NACM’s April Credit Managers’ Index Rebounds, But ‘Mixed Messages’ Endure

April results for NACM's Credit Managers’ Index mark an improvement from the sentiment one month ago. In addition, newly revised statistics from the February and March editions of NACM’s CMI illustrate a more positive picture that preliminary numbers indicated a few short weeks ago.

The revised 53.4 reading in March rose to 53.9 in April, according to data, which will be unveiled by NACM Friday morning. Still, there are troubling issues within the unfavorable factors categories. “This is a month with some mixed messages,” said NACM Economist Chris Kuehl, Ph.D. “This [month] is good, but it is also evident that the last couple of months did some damage, as there are weak numbers throughout the unfavorable categories. It would appear that a collapsed energy sector, winter worries and trepidation regarding dollar values and the interest rate weighed pretty heavily on past months.” He added that most of these concerns likely won't be in play by summer. 

April’s statistics show small gains from the revised numbers of March, which were decidedly better than preliminary data show, in areas like sales, new credit applications and dollar collections. Kuehl indicates that the May CMI will be a bit of a bellwether to determine if most of the index's recent roller coast behavior will cease with potentially stabilizing energy prices and better weather. 

Kuehl noted that revisions to the CMI in March and February changed the results of only a few of the categories, with the most dramatic update coming in the amount of credit extended category. Those categories have returned to the 60s, and the latest numbers mark the second consecutive month of gains, a first since June through August of 2014.

“Upon reviewing the data and assessing some additional numbers, it seems that there was not quite the drama originally noted,” Kuehl said.

- NACM staff

Consumer Confidence Takes a Tumble

Consumer optimism dipped in April, according to a recent Conference Board Consumer Confidence Index.

The index stands at 95.2, compared with its benchmark of 100 in 1985, and is down from 101.4 in March, which saw an increase. Its components include the Present Situation Index, which decreased from 109.5 to 106.8 month-over-month, and the Expectations Index, which dropped from 96 to 87.5.

“Consumer confidence, which had rebounded in March, gave back all of the gain and more in April,” said Lynn Franco, director of Economic Indicators at The Conference Board. “This month’s retreat was prompted by a softening in current conditions, likely sparked by the recent lackluster performance of the labor market and apprehension about the short-term outlook. The Present Situation Index declined for the third-consecutive month. Coupled with waning expectations, there is little to suggest that economic momentum will pick up in the months ahead.”

Consumers’ view of current-day conditions continued to soften as those who assessed business conditions as good slipped from 26.7% to 26.5%. Consumer pessimism also fell, however, as those who claim business conditions are bad moved from 19.4% to 18.2%.

Regarding the job market and wages, opinions were less favorable. Those who stated jobs were plentiful declined from 21% to 19.1%, and those who believe jobs are hard to get rose from 25.5% to 26.4%. Fewer respondents anticipated more jobs in the near future (15.3% to 13.8%). The proportion of consumers expecting their incomes to grow decreased (18.8% to 18.3%), as those who expected a decline in income rose (9.7% to 11.2%).

March’s rebound regarding the short-term outlook also recoiled. The percentage of consumers expecting an improvement in business conditions over the next six months edged from 16.8% to 16%, and those who expect conditions to worsen grew from 8.1% to 9.4%.

- Diana Mota, NACM associate editor

To read about The Conference Board and PricewaterhouseCoopers Measure of CEO Confidence survey and The Conference Board Leading Economic Index for the United States, see this week’s eNews.

Federal Reserve Holds Line on Rates, Treasury Debt Purchases

(Editor’s Note: The following statement was released by the Federal Reserve Wednesday following the Federal Open Market Committee’s regularly scheduled monetary policy meeting):

Information received since the Federal Open Market Committee met in March suggests that economic growth slowed during the winter months, in part reflecting transitory factors. The pace of job gains moderated and the unemployment rate remained steady. A range of labor market indicators suggests that underutilization of labor resources was little changed. Growth in household spending declined; households' real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high. Business fixed investment softened, the recovery in the housing sector remained slow, and exports declined. Inflation continued to run below the committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the committee seeks to foster maximum employment and price stability. Although growth in output and employment slowed during the first quarter, the committee continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the committee judges consistent with its dual mandate. The committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the committee expects inflation to rise gradually toward 2% over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the committee today reaffirmed its view that the current 0% to ¼% target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the committee will assess progress--both realized and expected--toward 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. The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term.

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. This policy, by keeping the committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%. The committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run. 

- Source: The Federal Reserve's Federal Open Market Committee

Alternative Approaches Often Needed to Lower Risk with Middle Eastern Borrowers

Collecting debt in any country can be a challenge­, but when it comes to doing business in the Middle East, the risks for credit managers can be even greater, as was noted at FCIB’s recent International Credit and Risk Management Summit in Madrid. Opportunity is present and growing in the market, but doing business there on credit can prove very difficult, said summit speaker Andy Yiacoumi, MICM, managing partner for Credit Management Institute Middle East FZ LLC in Dubai.

There are many areas that require an alternative approach. For example, under Sharia Law, charging interests on payments is forbidden, which stems from the belief that “one should not be able to receive income from money alone,” as noted by Investopedia.

Yiacoumi noted the Gulf Co-operation Council (GCC) region—which includes United Arab Emirates, Oman, Saudi Arabia, Qatar, Bahrain, and Kuwait—carries inherent perception about “prosperity, oil, gas, investment, political stability [and] conservative society.” However, disputes, deterrents and challenges come with the territory of doing business therein. For example, no established ethics exist for prompt payments, transients comprise much of the population and, notably, professionals typically have limited credit management training. “One of the most common issues faced with companies is a lack of understanding of sound credit management processes,” Yiacoumi said. The risk of bounced checks and fraud is high in this region as well.

Given these issues and the frequent lack of accessible public information on companies, Yiacoumi said that to do business within the Middle East requires credit managers to “look at alternative options to help us better understand who we are dealing with and ethics relating to paying suppliers on time.” He cited resources such as customer references, previous trade history, bank reference, newspapers, trade associations and even a visit by the credit manager. Managing the relationship can be critical, especially in times before there are any problems. “The key to sound ledger management is a proactive collection process giving the client every positive reason to pay on time by covering every possible excuse along with regular contact,” he warned.

- Jennifer Lehman, NACM marketing and communications associate

Eurozone Growth, Exports Disappointing Despite Favorable Currency Valuation

Expectations have been pretty high that the lower value of the Euro versus the U.S. dollar and some other current economic trends were going to make a real difference in Europe. As it turns out, that impact has not really manifested as yet. Thus far, an market reaction has not been enough to offset the other problems, which is setting off another round of soul-searching analysis from economists and policy-makers struggling to devise a plan for Europe to exit these persistent doldrums.

The flash version of Markit Economic’s Purchasing Managers’ Index (PMI) brought bad news this week. The overall Flash Eurozone PMI, of which final statistics for the month are due in two weeks, slipped to 53.5 from 54, and most of that erosion can be laid on France. Last year was an unmitigated disaster for French economic growth and there has been some expectation that 2015 would be better. However, the level of the French PMI has fallen to 50.2, dangerously close to contraction territory.

The rest of the EU had hope that the Germans would gain ground as the euro lost value and made their exports cheaper. The problem for Germany and a Europe that, as a whole, relies upon German success, is that many of the nations it traditionally exports to are in trouble as well--that affects demand. The United States is far from the only country that moves Germany’s needle.

Europe faces a major dilemma. It is simply not clear what the EU can do to break out of the pattern of the last few years.

- Chris Kuehl, Ph.D., NACM economist

FCIB Summit: Sellers, Buyers Working More Closely as Global Recovery Still a Year Off

More than 100 business and credit professionals from as far as the Europe Union’s outlying borders, the Far East and the Americas traveled to Madrid this week for FCIB's annual International Credit and Risk Management Summit and Expo. The three-day conference, from Sunday through Tuesday, offered attendees an opportunity to network with one another and learn about relevant topics affecting the credit industry, such as supply chain finance and working capital management.

Freddy van den Spiegel, former chief economist for BNP Paribas Fortis, set a tone for the conference while explaining that the global economic landscape was not in as bad a shape as many media experts purport and is especially far from the “great unraveling” that the Financial Times promises. Still, the popular economist admitted the global recovery likely won’t accelerate much until 2016.

Supply chain management and financing became a bit of a buzz topic at the conference. Jaap Jan Nienhuis, senior credit consultant for Innopay BV in Amsterdam, defined supply chain finance as a collaboration between a buyer and seller on cash flow with the objective of optimizing working capital and reducing risk. Usually facilitated by an external platform, it is an expanding area in business credit marketplace yet is still employed with regularity by a small portion of companies. In a related interview with FCIB, Nienhuis noted the surge of new initiatives or product and service offerings related to supply chain finance, with something new hitting the market “almost every week” to meet the growing demand. A number of European creditors are increasing the amount of discounts they offer for early payments, which help the cash turn by sometimes avoiding expensive bank borrowing fees, Nienhuis added. Related speaker panel discussions on the topic included “e-Commerce Driven Strategies to Support Working Capital Management” and “An Alternate Financial Supply Chain.”

Other discussions of particular note focused on specific regions including the Middle East, Asia and Africa. During the “Trade Financing in Emerging Markets” session, panelists targeted Africa as market with boom potential. “There is a lot of prospective for growth in Africa,” said Jean-Paul Steenbeke, deputy CEO, head of sales and account management for Credimundi in Brussels.

Many countries were represented by attendees at the Summit including: Spain, Netherlands, Italy, Saudi Arabia, Japan, France, United States, Finland, Germany, Switzerland, United Kingdom, Tanzania, Russia, United Arab Emirates and Cyprus.

- Jennifer Lehman, NACM marketing and communications associate

Trade Promotion Authority Likely on the Way to President

After significant delays, both based in partisan gamesmanship and wariness from the most progressive in President Barack Obama’s own party, Congress appears close to approving trade promotion authority for the president. The move should clear the way for the United States to push a long-negotiate multilateral free trade agreements (FTA’s) to the finish line in the coming months.

Widespread reports have surfaced noting that key federal lawmakers have crafted legislation that will give Obama trade promotion authority, which is seen as critical for the administration to negotiating the final points of the Trans-Pacific Partnership, among other deals. Supporters, including organizations such as Business Roundtable, the National Retail Federation and more moderate/centrist lawmakers from each party, believe such authority would help fast track the enactment of business-friendly FTAs. Obama even made a passionate plea for the authority during January’s State of the Union address.

"Give me trade promotion authority to promote deals in Europe and Asia," Obama said. "I’ll be the first to admit that past trade deals haven't lived up to the hype. But 95% of the world's customers live outside our borders ... Small businesses need to sell more products overseas."

Trade promotion authority is a strategic working relationship between the president and Congress that sets the parameters for the U.S. in various international trade negotiations, establishes a framework for Congress and the executive branch to more quickly work out agreements and includes a set of legislative procedures that allows the president to submit to Congress bills implementing trade agreements for an up-or-down vote within a short period of time, without the threat of amendments, according to Robert Brown, a partner with Bingham Greenebaum Doll LLP. Congress has approved this authority for every president from the 1930s until 2007—perhaps not coincidentally, new trade deals have languished since that time.

“By renewing TPA with updated negotiating objectives, Congress can strategically address issues pertaining to current US trade negotiations,” Brown wrote in a 2014 article for NACM’s eNews. “These trade negotiations are of vital importance to the US economy.”

The TPP is the deal closest to complete and one most likely to benefit from potential passage of legislation granting Obama the trade promotion authority. The TPP involves a number of emerging Southeast Asian nations as well as the U. S., Canada, Japan, Chile and Peru, among others. The TPP is supposed to bring together the nations of the Pacific in some kind of trade partnership that will advance their respective economies. It was supposed to be the key to the U.S. "pivot to Asia" policy and, indirectly, a way to ease some of China's trade dominance in the region.

But it has been fraught with delays, diplomatic errors, allegations that the U.S. and Japan have been bullying their way through the trade talks and, perhaps the most unsettling, lack of transparency. Regarding the latter, nearly no one has seen official documents and specific recommendations including in the proposed TPP other than (if they’re to be believed) what has been released by WikiLeaks. These reasons and supposed protection of U.S. workers were among the complaints heavily bandied about this week by a number of liberal Democrats that oppose approving the authority. Many Republicans that in past years opposed giving Obama such authority have eased on their stances, at least publicly.

- Brian Shappell, CBA, CICP, NACM managing editor

Fed Beige Book: Strong Dollar, Weak Oil Prices Holding Back Several Sectors

(Prepared at the Federal Reserve Bank of Cleveland based on information collected on or before April 3. This document summarizes comments received from business and other contacts outside the Federal Reserve System and is not a commentary on the views of Federal Reserve officials).

Reports from the 12 Federal Reserve districts indicate that the economy continued to expand across most regions from mid-February through the end of March. Activity in the Richmond, Chicago, Minneapolis, Dallas, and San Francisco districts grew at a moderate pace, while New York, Philadelphia, and St. Louis cited modest growth. Boston reported that business activity continues to expand, while Cleveland cited a slight pace of growth. Atlanta and Kansas City described economic conditions as steady.

Demand for manufactured products was mixed during the current reporting period. Weakening activity was attributed in part to the strong dollar, falling oil prices, and the harsh winter weather. Business service firms saw rising activity, especially for high-tech services, and they expect positive near-term growth. Cargo diversions resulting from labor disputes on the West Coast boosted activity at several East Coast ports. A majority of districts reported higher retail sales, and they cited consumer savings from lower energy prices as helping boost transactions. Auto sales rose in most Districts. Tourism and business travel is rebounding from the harsh winter, with contacts expecting growth for the remainder of the year in corporate and leisure travel. Residential real estate activity was steady to improving across most districts, although there was some slowing in housing starts due to abnormal seasonal patterns owing to the harsh weather. Multifamily construction remains strong. Activity in nonresidential real estate was stable or improved slightly across many districts. Agricultural conditions worsened slightly. Factors contributing to these conditions varied by district but included wet fields, persistent drought and a harsh winter. Investment in oil and gas drilling declined, while mining activity was mixed. Banking conditions were largely stable, with some improvement seen in loan demand.

- Source: Federal Reserve

Another Study Suggests B2B e-Commerce gaining popularity, but challenges remain

As manufacturers and wholesalers migrate from legacy systems to open, online platforms, business-to-business (B2B) online retailing is experiencing strong growth. The B2B online market could easily reach double the size of the business-to-consumer (B2C) online market, generating revenues of $6.7 trillion by 2020, according to Frost & Sullivan, a growth strategy firm.

In part, because B2B models are moving toward “ubiquitous online platforms that allow buyers and sellers from anywhere in the world to transact goods and services with ease,” adding legacy systems involving the use of electronic data interchange that can be expensive and cumbersome to handle is necessary.

The analysis from Frost & Sullivan, Future of B2B Online Retailing, reveals that B2B online sales will account for nearly 27% of total manufacturing trade, which is expected to hit $25 trillion by 2020. “Geographically, China and the United States will lead the B2B online retailing market. The latter is anticipated to double its revenue contribution to $1.2 billion by 2020.

“As marketplaces and cross-industry public platforms such as Alibaba and Amazon become popular, B2B online relationships are likely to move from a one-to-many to many-to-many business model. Instead of a model where one company invests and builds an e-platform for its suppliers, the preference will be for a solution in which anyone can integrate an e-procurement process and facilitate the purchase of goods online.”

Private industrial networks, where specific companies exchange products, and public market places for on-the-spot purchasing have gained prominence over the last decade, said Archana Vidyasekar, Frost & Sullivan’s Visionary Innovation Group team leader. “With businesses buying more than selling online, these seller-driven B2C-type open public networks will help provide more visibility and storefront capabilities to sellers.”

Unlike the B2C setting, however, B2B prices are variable and order volumes are high and wide ranging, necessitating a flexible shipping and logistics solution, Frost & Sullivan said. “Tax and regulatory concerns also impact sales highly, and providers typically employ large staff whose only responsibility is delivering products and services within these restrictions.”

Additionally, executing marketing or educational initiatives in the B2B setting are complex; clients must understand how products work and interact with systems they already have or are considering. “The black box effect, wherein a customer buys a device without a real interest in learning how it works, barely exists in the B2B context.”

“Nonetheless, with technological advancements facilitating the procurement of goods on the move through smartphones and tablets, business use of online platforms will rapidly grow,” said Pramod Dibble, the firm’s Visionary Innovation Group consultant. “The emergence of cloud platforms that offer more scalability, both as a software and infrastructure service too, is pushing businesses toward B2B online retailing.”

The firm suggests that Internet retailers offer a menu of services rather than one bundled option to allow customers to experience the online channel with low risk. “Even clients hesitant to disrupt their current ecosystem of sales and distribution will then begin using online channels, which automate many of the time-consuming and costly aspects of procurement.”

- Diana Mota, NACM associate editor

To read more about the future of B2B e-Commerce, click here for an eNews item about Forrester’s inaugural five-year B2B e-Commerce forecast.

New Automobile and Light Truck Sales Rebound

Suddenly, the automotive sector seems to have come back to life, as sales are higher than they have been in more two years. While this is good for auto producers and the many domestic companies supplying them with materials and parts, theories are split regarding whether it is a more long-term trend or merely a fleeting surge.

Those predicting hot automotive activity, the kind that helped carry U.S. manufacturing throughout parts of 2013 and early 2014, continue to reference the fact that the America car fleet is still pretty elderly by most accounts—the vast majority owning current vehicles for more than 10 years. This creates some consistent demand even though the average car can last far longer than was the case in past years. Another long-term motivator is the ongoing willingness of banks to lend widely for car sales. Banks have gotten interested in mortgages again, but there remains a desire to add car loans and similar activities.

The oft-cited arguments that the auto activity surge will be short-lived counter that most buyers rely on tax return money for downpayments and that more interest exists simply from people getting out of their houses more following the end of winter weather. This winter was brutal in a lot of ways. There were many parts of the country that got far more snow and ice than usual and when there is that kind of weather in a place that doesn’t usually deal with it—there are lots and lots of wrecks. To that point, it is often forgotten that roughly 35% of all car sales are out of necessity (i.e., a replacement) as opposed to simple desire.

Car dealers in such cities have been reporting a spike in activity motivated by need. However, there is concern if not assumption that, once the post-winter rush ends, some of the demand will ebb.

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

Bankruptcy Roundup: Nevada/Chapter 9, Retail, Coal

Nevada legislators are considering legislation, Senate Bill 475, designed to give municipalities authority to file a bankruptcy petition under certain conditions. As written, the proposal requires that the state's tax commission must declare the entity in a severe financial emergency that is unlikely to cease within three years. The county or city, before filing the petition, must submit the proposed petition to the governor and the Office of the Attorney General for their review and approval.

EveryWare Global Inc. has filed Chapter 11 petitions to implement a prepackaged financial restructuring that cancels about $248 million of the company’s long-term debt in exchange for common stock representing 96% of its common stock post-emergence. "The liquidity provided by our lenders during this process allows us to focus on running the business in the ordinary course while we deleverage our balance sheet," the company said, adding it expects to emerge from bankruptcy within 60 to 75 days. EveryWare was formed through the merger of Anchor Hocking, LLC and Oneida Ltd. in March 2012 and is a global marketer of tabletop and food preparation products.

Xinergy Ltd., a U.S. producer of metallurgical and thermal coal, and 25 of its subsidiaries have filed for Chapter 11 protection. The company plans to operate its businesses and continue customer shipments during the reorganization. "Over the past several years, the coal markets in the U.S. have faced a number of significant challenges, including increased environmental regulations and reductions in demand due to weaknesses in the economy and lower natural gas prices," stated Bernie Mason, Xinergy's CEO, in a press release. "Additionally, continued weakness in the market for metallurgical and thermal coal, combined with an extremely cold winter that impacted the mining and shipment of coal, has continued to erode Xinergy's cash position."

- Diana Mota, NACM associate editor

Case Shows 'Trust but Verify' an Important Guiding Principle for Suppliers, Subs

A famous quote from the Cold War era, “Trust but verify,” is back in fashion on Capitol Hill and in many business instances, as many circumstances continually dictate its prudence. A recent fraud case out of Minnesota related to a public works project covered by the Minnesota Little Miller Act is a great example of the pertinence of this quote.

Scott County, MN authorities charged Gerard Roy on five counts of forgery, alleging he forged bond documents, including the payment bond, designed to protect subcontractors and material suppliers in the event of non-payment. Roy, of RSI Associates Inc., prepared the documents in question to win a contract on a government project last summer. Various subcontractors continue to wait on payments related to the project even though the municipality where the work was conducted (Hastings, MN) paid RSI in excess of $100,000 for cement and electrical work.

“The travesty in this case, is that what is considered ‘normal’ protocol for subcontractors and material suppliers—obtaining a copy of the bond and assessing the rating of the bonding company—most likely would not have uncovered this fraud,” said Chris Ring, of NACM's Secured Transaction Services. “An additional protocol—contacting the bonding company to assure the bond covers the related project—could have been completed to potentially uncover this fraud as well.”

Ring notes that fraud cases such as this are the exception rather than the rule. Business norms aside, a subcontractor or a material supplier on this type of project would best be served by assuming the potential of a worst-case scenario exists. “This exceptional case could result in a write-off, as the government will likely shield itself from responsibility related to this fraudulent act.”

- Brian Shappell, CBA, CICP, NACM managing editor

Former Secretaries Push for Free Trade Agreements

Free trade agreements strengthen United States’ competitiveness, spur economic growth and bolster job creation, wrote former Secretary of Commerce William Daley in a U.S. Department of Commerce blog. Daley, one of a group of 10 former commerce secretaries, whose tenures spanned from 1972 to 2012, made a plea to Congress to pass trade promotion authority (TPA) for President Barrack Obama. Recently, eight former U.S. Department of Agriculture secretaries had made a similar plea.

“American companies grow and succeed in the global market place through high-quality high-standard trade agreements that help our firms gain access to new overseas markets,” the bipartisan group’s letter states. “New U.S. trade agreements will generate more export opportunities for American companies, boost our economy, create jobs and yield overall prosperity for our country.”

The secretaries urged Congress to omit currency provisions from trade promotion legislation. “... we believe that currency issues would be more effectively addressed by the Department of Treasury through continued intensive dialogue and bilateral engagement, not by providing the commerce department additional authority under Anti-Dumping and Countervailing Duty law or through currency-related obligations in trade agreements.”

TPA, which hasn’t been approved since 2007, requires the administration to seek Congress’s guidance throughout negotiations. Obama is currently working on two agreements, which could open overseas markets to American companies: the Trans Pacific Partnership and the Transatlantic Trade and Investment Partnership. Combined, they will provide access to free trade arrangements with 65% of global GDP as well as provide preferential access to new potential customers, according the secretaries’ letter.

- Diana Mota, NACM associate editor