Argentine Congressional Vote Paves Way for Re-introduction to International Credit Markets

Argentina’s Senate has lifted one of the last hurdles to allowing the country access to international credit markets for the first time since 2001.

On Thursday, the Argentine Senate voted 51 to 16 for President Mauricio Macri to issue $12 billion in bonds, $4.65 billion of which will be used to pay U.S. hedge funds and end a years-long legal dispute, according to the Wall Street Journal.

Barring further legal barriers in U.S. courts, the vote will mean that financially struggling provincial governments and companies in Argentina will have access to desperately needed credit from abroad.

The lawsuit with U.S. creditors caused Argentina to default on its debt for the second time in 2014–the country had to pay about 9% to borrow money, which is about twice what neighboring nations have had to pay, the WSJ notes.

Having access to international credit markets comes at a fortuitous time for the South American country, as some economists anticipate the new political administration seeking more market-friendly regulations is likely to jump-start the economy in the near future.

According to a Wells Fargo report released today, Argentina’s GDP grew by 2.1% in 2015, though the economy struggled in the fourth quarter, posting a 0.9% growth rate in a preliminary reading.

Wells Fargo senior economist Eugenio Aleman cautions that this preliminary reading is likely to see significant revision after the results for the first quarter of 2016 are released at the end of June. That’s because “Argentina’s statistical institute is in the process of fixing all of the data issues left by the previous administration, which means the revisions are expected to be important,” Aleman wrote in the report.

Overall, commerce output increased just 1.3% in 2015. Agriculture and the cattle sector saw the strongest increases in 2015 with a growth rate of 6.4%, but it saw a 2.9% decline in the fourth quarter, Wells Fargo said. Still, the country’s new administration is expected to lower taxes on agricultural exports this year.

“Thus, expect a very strong performance by this sector as well as for exports during 2016,” Aleman said.

Argentina’s construction sector also showed strongly in 2015 with a 5% growth rate and Wells Fargo anticipates a boom in construction this year “as restrictions and regulations on real estate transactions are eliminated.”

- Nicholas Stern, NACM editorial associate

Western Cities Lead Year-Over-Year Housing Price Increases

Home prices tracked in the S&P/Case-Shiller U.S. National Home Price Index rose 5.4% in January, year-over-year, led by another month of double-digit increases in West Coast cities.

Portland saw the biggest increase in prices from the previous January (11.8%) followed by Seattle (10.7%) and San Francisco (10.5%). Eleven cities reported higher price increases, year-over-year, while the northeast reported the weakest growth.

“Home prices continue to climb at more than twice the rate of inflation,” said David Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices. And although the sale and construction of new homes has fallen behind sales gains for existing homes, this trend may be reversing, Blitzer said, as single-family starts in February were the highest reported since November 2007. Single-family units were 70% of the total housing starts in February, an increase from 57% in June 2015 and near the 75% to 80% range approached before the housing crisis.

Still, financing for potential purchasers of new homes, particularly for those with significant credit card or student loan debt, remains a barrier, Blitzer said.

“While rising home prices are certainly a factor deterring home purchases, individual financial positions are more important than local housing market conditions,” Blitzer said. “One hopeful sign is that the home ownership rate, at 63.7% in the 2015 fourth quarter, may be turning around. It is up slightly from 63.5% in the 2015 second quarter but far below the 2004 high of 69.1%.”

Other, year-over-year increases from January 2016 by city:

Denver, 10.2%

Dallas, 9.2%

Tampa, 7.4%

Detroit, 7.1%

Los Angeles, 6.9%

San Diego, 6.9%

Miami, 6.8%

Phoenix, 6.1%

Las Vegas, 6.0%

- Nicholas Stern, NACM editorial associate

Numbers for Fourth Quarter Mixed

The final number for fourth-quarter (Q4) gross domestic product is not going to send people into wild celebration, but it is nice to know that things were not quite as bad as we originally thought and even better that improvement came from additional consumer activity, which had not been adequately computed earlier. The third and essentially final version of the numbers shows the economy growing at 1.4%. This is not stunning growth, but it is better than the 0.8% that had been originally reported. Now if that upward trend continues into the first quarter of this year, we may have some legitimate reasons to celebrate.

Corporate profits remain weak, however. The last of the Q4 numbers aren’t all that great. There was a 3.6% decline as compared with quarter-on-quarter a year ago, but for the year, profits went up by 3.3%. This is paltry compared with the rise that took place in 2012, when there was an 18% increase. On the other hand, the 3.3% increase is better than what was scored in the last couple of years—0.1% in 2014 and 0.6% in 2013. The corporate rates have been varied as well with very low numbers in the oil sector and higher ones in finance and real estate.

A Look Ahead This Week

Headlines Friday will focus on the manufacturing Purchasing Managers’ Index (PMI), but pay attention to those sub-indices as well. Next week the service sector PMI will be released, and that merits attention as well.

NACM’s Credit Managers’ Index also comes out this week. It is modeled on the PMI with the same diffusion index and values—above 50 is good and below 50 is bad. The analysis for it has just started, but the first pass suggests that this was a pretty good month. That is meaningful as the CMI often predicts the PMI.

Latest reports from the automakers suggest February was a good month and on pace with the sales data from last year, which recorded a record number of 17.5 million vehicles sold. Most people expected this level of demand to have cooled by now, but that is not the case thus far or so it seems. The fact is that the U.S. fleet is still old as compared with previous years, and it is still easy enough to get a car financed, so the buyer is still in the market. One cautionary note is that there have been more cars repossessed than in previous years, so it may be that the number of reliable borrowers has started to wane. Later in the week, there will be further reports from both the Conference Board and the University of Michigan that will allow some insights into the status of the consumer, and the expectation is that they will both be better than they have been.

This also will be a week for examining inflation trends as well. The Consumer Price Index (CPI) moved up more dramatically than has been the case in four years—hitting 2.3%. This is not the measure the Fed prefers to use when looking at inflation, however, and this week we will get the data from the personal consumption expenditures (PCE) survey. The PCE is seen as a better test of inflationary spending as it tracks the actual outlay as opposed to the CPI, which looks at the prices of an average set of purchases. Right now, the Fed has been warning that it still doesn’t see a lot of evidence as far as inflation is concerned.

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

Durable Goods Figures Down for February

A fall in orders for transportation equipment led to a drop last month in new orders for manufactured durable goods.

“In short, the orders figures were broadly disappointing and dashed hopes that January’s gains might mark the start of a new upward trend,” noted Tim Quinlan, senior economist at Wells Fargo’s Economics Group, in a report on the data.

The Commerce Department data released today show new durable goods orders decreased $6.6 billion, or 2.8%, to $229.4 billion in February, and durable goods have been down for three of the last four months; January saw a 4.2% increase.

New orders for transportation equipment were down $4.9 billion, or 6.2%, to $74.2 billion. Within this category, declines in aircraft orders were a prime culprit–civilian aircraft orders dropped 27.1% and defense aircraft fell 29.2%, the Wells Fargo report states.

Other areas that saw a larger decline include new orders for electrical equipment, appliances and components, down 2.8% to $9.8 billion, and machinery, down 2.6% to $31.6 billion, the Commerce Department reported.

Shipments of transportation equipment, down 1.2% to $79 billion in February, also led an overall monthly decrease in manufactured durable goods shipments in February, which fell 0.9% to $238.3 billion.

Unfilled orders for manufactured durable goods also decreased for two of the past three months, again, driven by transportation equipment, which fell 0.6% to $789.1 billion, the Commerce Department said.

Overall unfilled orders for durable manufactured goods dropped 0.4% to $1.2 trillion.

The gray outlook continued in February for inventories of durable goods, which have been down seven of the last eight months. Commerce saw overall inventories decrease in February by 0.3% to $394.3 billion, led by primary metals, which have been down for more than a year, and dropped 1.2% to $33.2 billion.

Is a recession imminent?

Considered by analysts to be a good proxy for current quarter equipment spending, core capital goods shipments dropped for the second consecutive month, putting the three-month annualized rate of decline at 6.8%, Wells Fargo said.

“When the three-month annualized rate of decline starts falling on a double-digit percentage basis, it is often an indication of recession,” Quinlan wrote. “To be clear, we do not think the U.S. economy is headed for imminent recession, but the manufacturing sector is a clear vulnerability. Headline GDP growth figures will not be getting much help from business spending in the near future.”

- Nicholas Stern, NACM editorial associate

Positive Signs Emerge in European 1Q Economic Growth

(Editor's Note: All data and analysis were released prior to the latest terrorist attack on European soil on March 22 in Brussels, Belgium).

Led by an upturn in services and new business growth, the eurozone economy gained some steam at the end of the first quarter.

Markit’s flash Eurozone Purchasing Managers' Index (PMI) increased to 53.7 in March from 53 in February, showing the fastest expansion rate since December. Manufacturing growth was slight, but output and new orders rebounded from 12- and 10-month lows, respectively, from February, according to Markit data. Analysts also expect the service sector to improve throughout the year.

“The eurozone saw renewed signs of life at the start of spring,” said Chris Williamson, chief economist at Markit. “The March PMI showed a welcome end to the worrying slowdown trend seen in the first two months of the year, putting the region on course for a 0.3% expansion of GDP in the first quarter. ... [still], “plenty of worrying signs persist, however, to take the shine off the rise in the headline PMI." Among those is that the miniscule uptick in new order growth suggests growth through the spring is no certainty.

Other cloudy spots included employment, which saw its smallest monthly increase since September, while work backlogs barely budged. Services employment saw the smallest growth in half a year, while the manufacturing sector hadn’t seen such tiny job gains in 16 months, the report found. Prices continued to drop across the Eurozone, including average input costs which decreased again for the third straight month and drove down average prices charged by firms for their goods and services at the second-fastest rate in over a year, Markit said.

Germany experienced the most growth by country, even though the pace of economic expansion was unchanged from February’s five-month low. New orders remained anemic in Germany and at an eight-month low; however, manufacturing output rose slightly and services expansion stayed on solid footing, analysts found.

- Nicholas Stern, NACM editorial associate

Sports Authority Files Flood of Suits to Invalidate Vendors' Rights

Last week, The Sports Authority, Inc. and certain of its affiliates (“TSA”) filed adversary complaints against approximately 160 trade vendors in the U.S. Bankruptcy Court for the District of Delaware (the “Court”). TSA, which filed for Chapter 11 protection on March 2, is attempting to use the complaints to invalidate vendors’ purported consignment rights. If successful, trade vendors that believed themselves to be protected as a consignor would be relegated to unsecured creditor status.

Trade vendors in a variety of industries routinely enter into consignment agreements, whereby inventory is “consigned” to a third-party for sale to its customers. Title to the inventory remains with the consignor and transfers only at the point of sale. Rather than be entitled to profits from the sale of the inventory, the consignee receives a commission from sale and turns over the remaining proceeds to the consignor. While there are a number of benefits that run with a consignment relationship, vendors must be careful when both negotiating the consignment agreement and when perfecting its rights.

In TSA, the debtors are attempting to nullify the vendors’ retention of title. TSA is also asserting that the affected vendors failed to properly perfect their consignment rights and even if the Court finds that the consignment interests were properly perfected, TSA’s secured lender’s interest in the consigned inventory is senior to the consignors’ interests. Accordingly, TSA seeks a declaratory judgment against each of the affected vendors that their consignment rights and security interests are either invalid or subordinate. This would allow it to sell that inventory in the ordinary course of business and without regard to the consignment relationship.

It is important to note that not all consignment agreements are equal, and a determination of the validity and perfection of a consignor’s rights depends upon a host of factors (plain language of the agreement, the conduct of the consignee, whether the consignor perfected its interest through a UCC-1 financing statement or by operation of state common law, etc.).

Whether affected by one of the Sports Authority lawsuits or if commonly selling goods by consignment, creditors should pay attention to these matters. Ensure your agreements and subsequent perfection of your company’s interests have been conducted properly.

- Brian Jackiw, Esq. and Thomas Fawkes, Esq., Goldstein & McClintock LLP

Business Relationship Can Satisfy Ordinary Course of Business Defense

On March 3, 2016, the U. S. Bankruptcy Court for the District of Delaware in Forman v. Moran Towing Group (in the legal case of AES Thames, LLC, et. al., Case No. 13 A 50395) adopted a creditor-friendly approach when analyzing whether a vendor has a valid ordinary course of business defense.

In Thames, the debtor paid its vendor based on the loaded quantity of cargo (i.e., coal) being shipped to the debtor. Under the contract between the parties, the vendor generated an invoice within 10 days after the loading of a vessel. The agreement further provided that on the 25th day of each month (or, if the 25th was not a business day, then the first business day thereafter), the debtor would pay the vendor for all cargoes loaded during the previous calendar month. When analyzing the timing of the debtor's payments, one could choose to review the number of days between the loading date and payment, the invoice date and payment, or the due date and payment. While the vendor argued any of the three dates were applicable, the court found that measuring the time from load date to payment or from invoice date to payment does not reflect whether the payments were timely or whether there was a consistency to the payments.

During the preference period (90 days before the bankruptcy date), the debtor made two payments to the vendor, and those payments were made 19 days (covering five invoices) and 10 days (covering three invoices), respectively, after the applicable due date. The trustee argued that the debtor historically paid the vendor on average 2.45 days after the due date, while during the preference period the debtor paid the vendor on average 15.63 days after the due date. The trustee also argued that during the lengthy historical period, only 4 of 164 invoices (or 2.44%) were paid 10 days or later after the due date. Therefore, the trustee concluded that the alleged preference payments did not conform to more than 97% of the payments during the historical period.

The vendor argued in response that historical payments ranged between 28 days before and 35 days after the due date. Therefore, the range of payments during the preference period (10-19 days) falls within the historical range. The court, in ruling in favor of the vendor, found that the trustee's reliance on the average payment time did not present a complete picture of the payment history. After reviewing the parties’ entire payment history, the court found that a late payment of 10 or 19 days, although infrequent, was not unprecedented in the parties' relationship. Moreover, the other factors to be considered in analyzing an ordinary course of business defense all fell in favor of the vendor. The amount of the transfers fell within the historical range of the amount of payments; the payments continued the debtor's practice of paying a number of invoices together for all cargo shipped in the previous month. The alleged transfers, like all payments during the historical period, were made by wire transfer. The parties stipulated that the vendor did not take any unusual action to collect on the invoices paid during the preference period, and there was no evidence that the creditor did anything to gain an advantage over other creditors during the preference period. The court therefore concluded that the business relationship between the vendor and the debtor fell within the type of relationship the ordinary course of business defense is intended to protect.

The moral of the story is that a vendor should not be intimidated by a trustee’s statistical analysis of past practices when the actual relationship between the parties suggests a different conclusion. The ordinary course of business defense can be interpreted broadly to cover a wide range of payments and vendors should not hesitate to aggressively assert this defense when faced with preference litigation.

- Harold D. Israel and Brian J. Jackiw, Goldstein & McClintock LLLP

Chinese Companies See More Late Payments in 2015

Corporate payments among China-based firms continued to worsen in 2015, and Chinese companies decreased average credit terms, sparking a warning that firms with overcapacity and low profits have a higher likelihood of default.

Some 80% of 1,000 China-based companies surveyed by Coface said they experienced late payments in 2015, up slightly from 79.8% in 2014, the firm outlined in a report released March 16.

Meanwhile, 58.1% of those surveyed said they saw an increase in overdue amounts over the prior year; 17.9% had accounts past 180 days, exceeding 5% of their annual revenue, wrote Coface economist Charlie Carre in her report China Corporate Payment Survey: Only a Few Spared.

“This is in line with the rise of nonperforming bank loans, an increasing number of corporate defaults and the deterioration of business and investor confidence,” Carre wrote.

More Chinese companies also believe the Chinese economic slowdown will affect their buyers’ payment defaults in 2016–57.9% in 2015 vs. 48.4% in 2014.

Customer financial difficulties (62.4% of respondents) continue to impact late payments, which are in turn increasingly led by “fierce competition impacting margins” (46.9%) and “lack of financing resources” (18.1%),” Carre said.

The Chinese construction sector appears most at risk, with 28.3% of credit sales overdue by more than 150 days, while 57% of the sector’s respondents have more than 2% of their turnover affected by overdue payments of more than six months, Carre found.

Other sectors feeling the strain are IT and metals, with 15.2% and 13%, respectively, of overdue credit sales of more than 150 days, Coface said. Telecoms are also under strain.

When it comes to resolving nonpayments, a majority of survey respondents (73.4%) said “amicable negotiation is the most effective tool,” while 43.9% said the legal environment in China improved over the prior year, leading Carre to conclude that more firms may feel comfortable with taking legal recourse.

- Nicholas Stern, NACM editorial associate

Gas and Energy Prices Drag Down February Producer Price Index

The Producer Price Index (PPI) for final demand, or the prices U.S. businesses receive for their goods and services, decreased in February from the prior month, mostly due to lower energy prices.

The PPI dropped 0.2%, while the index for final demand goods fell 0.6% in February, marking the third straight month of decline, the Labor Department’s Bureau of Labor Statistics reported today.

Final demand energy dropped 3.4%; gasoline, 15.1%; and the index for final demand foods, 0.3%, while prices for goods less foods and energy advanced 0.1%.

Also on the uptick were prices for pharmaceutical preparations (1.2%) as well as prices for home heating oil and fresh eggs. Final demand services stayed flat in February after three consecutive increases. Retailing led in the indexed services that declined–down 6%–while financial services gained nearly 5%.

In other economic news, the Commerce Department said that seasonally adjusted manufacturers’ and trade inventories were up 1.8% in January 2016, year-on-year, and increased 0.1% from December. Meanwhile, trade sales and manufacturers’ shipments for January were down 1.1%, compared with January 2015, and 0.4%, from December 2015.

- Nicholas Stern, NACM editorial associate

U.K. Sees Rise in Late Payments

The number of overdue payments experienced by U.K. businesses reached a two-year high in fourth-quarter 2015, according to Euler Hermes. The trade insurer's March 9 report, U.K. Late Payments Hit Two-Year High at 2015 Year-End, finds that 14 of the 17 major industry sectors it covers reported increases.

The firm’s quarterly report analyzes data from 250,000 U.K. corporate clients for payment incidents, which include late or delayed payments, default, insolvency, country court judgments or credit insurance claims. The number of firms that reported delayed debtor payments rose 12%, from October to December 2015, compared with the prior quarter. This was the highest level for eight consecutive quarters. In addition, one in six companies said it had difficulty making timely payments last year, up from 10% in 2014.

Construction companies registered 31% of all payment incidents reported—the most for any sector. “Overdue payments are not particularly unusual in a sector where disputes are often partly to blame for delays,” Euler Hermes said. “However, the sector suffered a 27% year-on-year rise in the number of overdue payments incidents in 2015, as some firms toiled with low-margin contracts secured during the last recession.” Subsectors affected the most included general contractors, civil engineering providers and installers of wiring and fittings.

The U.K.’s automotive and electronics sectors reported payment issues fell by 12% and 15% year-on-year, respectively. “However, there were significant increases across the metal and chemicals industries as they struggled to cope with falling European demand and the China slowdown: 2015 payment issues were up 28% and 13%, respectively, versus 2014,” the firm said.

“While some UK industry sectors have seen reductions in overdue payment incidents, insolvencies are set to rise 5% this year, and average day sales outstanding is expected to edge up to 56 days,” said Dirk Kotze, head of risk underwriting at Euler Hermes U.K. “The start to 2016 has seen increased volatility, so companies need to remain vigilant.”

Euler Hermes’ data suggest “challenging times ahead, so firms should tread carefully when offering open credit terms on new contracts or to new customers,” said Valerio Perinelli, CEO of Euler Hermes U.K

- Diana Mota, NACM associate editor

U.S. Import Prices Drop Amid Cheaper Fuel Prices

U.S. import prices—mostly due to lower fuel prices—declined 0.3% in February, following a 1% drop in January and 1.2% drop in December. The dip marks an ongoing monthly decrease in import prices that stretches back to June 2015, when the index increased by 0.1%, the U.S. Bureau of Labor Statistics (BLS) reported today. The price index for overall imports decreased 6.1% from February 2015 to February 2016.

In February, the cost for imported fuel fell 3.9%, marking an easing up of steep declines in fuel prices that totaled 21.9% over December and January, BLS said. Fuel prices also have not advanced since June 2015, when the index increased 1.5%.

Fuel prices have dropped 37.3% over the past year, while natural gas prices also fell year-over-year in February by 36.4%. BLS also recorded lower prices for foods, feeds and beverages; automobiles; and nonfuel industrial supplies and materials, offsetting higher consumer goods prices.

Export prices decreased in February by 0.4%, led by declining nonagricultural prices that overtook increasing agricultural prices, the department reported. Export prices have also marched steadily downward since May 2015. The price index for nonagricultural industrial supplies and materials has decreased 15.2% over the past year.

- Nicholas Stern, NACM editorial associate

Issues Facing the U.S. Economy

What role the United States will be able to play in the global economy’s future is a most pressing issue. Many people have assumed the U.S. is still poised to rescue the world through its population’s consumption patterns. The reality is that consumers appear to be slowing down, and that may be a long-lasting trend. The recession has altered expectations for an entire generation, and that constrains domestic growth. The evidence thus far is the Millennial is not the consumer that Boomers were. That has already had profound implications for sectors like housing and the automotive community. That record-setting year of vehicle purchasing was great, but the sobering reality is that more than 75% of the cars bought were purchased by Boomers and members of Gen-X.

Fed Not Expected to Hike Rates until Summer

But, what do we know. Last year, economists were convinced that rates would come up in June and then September was seen as certain. When the Fed finally did hike rates in December, the assumption was that it would raise them again in March of this year. That is obviously not happening, and now the consensus view is that they will rise by another quarter point in the summer—unless of course they don’t. The fact is the Fed is just not seeing the pressure that usually prompts it to act—no inflation and no real signs of it emerging any time in the near future.

Where Will Progress Come From?

There are several groupings as far as the global economy is concerned. There are the formal ones like the EU and the ones based on some kind of trade connection such as NAFTA (the North American Free Trade Agreement) or OPEC (the Organization of the Petroleum Exporting Countries). Right now, the contribution from Europe is minimal, and there have been issues as far as Asia and certainly the Middle East. Where is the growth going to come from? Right now, the only sector healthy enough to make that claim is North America, but there are plenty of qualifiers given the ongoing struggles of Mexico, Canada and the U.S.

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

Slew of Oil-producing Nations See Downgrades, Reviews for Downgrade as Prices Remain Low

The continued drop in oil prices led Moody’s Investors Service to review the ratings of 18 oil-exporting sovereigns for possible downgrades and adjustments.

The ongoing oil prices rout is causing “material, and in some cases quite profound, implications for the economic growth and balance sheets of sovereigns that rely to a large extent on oil and gas to drive their growth and finance their expenditures,” Moody’s explained in its report, Oil-Exporting Sovereigns—Global: Key Drivers of Rating Actions on 18 Issuers to Assess Impact of Sharp Fall in Oil Prices.

Price forecasts by the ratings agency for Brent oil per barrel dropped to $33 for 2016, $38 per barrel in 2017 and $48 per barrel by 2019.

“Given the importance of economic and fiscal strength in Moody's sovereign risk analysis, the rating agency believes that the credit risk profiles of these oil-exporting sovereigns are therefore under increasing pressure,” Moody’s concluded.

The four countries that were downgraded and placed on review for further downgrades included Azerbaijan and Bahrain, both moving from Baa3 to Ba1; the Republic of the Congo, from Ba3 to B1; and Oman, A1 to A3.

Moody’s placed the following countries on review:
  • Abu Dhabi
  • Angola
  • Gabon 
  • Kazakhstan 
  • Kuwait 
  • Nigeria 
  • Papua 
  • New Guinea
  • Qatar
  • Russia
  • Saudi Arabia
  • Trinidad & Tobago
  • United Arab Emirates
Moody’s also changed the rating outlook to negative from stable on Venezuela’s Caa3 rating, while Norway remained stable with an Aaa rating.

- Nicholas Stern, NACM editorial associate

Is European Sovereign Debt Sustainable?

Although concerns regarding European sovereign debt sustainability have quieted, they could resurface if economic growth in some countries stalls or governments become more profligate, or both, according to a recently released special commentary from Wells Fargo, How Sustainable is European Sovereign Debt.

Of the six economies analyzed, Germany stood out “in terms of debt sustainability under most ‘realistic’ scenarios,” the report notes. “The AAA credit rating of Germany is well deserved.” Greece took similar honors “in terms of debit (un)sustainability," and France, Italy, Portugal and Spain "could stabilize government debt-to-GDP ratios, if nominal GDP growth rates remain solid, borrowing costs remain low and governments stay committed to fiscal discipline," it adds.

To achieve and sustain stronger economic growth rates, countries would likely need politically challenging structural economic reforms. “There is not much room for error,” the commentary states. “Most combinations of fiscal slippage, rising borrowing costs and economic deceleration would cause debt ratios to rise further.”

Wells Fargo identified four factors that debt sustainability, or stability in a country’s debt-to-GDP ratio, requires: debt-to-GDP ratio at present, the government’s primary fiscal surplus or deficit (i.e., the fiscal position net of interest payments), the nominal GDP growth rate and the rate of interest the government needs to pay on its debt.

- Diana Mota, NACM associate editor

Employment Numbers Support Interest Rate Hike

Talk of an imminent recession was somewhat blunted today as the U.S. Labor Department reported job growth in February. The unemployment rate stayed flat at 4.9% as employers added 242,000 jobs. Employment gains were noted in health care and social assistance, retail trade, food services and drinking places, and private educational services. Job losses continued in mining. In addition, the Labor Department revised job gains upward by 30,000 for the prior two months.

The numbers have market watchers speculating whether it’s enough to push up short-term interest rates when the Federal Reserve meets March 15-16. Other key economic indicators continue to paint a mixed picture of the economy, however. The Labor Department, for instance, also reported Friday that American wages decreased 0.1% from the prior month with a tepid annual gain of 2.2% as the average workweek shrunk to 34.4 hours—its lowest since January 2014.

The latest Federal Reserve’s Current Economic Conditions report released March 2, known as the Beige Book, also presented a mixed view of the economy, said NACM Economist Chris Kuehl ,Ph.D. “The changes were not all that substantial from what was reported in January, but where there was difference, it was significant,” he said. And “the most notable shift has been in the labor market.”

Despite an overall rise in employment and a desire to hire, the majority of Federal Districts reported difficulty finding qualified help. “In the majority of cases, the business community was struggling to find appropriate workers,” Kuehl said. “This is not a new issue, but the lack of talent and skill is spreading to industries in the service sector as well as in manufacturing, transportation and construction.”

Keuhl said he sees three basic employment issues taking place simultaneously. The first is that there don’t appear to be enough workers with the right skills and training. “Companies need people who are ready to slot in almost immediately and that has translated into a lot of poaching from other companies as opposed to taking on new people,” he said.

The second barrier is finding workers that can pass the entrance requirements such as drug screenings, Kuehl said. This has been a significant issue in manufacturing, transportation and construction. “They are also having issues with some of the physical demands,” he said.

The third barrier is employees with an “inflated sense of expectations,” Kuehl said. “Many of those applying for work are asking for more money and other compensation than is reasonable and have unrealistic expectations as far as future promotion is concerned.”

In past years, a lack of qualified workers would trigger companies to pay more for the people they need and wage inflation would start to kick in, he said. “This has not happened in the majority of markets. The Fed continues to see evidence of slowing inflation and very little evidence that higher wages are triggering any kind of rise. This means there is still no pressing reason for the Fed to take steps to hike rates as a means by which to tame inflation.”

- Nicholas Stern, NACM editorial associate

Fed Beige Book Reports Some Weakness

Half of the Federal Reserve districts reported some growth, according to the latest Federal Reserve’s Current Economic Conditions report, known as the Beige Book. The other half, however, noted problems and concerns.

“Over the last several months, reports from the Beige Book have been anywhere from flat to positive, with no region really experiencing a decidedly bad period,” said NACM Economist Chris Kuehl, Ph.D. “This has started to change as the latest report has some regions slumping due to the issues that have been affecting the overall economy since the start of the year. The good news is that growth in the domestic economy has been steady and that has allowed some expansion as far as the overall economy is concerned.”

The Beige Book, however, is not a detailed analysis, Kuehl pointed out. “It is something of a temperature taker for the moment and is based on the assessments and reports collected by the Fed’s staff and local board in each of the 12 Federal Reserve districts. These are somewhat anecdotal and designed to give a flavor of economic activity as opposed to providing some kind of detailed study.”

Three districts “asserted that they have been feeling the pinch from the struggles in the financial sector and note that investor unease has been at the top of the list of inhibitions,” he said. Eight districts reported a decline in manufacturing affected by the impact of the “strengthening dollar” and “weakening global outlook” on exports. “The dollar value has been a real drain on the export sector, but for those that are buying raw materials and parts from overseas, the strong dollar has been a boon of sorts,” Kuehl noted. Regions that include part of the oil sector also noted declines in manufacturing.

Pockets of positive manufacturing growth were connected to the automotive and aerospace industries. For example, 2015 auto production in Cleveland reported close to historically high levels. “The industries that were growing were those connected to the domestic economy as opposed to those that had more of a stake in the overseas market,” Kuehl said.

Although changes were not substantial compared with January’s report, “where there was difference, it was significant,” Kuehl said. The most notable shift came from the labor market. The majority of districts said businesses wanted to hire, but for the most part the business community was struggling to find appropriate workers. “This is not a new issue, but the lack of talent and skill is spreading to industries in the service sector as well as in manufacturing, transportation and construction,” he said.

The attitude of the overall business community remains upbeat as far as future growth is concerned, according to the Beige Book’s findings. Similarly, “The latest data from the Purchasing Managers’ Index and the Credit Managers’ Index show a certain level of faith in continued growth this year albeit at a slow pace,” Kuehl said. “The business community is indeed worried about the markets and the oil sector and the state of the export community, but it also reacting to some improved performance from the consumer. The big unknown is the election.”

- Nicholas Stern, NACM editorial associate, and Diana Mota, NACM associate editor

Sports Authority Files Under Chapter 11

In recent weeks, Sports Authority has garnered considerable media attention and speculation based on its well-documented financial woes, including an estimated $650 million in bond debt and revenues weakened by factors such as intense competition from national sporting goods retailers (e.g., Dick's Sporting Goods), newer specialty brands (e.g., Lululemon Athletica, Athleta) and Internet-based retailers (e.g., These woes culminated in Sports Authority’s March 2 Chapter 11 filing in the U.S. Bankruptcy Court in Delaware.

Although most Sports Authority trade vendors were aware of this possibility, many have trepidation as to how to react to such news.The answers regarding how to react are not black and white, unfortunately, and will depend in large part on the particular relationship that a vendor has with Sports Authority.

However, among the guiding principles to which affected vendors should consider adhering is that of continued sales on credit. Without existing credit enhancements, vendors risk nonpayment for goods shipped to Sports Authority post-petition; however, those risks are mitigated by the fact that claims for post-petition shipments are entitled to administrative expense priority in bankruptcy. Since Sports Authority has lined up almost $600 million in debtor-in-possession financing, it should be assumed that it will have sufficient resources (at least at this time) to pay post-petition invoices. However, credit departments may wish to limit extensions of credit, or require cash in advance, until such time as Sports Authority can demonstrate an ability to satisfy such obligations.

- Thomas R. Fawkes, Esq. and Brian J. Jackiw, Esq., attorneys at Goldstein & McClintock LLP

For more advice on what credit managers should consider going forward in the Sports Authority situation or others like it, read the extended version of the article in this week's eNews, available late Thursday afternoon at

Why It's Hard to Focus on Growth

The meeting of the G-20 finance ministers last week was not much of a confidence builder for the global economy. Other than obligatory handwringing, nothing substantial came from the meeting of the world’s 20 largest economies. This outcome is despite the barrage of reports and studies coming from groups such as the Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) calling for a whole range of responses and reactions.

Many people want to know why it has become so hard to find a consensus on growth. It is not as if there is one side that opposes growth and another that favors it—every nation wants to see more economic progress. Analysts assert there are perhaps three barriers to any kind of coordinated approach.

The first problem is that no agreement exists about what the most urgent issue is among the G-20. Each country has its own set of preoccupations that distract from the issue of growth. These states have not failed to recognize the importance of addressing economic progress, but the issue has not yet reached the crisis point as it did in 2008-09. Right now, a massive immigration crisis has Europe distracted, and the EU is considering what life would be like if the British pull out. And the U.S. is in the midst of an election that promises to be the most divisive in decades.

This is the year of the angry voter, and this predicament is not limited to the U.S. All over Europe, the politics of austerity have created a ferocious anti-austerity movement. The politics of anger and frustration does not lend itself to cooperation and collaboration—even on something that everyone would agree is important. Even Asian states are struggling to focus as Japan has become disillusioned with Abenomics and China is trying to determine if its strategy of shifting to a domestically driven economy is going to yield positive results fast enough.

The second set of barriers is rooted in the fact that debt and deficit still rank as key worries. The assumption for years has been that nations can’t sustain debt levels more than 60% of national GDP. Virtually every state in the G-20 now has debt far beyond that level. The U.S. has a debt load that tops 100% of GDP; Japan is at 260%; and China is at least at 240%. Most of the European states are between 90% and 150% of GDP. The need to reduce that debt load remains a priority in these states; and for some, the politics of debt reduction has altered the political landscape. Years of austerity have not had the desired impact, and this leaves leaders in a quandary. The assertion had been that private investment would surge once the nations engaged in some level of fiscal responsibility, but that has not been the case. In all fairness, the states that have been engaged in austerity have not exactly conquered the debt issue, and investors are still not feeling confident. Real progress on reducing the debt has been halting at best, and the attempt to reduce it has created an inflamed electorate willing to punish anyone who tries to expand this austerity effort. Everybody supports debt reduction in the abstract, but nobody wants the spending important to them reduced.

The third barrier to growth is that there is no real engine the rest of the world can rely on to pull the system out of its funk. The U.S. has the strongest economy, and this is damning with faint praise as the U.S. economic growth numbers are far from impressive as compared with what they were even a few years ago. The bottom line is that there has been little recovery from the recession of 2009. There was no V-shaped bounce back after the fall, and most analysts have described the recovery as a “check mark”—a sharp reduction followed by a long and slow recovery. The Chinese are slumping to perhaps 6% growth, and Europe is mired in one crisis after another, which keeps dragging economic recovery down to less than 1%. Emerging markets that were supposed to fuel recovery are now staggering and trying to survive. Brazil is in full depression these days; Russia has been hammered by the collapse in commodity prices; and only India is still managing to hold its own.

As a number of organizations have suggested, the G-20 needs to form a real collaboration on key financial issues like interest rates and growth promotion. Currently, it’s every country for itself, and there is ongoing fear of devaluations and interest rate hikes. Fiscal stimulus—by far the most controversial step for recovery—has traditionally been the tool used by governments to get out of a recession. Fiscal players have been disengaged almost from the start as there was more worry about debt levels than growth. Central banks were left to do all the boosting, and they always have to work indirectly. The call from the IMF is to open the flood gates and introduce significant fiscal stimulus—both from spending and from tax reduction. This means creating an even bigger debt crisis; but the logic is that without growth, there is no way to ever reduce debt and therefore adding more makes sense to get that growth. The logic is impeccable if one finds a way to spend that really does boost growth. That is far harder than it would seem as there are many ways that stimulus money can go astray. The U.S. has experienced this itself. The $800 billion that was supposed to go toward stimulation through infrastructure development in 2009 was frittered away by states that used the federal cash to offset losses in the recession. All that happened is that states delayed their response to the recession by a year or two and made cuts in 2010 and 2011.

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

Keeping Credit and Sales on the Same Team

Credit and sales enjoy a symbiotic relationship. The success of each depends on the other one doing its job well. The sales department relies on credit to help expand sales and improve profitability, and the credit department depends on strong sales that it can collect. By partnering together, the two departments help fortify an organization’s success.

"All the sales in the world will not help businesses' bottom line, if sales are of poor quality and a large percentage of customers end up not paying their accounts," said Kevin Stinner, CCE, CCRA, who serves as an area credit manager with Crop Production Services and secretary of the NACM Gateway Advisory Board and member of its education committee. "However, if credit terms are too tight, new business will be restricted, and the business will not expand its profitability. Credit and sales is a balancing act."

Finding ways to strengthen the bond ensures that the relationship stays on track. NACM offers a number of tools to help accomplish that task. For example, members of the association’s 2015 Graduate School of Credit & Financial Management (GSCFM), held at Dartmouth College in New Hampshire, developed several best practices through their class project, The Dynamic Duo: Credit and Sales—A Look at Relationship Best Practices, which promotes working as a team. The credit professionals who developed the white paper formed a list of questions for each department to ask, answer and rate as part of an annual evaluation process to maintain the partnership, which depends on the support of an organization’s senior management.

Some of the questions include the following:
  • Is there mutual respect between functions?
  • Do credit personnel understand or are they knowledgeable about sales' objectives/goals? If not, why?
  • How would credit and sales personnel rate the mindfulness of themselves and each other?

The process then challenges participants to prepare a written analysis of their findings. “This demonstrates that relationship building is being taken seriously, and some of the responses may be surprising,” the white paper states.

In addition, an upcoming webinar presented by Stinner will look at the issue. Creating an Advantageous Partnership for Both Credit and Sales, held Monday, March 7, from 3-4 p.m., will explore the importance of collaboration between the two departments, ways to develop and strengthen bonds and how to maintain a good working relationship.

"Both sales and credit have the same ultimate goal—increase profitability of the business," Stinner said. "Sales by increasing sales, and credit by protecting a business’s receivables. By the two working together, the two stand a better opportunity at achieving each other’s goals, and thus gaining the advantage over other competitors that don’t have a good relationship between sales and credit."

Stinner also will present How to Make a Successful Credit Decision Based on Limited Credit Information in Las Vegas at NACM’s 120th Annual Credit Congress in June.

- Diana Mota, NACM associate editor