lives.

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence

Low Oil Prices, Sanctions Hinder Economy in Russia

In the third quarter, real gross domestic product (GDP) in Russia contracted 4.1% from a year earlier and is largely attributed to the recent collapse in oil prices, according to a Nov. 12 report from Wells Fargo.

Falling crude oil prices led to a decline in the Russian ruble compared with the U.S. dollar, which increased Consumer Price Index (CPI) inflation into the double digits. The central bank’s policy rate also remains elevated at 11%. “The combination of relatively tight monetary policy and soaring inflation has weighed significantly on domestic demand,” the report reads.

Real wages fell by nearly 10% year-over-year, which Wells Fargo says is “a key contributor to the weakness in real retail spending.” The sanctions imposed by Western nations have also impacted the country’s economy, negatively weighing on foreign investment and trade flows.

Economists at Wells Fargo say that while the near-term outlook for Russia is dim, they anticipate real GDP to improve in 2016. “However, with oil prices projected to remain at or near current levels for the foreseeable future, the recovery in Russian [economic] activity is likely to be relatively modest,” the report states. “Moreover, with Western sanctions unlikely to be lifted in the near term, a return to the supercharged growth rates of the prior decade is likely out of reach for the Russian economy.”

- Jennifer Lehman, NACM marketing and communications associate

Eurozone News Far from Inspiring

News from European economic analysts is not very uplifting. Data show growth is as anemic as it has been for the last few years. It is somewhat encouraging that things are not worse than this, as some had expected the eurozone to sink into recession by this time. Instead, it has experienced some slight growth—about 0.3%.

That Europe has not entered a formal recession is cold comfort as the pace of growth is far too slow for any real recovery in the majority of the region. Germany’s struggles are the most distressing part of the data. If the engine of Europe falters, there is faint hope for the rest of the region.

The expectation had been growth of 0.4%—the same rate as had been registered last month. That growth, being even more anemic than had been expected, comes as a blow to those who have been looking to see European recovery at some point in the coming year. At this point, three reasons are cited for this reduction in activity.

The first and likely the most direct is that China has slowed; and with that retreat, Germany and some of the other markets have lost an important destination for their exports. Germany has been especially active as far as selling to China and has taken its slowdown harder than most. Not only does Germany have a significant stake in the Chinese economy, it also does a great deal of business with the Asian states, which used to sell a lot to China. If the Chinese aren’t buying their output, they are not buying much from German or any of the other eurozone economies.

The second issue for the reduction in growth has been the wave of migration from the Middle East and North Africa. There have been obvious and not so obvious impacts. There is the sheer cost of taking care of the refugees—an expense that has only just started to build. It is estimated that Europe will host close to one million refugees this year and as many as three million in the next two years. That assumes that nothing happens to stem the rush. This is straining budgets and will continue to affect the poorest states in Europe as they are the first point of arrival for the majority of those seeking to come to Europe. The less obvious impact has been on business. Travel is now very hard, and that has interrupted tourism as well as business trips. There is real confusion as to what happens next, and that has the consumer in Europe more than a little nervous.

The third issue is lack of internal demand, which tracks back to the major economies in the eurozone—Germany and France. The U.K. is not part of the eurozone, but it plays a big part in the European economy. These are the states that provide demand for the other states in Europe. Without the Germans and the French, the other nations have little or no domestic opportunities for growth.

It is likely these bad numbers will provoke a response from the European Central Bank (ECB). The thinking at this stage is that Mario Draghi will announce an expansion of the quantitative easing program launched earlier this year. It is also possible that the very low interest rates will be lowered even further. Frankly, the ECB has just about run out of ammunition. At some point the legislatures of the region are going to have to consider reversing their position on austerity. This is not going to be an easy switch to accomplish, and right now it seems exceedingly unlikely despite the intense pressure.

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence

Credit Manager Offers View on Catalonia Vote

For now, it's business as usual in Spain, said Madrid-based credit manager Joaquin Rodriguez Cazalla, of Holcim, S.A., who shared his thoughts about the country's Catalonia region's potential succession

Catalonia sits in the northeastern part of Spain and its parliament adopted a resolution Monday supporting its independence. “Clearly, the origin of the problem is linked to the sharp crisis suffered in Spain, intensified since 2010,” Cazalla explained. “The weakness of governments in the Mediterranean area has brought about different kinds of responses and radicalization processes of alternatives.”

Through this recent declaration, the Catalan party hopes it can break away within 18 months; however, Spain’s prime minster has said the Spanish government will appeal the motion.

While the move has not yet affected business transactions in Spain, it could in the future. “Some movements of companies from Barcelona to the center of the country, delays in payments to suppliers from the regional government in Catalonia or some Catalan blockade campaign products have been some of the effects of this dispute, but not relevant [until] now,” he said. “Probably the worst effect (we cannot evaluate it) is the stop of new investments.”

Even though it has mostly been business as usual in Spain, Cazalla said many people are dealing with the social ramifications of the crisis. “While this induced problem of social psychoanalysis is being solved, fortunately business goes on,” Cazalla added.

- Jennifer Lehman, NACM marketing and communications associate

Check out NACM's eNews article, Catalan Resolution Unlikely to Impact Business in Spain

Small Business Optimism Holds Still

The Index of Small Business Optimism in October posted no change after a rise of only 0.2 points in September and 0.5 points in August. The National Federation of Independent Business’s index is holding at a below average reading of 96.1.

While labor market components posted minor declines, they held at historically strong levels, NFIB said. “This time owners reported no net growth in employment, a significant decline from reports in the previous four months.”

Three percent of respondents said all their borrowing needs were not satisfied, up 1 point from the record low reached in September. Those who reported all of their credit needs were met held at 30%, and 53% stated they did not want a loan. “For most of the recovery, record numbers of firms have been on the ‘credit sidelines,’” the organization said. “Interest rates are low, but prospects for putting borrowed money profitably to work have not improved enough to induce owners to substantially step up their borrowing and spending. Owners can’t find many good reasons to borrow to invest when expectations for growth are not very positive.”

Only 2% identified financing as their top business problem, and owners reporting that they borrowed on a regular basis went down one point to 28%. The average rate paid on short maturity loans rose 30 basis points to 5.1%. The net percent of owners expecting credit conditions to ease in the coming months was a negative 5%, a 1 point improvement.

“The October NFIB survey gave no indication of resurgence in growth in the small business sector with the Index remaining below the 42 year average of 98,” said Bill Dunkelberg, NFIB chief economist. “The labor market components might have held at historically strong levels, but this time owners reported no net growth in employment, which is a significant drop from reports in the previous four months.”

- Diana Mota, NACM associate editor

Low Oil Prices Likely to Stay?

Most of the rules that once governed the oil world seem to have changed and it doesn’t seem likely they will be reverting any time soon. The old “system” was predictable: The price of oil would drop at some interval as demand slipped, and the oil producers would react by restricting output for a while. This artificial supply shortage would allow the glut to vanish, and the prices would start to come back to levels the producers wanted to see. These days are over now—at least for a while.

Non-OPEC states now control more of the world’s oil supply, and they rarely work in concert. The producers do not like the oil price right now and would much prefer a $100 per barrel rate as opposed to prices in the 50s and 60s. At this point, however, market share is more important to producers than the per barrel price. Each is essentially saying the same thing to the market: “I’ll cut production if you cut first”. None of the oil producing states is willing to take the first step and, thus, they compete aggressively, keeping prices low.

For the time being, demand is clearly not keeping pace with new supply. The United States has barely returned to consumption levels common prior to the recession. The Europeans still consume just about half what they once did, and the Asian states maybe two-thirds of what they did prior. The reasons for the demand reduction are mostly tied to slow economic growth, but there is also the fact that fuel consumption has been reduced as business and the consumer elect to use less. Cars are more fuel efficient, as are trucks, trains and airplanes. The power plants are also more efficient, while new oil-fired operations are rare. There is also the issue of climate change and the desire to reduce pollution.

The states that have been feeling the impact of low oil prices have mostly been in Africa and the Middle East. The costs of production are high in Nigeria and Angola and the other states in Africa. They need per barrel prices almost double what they are now. The Middle East is divided between those that can maintain an efficient system (Saudi Arabia, Kuwait) and states such as Iraq, Iran and Libya that can no longer produce oil cheaply.

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence

Four Reasons India and China Could Eventually Come to Blows

As the world is focused on the conflict between Ukraine and Russian or ISIS and the mass migration of refugees to Europe, overlooked to some degree has been the ongoing tension between India and China.

New prime minister of India Narendra Modi, while seen as pro-business and an economic reformer, is also an ardent Hindu nationalist. This nationalism extends to India’s often testy relations with neighbors. There are four potential flashpoints that could affect relations with China and could even lead to war under a perfect storm circumstances:
  1. India has been sheltering the Dalai Lama for decades and has upheld the Tibetan right to self-determination against the constant pressure to assimilate into the rest of China. The Dalai Lama is the one symbol that keeps Tibet alive, and his age is a major concern. When he passes, the Chinese will seek to elevate their choice to succeed him. This could spark intense protests in Tibet and that could conceivably draw the two states into conflict.
  2. The two countries account for 40% of the global population, but they have access to just 10% of the world’s water. The Tibetan plateau is one of the great fresh water reservoirs in Asia and supplies the bulk of India’s water. The Chinese have a plan to divert as much as 60% of the Brahmaputra River to feed the dwindling Yellow River, which would rob India of its largest source of fresh water. 
  3. Two land disputes—the areas of Aksai Chin and Arunachal Pradesh—that triggered the 1962 Sino-Indian war were never settled. 
  4. The Chinese and the Pakistani governments have been sporadic allies, and India is well aware of the military buildup to the north. Modi has been aggressive, if not hostile, towards the Pakistani leaders in the past and will have low tolerance for anything that could compromise the Indian security position.
None of this is to say that a shooting war is imminent. These have been issues since the 1960s; thus far, they have mostly been providing ammunition for political speeches. The caution is based on the fact that both states have stress in terms of their domestic policies. These are the kind of disputes and issues that can feed a demagogue and trigger escalating reactions that take on a life of their own.

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence

Political Jockeying Continues in Ex-Im Reauthorization Fight

Supporters of the Export-Import Bank of the United States (Ex-Im) continue to wait for the Senate to formally attach the measure to larger legislation a week after the House of Representatives voted 313 to 118 to reauthorize the export assistance agency. Meanwhile, conservative House lawmakers reportedly are searching for other ways to restrict Ex-Im, whose charter was allowed to expire in July.

Senate Majority Leader Mitch McConnell (R-KY) has held to his position that he does not want to bring Ex-Im’s reauthorization bill for a vote on its own and would rather attach it to the “must pass” Highway Trust Fund bill in coming days or weeks. Solid support appears to exist in the Senate to pass a bill with the same wording as used in its House counterpart—There were 64 senators that voted in favor of a similar version over the summer.

Meanwhile, far-right House lawmakers are trying another strategy toward scuttling Ex-Im by proposing several significant amendments to its version of the Highway Trust Fund bill that would place new restrictions on the bank (e.g., allowing only small businesses to participate in Ex-Im programs, barring Ex-Im from working with businesses in certain countries or regions including the Middle East, etc.). House Speaker Paul Ryan (R-WI) has recently bashed Ex-Im alongside of the Tea Party wing of the GOP, likening it to a form of corporate welfare. That assertion, as well as the reality that the United States is now the only major economy lacking a fully functional export credit agency (it may only service previous loans), has been widely and deeply panned by most political moderates, business analysts and economists.

Ex-Im, through the fees it charges, enables companies to sell products to foreign-based buyers that otherwise have insufficient borrowing options. Ex-Im typically generates a taxpayer-neutral result or, more frequently, a surplus; and it has not relied on taxpayer money to cover its activity at any point this decade. Agency supporters have expressed concern that previously funded companies may need to move some manufacturing operations outside of the U.S. if Ex-Im remains closed; that competitors subsidized by foreign governments would have an unfair advantage; and that domestic jobs will shrink at companies of various sizes.

- Brian Shappell, NACM managing editor, CBA, CICP