U.S. Trade Deal Improvements with Europe Unlikely Before New Administration

While it is believed that the chances of the Trans-Pacific Partnership passing through an increasingly partisan Congress or earning ratification in all of the other nations involved are remote, the potential free trade agreement update between the United States and European Union is even further from completion.

Obama Administration and EU leadership are deeply divided along many lines (e.g., agriculture, manufacturing, services, etc.) as they try to come to an agreement on the Transatlantic Trade and Investment Partnership (TTIP). France is deeply opposed, and Germany is only slightly more comfortable with what is on the table. Meanwhile, the U.S. position on trade has been weakening with every month of the current campaign. These are nations that really need one another’s markets, but the trading patterns are sensitive because they essentially trade similar goods with one another.

The prospects of an agreement are dim and even if the pact was ironed out with trade officials between the two sides was ironed out quickly, infighting within the U.S. House and Senate almost guarantee nothing will be completed with Europe in the remaining nine months of the Obama term.

The stated goal of the TTIP was to lower already low trade barriers between two of the world’s largest trading partners to enable the easier flow of trillions of dollars worth of commerce.

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

April Credit Managers’ Index Looks to Maintain Momentum

NACM’s Credit Managers’ Index (CMI) for April, which will be released on NACM’s website Friday, is expected to continue with positive news and to challenge for the best level of the calendar year.

The most recent CMI peak came in July and, following a late-summer/early-fall decline in form, the index began a largely positive growth trend again in November, even as a few key categories (e.g., sales) lost steam.

“The thinking was that a real corner had been turned and the remainder of the year would be equally strong,” said NACM Economist Chris Kuehl, Ph.D of July’s performance. “Then, momentum was lost in August. The difference between last summer and now is that there has been a consistent build in the data, which would suggest more sustainability.”

Take particular note Friday of the unfavorable factors categories, of which most have been threatening to enter expansion territory after a lengthy lull.

“This [April’s CMI] would be the first time that all the unfavorable readings have all been above 50 in close to two years, and that would be a significant development,” said Kuehl. “To some degree, these numbers would suggest that companies that were on the ropes have finally reached the end. They are no longer driving the data down.”

- NACM staff

Click here Friday morning (ET) to view NACM’s full April CMI report. Click here to view the CMI archive.

U.S. Executives Looking Abroad for Growth

Doubtful about prospects in the United States over the next year, executives at mid- and large-sized businesses surveyed for Wells Fargo’s 2016 International Business Indicator expect international business activity to pick up in the next 12 months.

The 2016 International Business Indicator moved up Monday to 65 from 63 this time last year, according to the Wells Fargo report. Some 64% of 262 executives surveyed predict their company’s global business to either “increase a little” or “increase a lot” by this time next year, while 54% said it will become more important to their company’s financial success.

The importance of international business to companies’ financial success may reflect, at least in part, diminished expectations about growth prospects in the United States,” said Jay Bryson, global economist with Wells Fargo. Indeed, the percentage of survey respondents who said they expected U.S. business conditions to be “much better” or “somewhat better” over the next year dropped from 64% in 2015 to 48%.
About 60% of respondents said volatility in commodity prices is affecting companies’ international business, with 61% saying low energy prices are benefitting them. Meanwhile, 66% said low interest rates in the U.S. have been beneficial, while 43% expect higher rates would affect overseas business.

A majority of respondents believe foreign political developments (59%) and foreign economic conditions (51%) may have negative effects on their companies’ global plans this year, Wells Fargo said. Also, slightly more than half noted “currency fluctuations or exchange rates” could negatively impact their businesses, up from 39% in 2015. “The significant attention to exchange rates could reflect the sharp appreciation in the value of the U.S. dollar that has occurred over the past year,” Wells Fargo analysts said. 

China Slips, Emerging Markets Remain In Spotlight
The survey also reported that 33% of respondents ranked Western Europe as the “most important international market today,” giving it the No. 1 slot and dropping China to second place with 23%. Last year, China was No. 1 on this list. “China’s slippage may reflect the slowdown that has been occurring in that country in recent years,” Bryson said. “Real GDP in China grew at its slowest annual growth rate in 25 years in 2015.”

Still, business executives rank developing economies as “hot spots” over the next two to three years, with nearly 70% of survey respondents agreeing that emerging markets represent the greatest revenue growth opportunity. Countries like China, Mexico and India, with their expanding middle classes, were particularly attractive to survey respondents.

“Although developing economies are not likely to return to the supercharged growth rates that characterized the middle years of the last decade, these countries will probably continue to outpace their advanced economy counterparts in coming years in terms of economic growth,” Wells Fargo economists said.

- Nicholas Stern, NACM editorial associate

New Chinese Corporate Default Trend Underscores Increasing Risk

Recent defaults by Chinese state-owned enterprises (SOEs) are on the rise as Chinese authorities exert less control than a decade ago over the nation’s financial system. This could bring default rates in line with those reported in developed economies, increasing credit risks of China-based companies.

China’s financial system is stressed from slowing growth rates, weakening bank asset quality and significant leverage growth over the past decade, explains Andrew Colquhoun, senior director of sovereigns at FitchRatings, in an April 21 report. Things may be worse for corporate sectors that have experienced “severe over-capacity and weakened credit profiles, but have also benefited from implicit government support in the past,” Colquhoun said. “If investors rapidly change their perceptions of government support in these sectors, it could lead to a disorderly deleveraging.”

In February, electrical transformer manufacturer Baoding Tianwei became the first onshore SOE to default on a corporate bond on principal, while in April, two more SOEs missed bond payments and another SOE had trading of its notes suspended. Several private-sector firms have also defaulted on their corporate bonds. These defaults in turn likely contributed to a rash of bond issue cancellations in March and April.

While the overall default rate is small compared with that in developed markets, a rise in default rates or an unanticipated credit crunch managed without a transparent and consistent process could leave lenders “uncertain as to which SOEs will be allowed to default and over the process for resolving creditors’ claims,” Fitch analysts noted. “In this scenario, even government-controlled banks could become risk averse and be unwilling or unable to lend—a feature evident in other government-controlled banking systems in emerging markets.”

- Nicholas Stern, NACM editorial associate

World’s Top Alt Energy Producer Files Chapter 11

Missouri-based SunEdison, the world’s largest corporate renewable energy producer, put rumors of its financial demise to rest Thursday when it officially filed for Chapter 11 bankruptcy protection. The case underscores some of the dangers of overly rapid expansion as well as hedge fund-driven business models in more volatile industries.

SunEdison filed in U.S. Bankruptcy Code for the Southern District of New York, which is widely considered one of the two most debtor-friendly jurisdictions for such proceedings in the country. As noted in the April 14 edition of NACM’s eNews, late 2015 whispers of financial problems evolved into an increasingly loud buzz last month when SunEdison delayed filing its year-end financial numbers (Form10-K) and 4Q2015 earnings information releases.

Aggressive expansion into new global markets, as well as new product lines, pushed SunEdison to the largest market share in the renewable industry. That expansion also invited risk-based problems at levels experienced by few of its competitors. Coming out of the last wave of alternative energy bankruptcies that ramped up early this decade, largely because of domestic producer oversaturation and allegations of Chinese product dumping at artificially low prices, the company’s rapid and bold expansion peaked in 2014 and 2015 and included ventures into several now-struggling “emerging economies.” In recent months, SunEdison’s plans for one corporate takeover fell apart at the last minute because of investor allegations of misrepresentation of its financial health. In addition, its stock price fell by about 98% in less than a year.

- Brian Shappell, CBA, CICP, NACM managing editor

Credit Quality of Chinese Industries a Mixed Bag in Short-Term

Amid an ongoing slowing in growth rates, the credit quality of Chinese companies [non-property] may play out in a tale of sector divergence over the next year to a year-and-a-half, with the oil and gas, steel and broader commodities areas struggling and consumer-based areas such as food and beverage, auto and construction racking up gains.

Structural changes in Chinese consumption preferences and distribution will support growth for companies in the Internet and technology sectors, albeit at the expense of traditional retail formats like department stores, said Moody’s Investors Service in its report today on key credit trends for these and other sectors in China.

For food and beverage companies, low raw material prices should support steady profit margins and “provide a buffer against weak revenues and pressure on profitability,” Moody’s analysts said. Automakers benefitting from China’s vehicle-purchase tax cut should experience sales gains in 2016. Slowing construction in the property and metallurgical sectors could be offset by moderate demand from Chinese and overseas infrastructure builds.

Meanwhile, the Chinese steel sector’s profitability will drop from falling production volumes and lower capacity use, as lower input material prices are “no longer sufficient to offset” muted market pricing, Moody’s predicted. Consequently, steelmakers' debt leverage and liquidity risk continue to rise, in turn raising corporate default rates in the sector,” says Lina Choi, a Moody's vice president and senior credit officer.

The bulk chemicals industry will see worsening oversupply, weak demand and lowered prices and profits, Moody’s predicted. Some specialty chemicals producers may, however, benefit from low oil prices.

“In the metals and mining sector, the sharp drop in revenue and earnings has raised leverage for many entities, which Moody's expects will lead them to balance cash preservation with the pursuit of growth opportunities,” the ratings firm said.

- Nicholas Stern, NACM editorial associate

German Exports Expected to Grow in 2017, Despite Global Turmoil

Trade credit insurance firm Euler Hermes anticipates global corporate bankruptcies will rise this year by 2% for the first time in seven years, and exporting giant Germany is no exception with cases expected to increase by a percentage point in 2017.

Still, Euler Hermes analysts expect German exports to grow by some $104 billion by 2017. "Exporters are pressing hard on the gas pedal,” said Ron van het Hof, CEO of Euler Hermes Germany, Austria and Switzerland. “Over the next two years they will even post stronger export growth than China ($96 billion) and gain pole position through this overtaking maneuver.”

Overall, German exporters have stable profit margins, and though world-wide economic turmoil could dampen profit expectations in the near term, payment behavior of German companies remains strong, according to Euler Hermes. For instance, DSO at listed German companies is 56 days compared to the global average of 67 days.

"It is interesting that payment delays fell last year, but non-payments were up 3%," said Ludovic Subran, chief economist at Euler Hermes."This, combined with high competitive pressure and below-average margins, confirms the trend reversal we predicted, with insolvencies stagnating once again in Germany in 2016 followed by a slight rise in 2017."

Germany’s largest trading partner, the United States, is expected to see a 3% rise in insolvencies, while its other two-largest trading partners, the U.K. and China, could see a rise in insolvencies of 1% and 20%, respectively.

The picture in emerging markets is also less than sanguine. Bankruptcies in Brazil could rise as high as 22%, while Colombia and Chile could see insolvencies grow by 13% and 11% over the next two years, respectively, Euler Hermes said. Asian “supplier countries,” like Hong Kong and Singapore will see 15% more bankruptcy filings, and Australia, South Africa, Turkey, Russia, Greece and Switzerland are also on track for more bankruptcies.

- Nicholas Stern, NACM editorial associate

Housing Starts, Building Permits Plummet

Housing starts dropped 8.8% month-over-month in March to a seasonally-adjusted annual rate of 1.09 million, while single-family housing starts tumbled 9.2% in March to a rate of 764,000, the latest data from the U.S. Census Bureau shows. Housing starts with five or more units fell 8.5% from February to March to 312,000.In line with starts, building permits in March fell 7.7% from February to 1.18 million, with single-family authorizations dropping 1.2% to a rate of 727,000 and permits for buildings with five units or more plunging 20.6% to 324,000.

Still, despite the fall in March, privately-owned housing starts were up 14.2% from March 2015 and building permits in March were 4.6% over the March 2015 estimate of 1.04 million, Census said.

Meanwhile, housing completions fared better in March and were up from February by 3.5% to a seasonally-adjusted annual rate of 1.06 million, according to Census. The March rate was 31.6% above what it was a year prior.

“The supply of new homes coming to the market has improved, as the number of homes completed and under construction both reported gains in March,” said Mark Vitner, senior economist with the Wells Fargo Economics Group. This strengthening trend bodes well for new home sales, which have been held back by tight inventories.”

“The housing market seems relatively well positioned heading into the spring home buying season. We expect housing starts to gain momentum in the year ahead, and cap 2016 up 11%,” Vitner added.

- Nicholas Stern, NACM editorial associate

So Much for That Oil Rally

Pundits and oil analysts had started to breathe a little sigh of relief as the per barrel price of oil had begun to act the way it was “supposed” to. Each week saw the price creeping back up to respectable levels and oil producers began to think that gloom and doom would fade in the wake of $50 to $60-dollar oil.

The OPEC system is not really functioning anymore—not like it has in the past, but it seemed to be working better than it has been lately, as the producers were seemingly in agreement that something had to be done about the oversupply of crude. Only a few days ago, it seemed certain the major oil states were going to agree to limit their output or at least freeze it where it is right now. That seemed a pretty logical move given that oil prices are still sitting at record lows. There is no sense that demand was going to start to rise anytime soon—not as long as the prognosis for the global economy remains weak.

That was the thinking before the end of the weekend and the failure of the OPEC states and Russia to reach a deal as far as output is concerned. The idea was that the heavyweights in the oil sector (excluding the U.S., Canada, Britain and Norway) would agree to freeze output at the current level. This was an idea floated by Russia and Saudi Arabia at the start of the year, and the two have been trying to get the other OPEC members to go along with the idea ever since. In the end, the Saudi government elected to bail on this agreement, as it is not willing to freeze output unless the Iranians are on board with that plan. To say that Iran has little incentive to play along is an understatement.

Iran is just starting to see sanctions lift and just starting to get back to the oil production levels it sported prior to the imposition of these restrictions. To freeze at current output levels would mean voluntarily undoing all the gains it could be making as these sanctions are removed. To note that there is no love lost between Iran and Saudi Arabia would be another understatement as these states are exceedingly hostile to one another. There is no desire to do much of anything to assist one another—even if that would be good news for both.

The global oil markets reacted to the news swiftly as the per barrel price fell by 5% and has been continuing to fall since. If there is no unified decision to reduce output, the glut will live on, and the only thing that will wrench oil prices back up will be an increase in demand sufficient to dry up that supply. Nobody sees that happening any time in the near future. Iran is committed to ramping its production up to around 4 million bpd; that is up from the 2.3 million bpd it produced last year. There is not enough demand for the oil that has been supplied already, and an additional 2 million barrels on the market will not make things any easier. The expectation of an oil sector gain has been dashed before it really started.

The thinking now is that oil prices will stop their recovery, and hopes of $60 a barrel oil by the end of the year have been dashed. The expectation has shifted to prices closer to $40 unless there really is a major surge in demand in the U.S. during the summer driving season. The problem is that it is not the U.S. that is behind in the consumption of oil—it is the rest of the world and especially the Europeans. The oil analysts had been expecting a more normal oil situation by 2017 and now there is real doubt. At this point, there are more limited scenarios as far as the price recovery of oil is concerned.

The first, and presumably the easiest, means by which the price of oil can go up is for the oil states to agree on that freeze. At the moment, two states hold the key to some kind of agreement—Saudi Arabia and Iran. They both have good reasons for their stance, and it will come down to whether they can set aside their differences and mutual enmity. It is actually far easier for Iran to do business with the “great Satan” than to work with the Saudi Oil Ministry. The feeling of hostility is mutual; there is therefore little flexibility as far as the Saudi position is concerned. To break the logjam, the Iranians will have to be allowed to produce more but perhaps not as much as they would like. The additional one or two million barrels from Iran would mean that other states would have to reduce their output accordingly and that will not be a popular position for the countries that would have to shoulder the bulk of that reduction—Saudi Arabia and Russia.

The second means by which the oil glut is resolved would be demand driven. There would have to be enough additional demand to soak up the current supply and handle more coming from the likes of Iran. That means getting the U.S. all the way back to consumption levels that are reminiscent of the last decade. It also means the rest of the world has to pick up the pace. That sounds feasible but not as long as global growth continues to sag and limp along at just around 3%, as opposed to the almost 6% that marked activity prior to the recession. There is no switch to flip as far as spurring consumption is concerned.

There is a third option. That involves the elimination of some of the oil production competitors. This was always the threat that Saudi Arabia imposed back in the strong OPEC days. If a country elected to consistently refuse the Saudi/OPEC imposed quota, the states that could produce oil cheaply would simply flood the market and drive prices down to the point that other states would no longer be able to produce. This is what Saudi Arabia tried to do in 2014 to force the U.S. shale oil developers to back off. That failed because the U.S. is a far more determined producer (as is Canada). There is far too much sunk investment in the U.S. and Canadian oil patch to walk away from. There are, however, states that are far less resilient, and they could be forced out. It is likely that five current producers could be forced out if prices stay below $40. These include Venezuela, Algeria, Angola and Ecuador and perhaps even Nigeria. Even a partial withdrawal from the oil world on the part of these states could pull enough oil off the market to end the glut. The problem is that this reduction will certainly not be voluntary, and it will hardly be organized or even close to permanent as these are all states that rely on oil for over 90% of their budget.

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

Mostly Solid Beige Book Hints at Inflation, Pressure to Raise Interest Rates

National economic activity expanded moderately in late February and March, according to the Federal Reserve’s latest report on current economic conditions in its 12 districts, known as the Beige Book.

Consumer spending, business spending and tourism each saw growth in most districts, while labor conditions strengthened, the Fed reported. Likewise, demand for nonfinancial services expanded and manufacturing activity, construction and real estate activity grew in most districts. On net, credit conditions improved, and overall, prices rose modestly in a majority of districts as input cost pressures continued to ease.

Still, “low prices weighed on energy and mining output as well as prospects for agricultural producers,” Federal Reserve officials reported.

“It seems that all 12 of the districts are reporting that wages are going up,” said Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence. “This is good news for the wage earners of course, but the bigger issue for the Fed is that this may well be the first real sign of an inflation build and that will impact the way the Fed talks about interest rates in the months ahead.”

- Nicholas Stern, NACM editorial associate

Late Payments Increasing in Western Europe

Low commodity prices and China’s economic slowdown are hammering payment conditions in Western Europe, where 90% of businesses report they’re facing late payments from their B2B customers, according to Atradius’ Payment Practices Barometer Western Europe 2016 survey.

“In the eurozone, the absolute level of insolvencies is currently 66% higher than the pre-crisis level, and strong increases in business insolvencies is forecast in China, Brazil, Russia and South Africa,” said Andreas Tesch, chief market officer of Atradius N.V. “Against this backdrop, a diversified customer portfolio and a firm grip on receivables management and credit insurance can be of great value in limiting payment default risks and ensuring business growth … during challenging economic times.”

The situation has meant that nearly 40% of B2B receivables are being defaulted on, the survey of 3,000 businesses in 13 countries notes. On average, overdue invoices are being paid within three weeks of the due date.

Survey respondents in Italy and Greece had it the worst, reporting that nearly half the value of their B2B invoices are being defaulted on, which is about 10% higher than the Western Europe average.

U.K. respondents said they’d been hit hardest by late payment from export customers—46.4% of British export credit sales were reported to have been paid late by B2B customers, compared with a 38.3% average for Western Europe.

Also, late payments of domestic invoices jumped to 57.9% in 2016 from 51.4% in 2015, most commonly because of customers’ lack of funds, especially in Greece, Atradius said.

Late payment for foreign invoices also worsened in Western Europe to 40.2% this year from 37.1% last year, with respondents from Austria most commonly reporting they’d received late payment.

Atradius noted some of the reasons survey takers gave about how late payments impact them:

· About a quarter of them had to delay payment to their own suppliers.

· About 20% said they had to take measures to correct cash flow or lost revenue.

· About 15% had to find additional financing or request a banking overdraft extension.

· Nearly 33% increased their checks of customers’ track records this year.

· Almost 29% will increase trade credit risk monitoring.

- Nicholas Stern, NACM editorial associate

Rising Oil Prices Lift U.S. Imports in March

Prices for U.S. imports rose 0.2% in March following a 0.4% decrease the prior month, driven by rising fuel prices, which more than offset lower nonfuel prices. U.S. export prices remained unchanged for the month after falling 0.5% in February, according to the Labor Department’s U.S. Import and Export Price Indexes, released April 12.

“While the dollar gave back some ground in March, the still strong level combined with weak growth overseas continues to limit exporters’ pricing power,” said Sam Bullard, senior economist with Wells Fargo. “We expect import price inflation to climb higher in the coming months as oil recovers a bit further and the dollar only gradually resumes its appreciating trend in the second half of the year.”

The imports increase was the first price rise since June 2015 and the largest one-month increase since May 2015. Overall, however, import prices in March fell 6.2% year-over-year.

The March gain in imported fuel prices, up 4.9%, came on the heels of significant declines the prior three months. Petroleum prices in particular advanced 6.5% and more than offset the 16.1% decrease in natural gas prices. Still, fuel prices declined 38.3% during the past year, with petroleum prices dropping 39.5% and natural gas prices falling 37.7%.

Nonfuel imports, meanwhile, decreased 0.1% in March for the third-consecutive month and have not increased since July 2014. Year-over-year, nonfuel import prices have decreased 2.5%. In March, falling prices for consumer goods; foods, feeds and beverages; and capital goods offset increases in prices for nonfuel industrial supplies and materials and cars.

Import prices for Chinese products decreased 0.2% in March and 1.8% over the prior year, matching the largest yearly drop in prices not seen since the year that ended November 2009. Import prices from the European Union also dropped in March by 0.1%. Prices for imports from Japan, Canada and Mexico, on the other hand, rose in March.

The 0.5% March rise in prices for nonfuel industrial supplies and materials were led by a 3.2% increase in unfinished metal prices. Also, European transportation fares declined 11.3% in March and import air freight prices dropped 12.6% over the year ending in March. Last month, agricultural prices decreased 2.5% following a 0.6% rise February; the decrease marked the largest one-month decline since August 2014, while year-over-year, agricultural prices dropped 11.1%. Lower prices for fruit, soybeans, corn and nuts led the decrease.

Prices for nonagricultural exports rose in March by 0.3% and marked the first monthly increase since May 2015, but still remained down 5.6% over the prior year. March export price increases were led by nonagricultural industrial supplies and materials, and overtook decreasing prices for automobiles.

Also of note, export air passenger fares ballooned 7.8% in March, the largest monthly increase since December 2014, but fell over the prior year by 4.6%.

- Nicholas Stern, NACM editorial associate

Small Business Owners’ Margins Squeezed, Indicating Recession Possible

Small business optimism has been on the decline for the past 15 months, and March’s reading from the National Federation of Independent Business (NFIB) Small Business Optimism Index piled on more of the same, showing a 0.3-point fall to 92.6.

A majority of the 10 components tracked by the survey decreased, led by a three-point fall for current inventory and current job openings, the NFIB said. Expected credit conditions declined a percentage point in March to a minus 6% reading. Borrowing needs were not satisfied, according to 5% of the owners, which is three points above the record low reached in September 2015.

“A ‘chartist’ looking at the data historically might conclude that the index has clearly hit a top and is flashing a recession signal,” the NFIB said. “The April survey will decide whether or not the alarm should be rung.”

The 7.7-point decrease in the index since December 2014 brought it back to levels typically associated with recessions, “making it one of the more pessimistic monthly business surveys,” in contrast to Institute for Supply Management surveys and regional Federal Reserve manufacturing surveys, which showed slight gains in March, noted Mark Vitner, senior economist with Wells Fargo.

General business conditions in the NFIB index dropped 29 points over the past 15 months, the most of any category, likely indicating business owners’ “scaled back expectations for sales, which have tumbled more than 18 points over this time period,” Vitner said.

Owners also reported ongoing concerns about their lack of pricing power; notably, the net proportion of firms that said they raised prices in March remained at a near-post-recession low of negative four points for the past three months, he said. A lack of pricing power “coincides with rising wages and benefit costs,” Vitner said. Also, the NFIB survey shows a “persistent squeeze on operating margins over the past 15 months,” he said.

“The squeeze on small business profit margins has also coincided with a pullback in capital spending and overall economic growth, which casts some doubt on the turnaround in other monthly surveys and may be a harbinger of slower economic growth this spring,” Vitner said.

- Nicholas Stern, NACM editorial associate

WTO Adds its Voice of Gloom

The latest report from the World Trade Organization (WTO) is adding to the general sense of global malaise. None of the big think tanks are very happy with the state of things, as the International Monetary Fund has been reporting slow growth along with the Organisation for Economic Co-operation and Development, Group of 20, World Bank and so on. The trends have not been good ones, and there are more barriers in place than ever. The WTO has reported that trade patterns have not been this bad since the 1980s. There has rarely been such an expanded period of slow trade—five years with growth rates at 3% or below. This year the expected growth rate is just 2.8%—a very far cry from the 6% and 7% that marked the years before the recession.

Reasons for the slowdown are obvious enough, but the solutions aren’t. The most obvious issue is that consumers have slowed drastically in Europe as well as in the U.S. The expected break out in consumer demand keeps getting pushed out further and further, and each time this occurs, there is an admission that few really know what is happening. It was assumed that U.S. consumers would get fully engaged when the usual motivations fell into place. It was thought that decent employment numbers, cheaper import prices and perhaps some kind of encouragement stemming from lower inflation were all that was needed. We have all of that and still there is little movement.

The employment situation has improved—the rate of joblessness is now down to 5% at the U-3 rate and even the U-6 numbers have improved. The latest data suggests that people are migrating back to the workforce after having been classified as discouraged workers for the last few years. The prices of imports have been falling as the dollar gained strength, making prices fall to the point that people worry about deflation. There has been really no inflation to speak of for years—at least at the core rate. The headline rate is also not that high. There has even been some of that tried-and-true consumer motivation in dropping fuel prices. This has always been the surefire way to get the consumer off the couch, but even prices at $1.50 a gallon and less have not been enough to get people in the mood.

What is going on? Why have these motivators not had the desired impact? There is plenty of debate, but one idea that has emerged is also being used to explain the anger of the voter. What explains the popularity of Donald Trump and Marine Le Pen and political parties like Podemos, Syriza and Alternative for Deutschland among others? One suggestion is that it is all about wages. The average person has not seen a wage hike in almost a decade. Never mind that most people have not lost much economic ground, as the inflation rate has also been very low in that period. People see little opportunity for gain and plenty of opportunity for loss. They fear being replaced by some foreign worker or immigrant—or worse yet, a machine. The fear holds them back from consumption, and it also fuels their political anger. The perverse solution for many of the world’s ills right now would be a nice little controlled bout of inflation, but nobody has a clue how to provoke one.

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

Technology, Consumer Goods Drive U.S. Economic Growth

The U.S. economy grew as a whole in March, led by increases in output for the technology, consumer goods, consumer services and healthcare sectors.

Following stagnation in February, Markit Economics’ Purchasing Managers’ Index (PMI) had a reading of 51.3 in March. Growth in the technology sector was at a 10-month high in March, following a survey-record decline in February, driven by higher new orders. Consumer services showed the second-best growth, followed by healthcare and consumer goods, which nevertheless saw the weakest risk in output in almost two-and-a-half years, Markit said.

Meanwhile, basic materials, financials and industrials all saw output declines in March. Industrials output was the weakest of the sectors in March, reporting its fastest drop since data collection began in October 2009 and with the weakest performance of the sectors for the first quarter of 2016, Markit said.

In Europe, the beverages sector led the pack—in March and for the first quarter—in Markit’s Europe Sector PMI, marking the biggest monthly output rise since September 2000, the firm found. The software and services sector rose second fastest with the strongest activity reported since September 2015.

Construction materials was the second-best performing sector for the first quarter of 2016, despite a growth slowdown in March, Markit said.

The metals and mining sector saw contraction in two out of the first three months of the year and was the only sector in March to post a quarterly average below the 50.0 mark, the firm said.

In Asia, the commercial and professional services sector had the top performance in the March Nikkei Asia Sector PMI, as well as the strongest sector performance of the first quarter, Markit found in a separate report. The Asian banks, software and services, beverages and food and machinery and equipment sectors all posted growth in March, while the insurance and pharmaceuticals and biotechnology sectors saw gains in March following contraction in February.

Asian metals and mining, which was the worst-performing sector during the last quarter of 2015, reported one of the quickest rebounds to record growth in March, Markit said.

On the other hand, forestry and paper products reported the worst growth in March, while transportation, real estate, healthcare services and technology equipment also saw contraction.

“Overall, business activity growth was recorded by ten of the 19 detailed sectors covered, up from only seven during February,” Markit said.

- Nicholas Stern, NACM editorial associate

U.S. Trade Deficit Grew in February

Imports and exports increased month-over-month in February, as did the U.S. goods and services deficit, according to Department of Commerce data released today.

The goods and services deficit grew $1.2 billion to $47.1 billion, from January to February. The February number reflects a goods deficit increase of $0.9 billion, to $64.7 billion, and a services surplus decrease of $0.3 billion, to $17.7 billion. Year-over-year, the average goods and services deficit increased $3.3 billion, or 6%.

Exports were up $1.8 billion to $178.1 billion, while imports rose $3 billion over January’s figure to $225.1 billion. The average for exports of goods and services decreased $11.7 billion from February 2015, while the average for imports decreased $8.4 billion for the same period.

“Sluggish economic growth in some of the country’s trading partners as well as the effects of dollar appreciation have weighed on real export growth over the past year or so,” said Jay Bryson, global economist with Wells Fargo in commentary on the trade data.

Consumer goods led export increases in February from January, accompanied by exports of U.S. automobiles and parts and foods, feeds and beverages, Commerce said. Meanwhile exports of industrial supplies and materials and capital goods decreased. Export services such as transportation, including freight and port services and passenger fares, decreased in February as travel increased incrementally.

“Although real exports rose 2.2% in February, which almost entirely reversed the decline in January, weak momentum in export growth coming into 2016 means that net exports likely exerted a significant drag on GDP growth in the first quarter,” Wells Fargo said.

Despite the fact that the value of imported oil is at a 13-year low—$9.9 billion in February—the total value of imports increased by $3.3 billion in February, led by consumer goods, food and capital goods. Meanwhile, imports of industrial supplies and materials and automobiles and associated parts decreased.

The U.S. deficit with China increased $1 billion to $32.1 billion in February. Exports to that nation decreased $0.3 billion to $8.4 billion—the lowest figure since June 2011—as imports increased $0.8 billion to $40.5 billion, the Commerce report finds.

The trade balance with Saudi Arabia changed in February from a deficit of $0.2 billion to a surplus of $1.3 billion as exports increased to $2.3 billion from $0.9 billion and imports decreased $0.6 billion to $1 billion. The government also reported surpluses with South and Central America ($2.7 billion), OPEC ($1.9 billion) and Brazil ($0.4 billion).

On the other side of the ledger, deficits were found with the European Union ($10.6 billion), Japan ($5.4 billion), Germany ($5.2 billion), Mexico ($5.1 billion), South Korea ($2.8 billion), India ($2.4 billion), Italy ($2.4 billion), France ($1.5 billion), Canada ($1 billion) and the U.K. ($0.5 billion).

- Nicholas Stern, NACM editorial associate

Subcontractor Appeals Court’s Dismissal of Claim

An Illinois circuit court erred when it summarily dismissed a subcontractor’s mechanic’s lien claim, according to the American Subcontractors Association (ASA), Inc.’s brief filed in the Appellate Court of Illinois.

The case, AUI Construction Group, LLC vs. Louis J. Vaessen, et al, involves “the landmark issue of whether subcontractors and suppliers still maintain lien rights for construction work on commercial construction projects … where the improvement is on property that is subject to an easement and title retention agreement,” ASA wrote in its brief. “This court’s decision in the matter will either further the letter and spirit of the mechanic’s lien act to the benefit of subcontractors, suppliers and the public at larger or unduly erode those rights, driving prices up, lowering completion for construction projects on easements and financially stressing—if not bankrupting—future subcontractors.”

If the decision holds, the circuit court’s “reasoning and rationale will reverberate across Illinois, to the detriment of the state’s economy” ASA added. The association notes that “small construction businesses, in particular, will pay the heaviest price. Most of those small businesses will be subcontractors.”

The ruling denies a remedy to small- and mid-sized businesses that can suffer severe harm from developments outside their control, such as their contracting partner’s insolvency or disputes between the owner and prime contractors or loss of project funding from a bank, ASA said. Allowing the circuit court decision to stand will have severe implications to payment protection in the construction industry and goes against the state law, it wrote.

The facts in the case include the following:

In 2007, the project’s owner, the estate of Louis and Carol Vaessen, and the developer, GSB 7, LLC, entered into a 50-year easement agreement, which authorized the developer to build and operate wind energy systems on the property in exchange for certain benefits, including payments from the revenue generated by the project. The agreement, however, was not recorded until Dec. 22, 2011.

Prior to filing, the developer contracted with Clipper Wind Power to design and build the project; Clipper contracted with Postensa Wind Structures U.S., LLC, for the design and build work for the project; and Postensa subcontracted with appellant AUI Construction Group to perform the construction portion of the project; and AUI started site work.

AUI’s scope of work totaled more than $2 million. The firm exercised its right under Illinois law to perfect and enforce a mechanic’s lien against the improved property. At arbitration over its claims, AUI received a substantial award for its unpaid bills. When its contracting partner, Postensa, then filed for bankruptcy, AUI moved to foreclose its mechanic’s lien and perfect the security interest it had in the improved property.

The developer and owner moved to dismiss the lien claims. Without conducting a trail or evidentiary hearing, the circuit court held as a matter of law that the project was not an improvement to real property under the state’s mechanic’s lien act and was simply a non-lien able trade fixture. And the decision is now being appealed.

- Diana Mota, NACM associate director

Manufacturing Activity Expands in March, but Signs of Underlying Weakness Remain

Despite job losses in the manufacturing sector, manufacturing economic activity expanded in March for the first time in the prior six months

The Institute for Supply Management (ISM)’s March Purchasing Managers’ Index (PMI) was 51.8%, up 2.3 percentage points from February’s reading, according to an ISM report released today. The figure reflects expansion in 12 of the 18 manufacturing industries tracked, including printing; furniture; machinery; plastics and rubber products; and fabricated metal, plastic, rubber, paper and chemical products.

ISM’s indices tracking new orders, production and prices all saw increases in March. Of particular note, the prices index jumped 13 percentage points in March to 51.5%, indicating higher raw materials prices for the first time since October 2014.

Meanwhile Markit Economics’ U.S. Manufacturing PMI in March registered 51.5, slightly higher than February’s 51.3 figure, signaling tepid improvement in operating conditions and the weakest quarterly upturn since the third quarter of 2012, the firm noted.

A rise in new work and sustained growth in employment topped positive aspects of March 2016’s reading, while manufacturing output growth remained unchanged from the 28-month low reported in February 2016, Markit said. Analysts also found an anemic rise in production volumes was linked “to subdued client spending patterns so far this year and a corresponding lack of pressuring on operating capacity.”

“Subdued client spending patterns within the energy sector, ongoing pressure from the strong dollar and general uncertainty about the business outlook were cited as factors weighing on new order flows in March,” said Tim Moore, senior economist at Markit. “Meanwhile, price discounting strategies resulted in the first back-to-back drop in factory gate charges for around three-and-a-half years, suggesting another squeeze on margins despite lower material costs across the manufacturing sector.”

- Nicholas Stern, NACM editorial associate