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