There are not many viable options for the recovery of Europe, so the pressure is now on France to join the Germans in repairing the damage to the European economy. But, by the looks of the most recent data, that is not something imminent.

The first quarter numbers for France are dismal, perhaps not quite as bad as many first thought likely, but nothing to suggest that France is going to be able to play a major role in the recovery anytime soon. The growth in the first quarter was just 0.1%, a hair above recession. The measures of business and consumer confidence are as low as they have been since the recession started in 2009, and the population has become utterly frustrated and disillusioned with the government of Francois Hollande. The slow growth has coincided with a serious scandal that has been undermining the reputation of a government that sought to set itself above the opposition.

There is no movement within the ranks of the consumer, as spending has diminished to nothing. The French economy is as dependent on the levels of internal consumption as the U.S. This is not a country that thrives on the export sector, as the Germans do. French business has long struggled to compete effectively on the global stage, and that has increased the reliance on the French household over the years. Right now, that household is in retreat on all fronts. There has been a dramatic reduction in the sales of new cars, appliances, clothing and even food.

Solutions to the crisis in France are hard to come by, as neither of the dominant parties perceivably have much to offer. Analysts look at France as too dependent on the internal market, but there is no easy way to make the country globally competitive. To export more effectively, the French would need to lower the cost of doing business, and that means radical labor reforms and regulatory changes that would not be popular in the country. French manufacturers have yet to embrace the world of technology, also limiting their export potential as well. The recovery of the domestic market is all about confidence-building, but this is at a low point for all. Reversing that malaise will require dynamic leadership and few expect to see anything like that from a scandal-ridden French leadership.

-Armada Corporate Intelligence

For more international business credit and economic news, check out this week's edition of eNews, available Thursday late afternoon (EST). NACM's eNews is available via email or through its website (www.nacm.org) inside the "Resources" pulldown bar.

As predicted in a 2011 Business Credit magazine article, the United States’ solar energy industry has taken its share of lumps over the last two years, but there are still those purporting the massive potential that solar holds. Whether true or not, there are real and continuing risks for everyone involved in the industry, and the government budget fight and “sequester” only adds a whole new dimension to potential problems, especially for survivors of the first wave of domestic solar-related bankruptcies.

U.S. product manufacturers are contending with what they see as unfair assistance to competing solar manufacturing sectors in Asia by their governments, especially that of China. The U.S. placed tariffs on Chinese imports, but the measures were seen as somewhat weak and coupled with evidence that some Chinese firms are simply off-shoring operations to areas like Singapore where such tariffs aren’t in play. In addition, the glut of U.S. producers left over from the cheap lending days of the financial boom of the late-2000s caused an industry saturation that became a real problem when demand fell during lower growth years. The two issues led to several high-profile bankruptcy filings headlined by that of Solyndra, which had ties to key Obama Administration fundraisers investigated for widespread fraud and reaping huge amounts in government grants.

Michael Joncich, manager of the business insolvency department for NACM affiliate Credit Management Association for NACM affiliate Credit Management Association, was among those who predicted the problems in 2011. He now speculates that reduced federal subsidies, grants and other assistance aren’t likely to help current matters. “Government can make or break an industry. I don’t really know if the shakeout is done yet,” he said.

Joncich noted that a colleague in the liquidation business recently learned everything he could about green businesses, thinking it was a bubble ready to pop, especially once it became apparent that the government was retracting its “generous funding” of those industries, including solar. “The observation is that they can’t seem to fund themselves,” he said. “When the government pulls back because of federal budget cutbacks, many can’t survive it,” he said.

It doesn’t mean all solar manufacturers are doomed, but there are enough red flags that virtually all creditors dealing with customers related to the solar industry should be paying close attention to them, their accounts and their terms.

- Brian Shappell, CBA, NACM staff writer
 

The Federal Reserve’s Beige Book economic roundup this week illustrated an economy improving and a pace of growth quickening. Reports from the 12 Fed Districts found, overall, a “modest to moderate” expansion since the Beige Book release just short of two months ago. Importantly, consumer spending is up, perhaps foreshadowing an uptick in all-important confidence.

However, two key districts – Boston and Chicago – showed much slower growth amid its industries that are more sensitive to ongoing problems with Congress and the Obama Administration simply not being able to work through issues like the budget/debt/”Sequestration.” San Francisco performed better than the two previously mentioned districts, but has some similar concerns of note.

Also threatening potential spring growth of the St. Louis and Kansas City regions is continued uncertainty within the agricultural sector. Both districts are heavily dependent on it, and optimism for a strong crop year, especially in a Kansas City district struggling with drought conditions, doesn’t seem to be especially high.

Still, the majority of district had much more positive news than negative on expansion in areas including sales (especially automotive), demand for services (notably technology and logistics-based), residential real estate, manufacturing (albeit modestly), labor market conditions and post-Hurricane Sandy reconstruction (New York and Philadelphia districts, primarily). To keep the overall good news rolling and growth pace accelerating though, the U.S. government is going to have to find ways to avoid the type of brinksmanship that has been all the rage on Capitol Hill over the last few years, NACM Economist Chris Kuehl, PhD hinted:

“In general, the Beige Book report holds that the economy is doing relatively well, but the stress in each report is that conditions would be far better were it not for the anchor of the budget crisis. The uncertainty factor is still a big concern nationwide.”

-Brian Shappell, CBA, NACM staff writer

The ongoing debt crisis in Europe continues to spread to the point where even the powerful German manufacturing sector is starting to take a hit. FCIB Global Conference Speaker Ludovic Subran, of Euler Hermes, noted this is likely to push bankruptcies much higher in a number of economies there.

Subran noted that projections show low growth, if any, in most European Union member economies over the next two years. As such, it leads to the question: How long can they survive these very low levels of demand? The answer for many companies simply is not very long.

"The rate of destruction of private companies is advancing," the economist told FCIB members and guests. "You have fewer and fewer companies. This includes very important links of the value chain that are disappearing...because some huge companies are going bust." He added there are many companies that rely overwhelmingly on some of these larger companies and intimated that a domino effect looms as a real and present danger.

Subran said that, by year's end, the projected increases in bankruptcies and/or other forms of business insolvencies is skyrocketing in places like Portugal (up 48% between 2011 and end of 2012), Greece and Spain (both 30%) as well as the Netherlands (25%). By contrast the average, per the Global Insolvency Index, is a 4% increase during the same period. Moreover, Subran said another 22% increase is expected in Spain between this year and 2013, with an 11% jump predicted for Italy and 10% for Greece. Granted, there are far fewer nations -- both in Europe and worldwide -- expected to outpace Euler Hermes' projected average insolvency pace through 2013 (3% increase among companies) than during the previous one-year period.

-Brian Shappell, CBA, NACM staff writer

Note: Look for more coverage this week here, through the FCIB Twitter feed (handle: FCIB_Global) and in NACM's eNews (available late Thursday afternoon).

The U.S. Department of Commerce announced this week that total August exports fell $1.9 billion from July down to $181.3 billion, the lowest level in six months. Imports also fell in August, but only by $0.2 billion, resulting in a 4.1% increase in the nation's trade deficit, which widened to $44.2 billion in August from July's revised figure of $42.5 billion.

Responsibility for the 1% decline falls solely on the goods sector, where exports decreased by $2.1 billion between July and August. The service sector saw a $0.2 billion increase in exports, resulting in a monthly all-time record at $52.8 billion. Decreases in the goods sector came primarily from fewer exports of industrial supplies and materials, which fell $1.2 billion in August, and of foods, feeds and beverages, which fell $1.1 billion.

Wider trade deficits are often considered a drag on economic growth as it indicates that U.S. companies are earning less on their overseas sales, while U.S. consumers are spending more money on products manufactured abroad. Nonetheless, exports remain at historically high levels, having grown at an annualized rate of 12.7% over the last 12 months compared to 2009. Total exports over the last year are valued at $2.173 trillion, which is nearly 37.6% above the total level of exports in 2009.

As of August's figures, the top ten buying countries with the largest annualized increases in purchases of U.S. goods, compared to 2009, were Panama (34.9%), Chile (27.8%), Argentina (26.3%), Turkey (26.3%), Russia (25.7%), Hong Kong (25.6%), Peru (25.3%), the United Arab Emirates (21.8%), Ecuador (21.6%) and Venezuela (20.9%).

- Jacob Barron, CICP, NACM staff writer

The latest Federal Reserve Beige Book, an economic conditions report released about eight times annually for the nation’s 12 Fed banking districts, finds a bit more of a mixed situation than the slow, yet steady growth reported for much of the year.

The Fed noted in the new Beige Book that a majority of districts remain in growth territory, but the tone seems less optimistic. Of particular concern appears to be the New York and Kansas City districts, both of which reported flat and/or softening sales. New York, notably, also had struggles to report in the real estate, commercial and residential (which showed a rare uptick again over the last six week period) as well as the all-important manufacturing sector. Also a bit off in manufacturing were the Boston and Philadelphia districts. Those reporting manufacturing improvement included Boston, Richmond, Atlanta, St. Louis, San Francisco and Kansas City. The rest essentially were middling. Whatever the district, vehicle sales continue to be supporting sales more than most product areas and, without its success, the numbers might look considerably bleaker.  

Another area more on the radar than usual is that of agriculture (noted in the previous blog entry and this week’s Thursday NACM eNews release). The drought conditions continue to impair the Minneapolis, Chicago, Dallas and Kansas City Districts -- all off from average levels -- though there has been some needed improvement in crop conditions from the last two periods. However, problems earlier this year are showing up in feed prices, which have affected businesses in half of the 12 Fed districts.

On the finance side, loan demand and credit standards held relatively stable. There were noted improvements in several districts in loan quality and delinquency rate declines.

-Brian Shappell, CBA, NACM staff writer

(Federal Reserve)  Reports from the12 Federal Reserve districts suggest economic activity continued to expand gradually in July and early August across most regions and sectors. Six Districts indicated the local economy continued to expand at a modest pace, and another three cited moderate growth. Among the latter, Chicago noted that the pace of growth had slowed from the prior period. The Philadelphia and Richmond districts reported slow growth in most sectors and declines in manufacturing, while Boston cited mixed reports from business contacts and some slowdown since the previous report.

Most districts indicated that retail activity, including auto sales, had increased since the last Beige Book report, although Cleveland, Chicago, St. Louis, Dallas, and San Francisco noted the retail improvements were small. Atlanta said that retail growth had slowed, while Philadelphia indicated growth in retail sales was somewhat faster than in the previous report. Boston, New York, Richmond, Atlanta, Minneapolis, and San Francisco recorded strong performance in tourism. Many districts reported some softening in manufacturing, either a slowdown in the rate of growth or a decline in the level of sales, output, or orders; among those with declining shipments and orders, Philadelphia noted that the rate of decline was tempering.

Bankers in New York, Philadelphia, Cleveland, Atlanta, Chicago, and Kansas City saw increases in demand for most loan types in recent months. By contrast, St. Louis, Dallas, and San Francisco indicated that loan demand was mixed, softening, or slightly weaker.

Real estate markets were generally said to be improving. Reports on commercial real estate markets were generally positive.

The Midwest drought has reduced actual and expected farm output, especially cotton, soybean, and/or corn crops in the Chicago, Kansas City, and St. Louis districts. Several districts noted concerns about rising agricultural commodity prices.

Hiring was said to be modest across the Districts, and wage pressures were characterized as contained.

-Source: Federal Reserve

China's State Council acknowledged the "increasing downward pressure" facing their economy this week. In a statement, the Council stressed that more attention would be paid by policymakers in the future on establishing "stabilizing economic growth," which is to say sustainable economic growth that still maintains adequate demand levels for the world's second-largest economy.

In the first quarter of 2012, China's gross domestic product (GDP) growth slowed to a still-meteoric 8.1% from 8.4% in the fourth quarter of 2011. While this has raised concerns about further deceleration at a time when the global economy needs it least, the slowdown is taking place by design. The Chinese government set the full-year GDP growth target at 7.5% for 2012, marking the first time in eight years that this target has been under 8%.

China's attempts to engineer a soft landing for their economy, although necessary from a sustainability perspective, have come at a less-than-advantageous time for the global economy at large, and particularly for the manufacturing sector. "The Chinese have continued to try to slow things down," said NACM Economist Chris Kuehl, PhD. "That has reduced their demand for goods from the U.S. as well as from other nations that the U.S. sells to. The export business has been critical for the U.S. manufacturer and it therefore causes some heartburn when those foreign markets seem to stumble."

Overheating seemed to be a real danger to China's continued regional economic dominance near the end of last year. "Inflation was hurtling out of control with a real rate over 6% and food inflation close to 12%," said Kuehl, who noted that a self-imposed slowdown designed to mitigate these effects seems to have been largely effective. "The inflation rate has fallen back to less than 4%," he noted, "but now the question is whether China will desire a resumption of their traditional growth rates, and whether that is even possible."

"As long as China is resisting the urge to stimulate growth, they will not be playing the role of economic engine for the region, and that slows down a good chunk of the global economy," Kuehl added.

To learn more about global economic trends and how to grow your company through exports, visit FCIB's website at www.fcibglobal.com.

-Jacob Barron, CICP, NACM staff writer
 

In line with a March Business Credit article outlining the vast troubles facing Japan, Fitch Ratings sent a definite message that it believes the Japanese should be moving at a faster pace in addressing its growing debt concerns this week.

Concerns over Japanese debt and growth -- as noted by experts like Adolfo Laurenti, deputy chief economist at Mesirow Financial; Masaaki Kanno, of JPMorgan Security Japan Co.; and NACM Economist Chris Kuehl in Business Credit -- eased slightly as a surge in the trade surplus was recorded just before the end of March. But this week’s Fitch downgrade has put Japan back into prominence in the world media in the most dubious of ways…at least for those who still value such analysis from U.S.-based ratings agencies that have faced much criticism in recent months and years.

Fitch downgraded Japan's long-term foreign and local currency issuer default ratings to 'A+' from 'AA' and 'AA-.' They are the lowest ratings for the nation out of the big three raters, which also includes Standard & Poor’s and Moody’s Investment Services.  The firm also listed both outlooks as “negative.”
“The downgrades and negative outlooks reflect growing risks for Japan's sovereign credit profile as a result of high and rising public debt ratios," said Andrew Colquhoun, head of Asia-Pacific Sovereigns at Fitch. "The country's fiscal consolidation plan looks leisurely relative even to other fiscally-challenged, high-income countries, and implementation is subject to political risk." Fitch added that Japan's gross government debt is projected to approach 250% of GDP by early 2013, “by far” the highest of any developed economic power.  

Endemic issues Japan is facing include the following:

• One word: debt…the debt-to-GDP ratio presently exceeding 200% is nothing short of astonishing.
• The nation must figure out how to address energy needs, especially with an expected, perhaps unavoidable movement away from nuclear power, at least in the short term.
• The export sector faces massive disadvantages compared to other regional nations’ manufacturing sectors, especially China, because of Japan's overly high, even troublesome, value of its currency (the yen) as investors continue to remove money from the euro.

Brian Shappell, CBA, NACM staff writer

Although lackluster manufacturing statistics out of China and its top trade partners isn’t necessarily reason for alarm, as noted in last week’s eNews by economists Chris Kuehl, PhD and Ken Goldstein; market watchers and credit analysts remained somewhat puzzled at often contradictory data coming from the Asian powerhouse.  
 
While the Chinese government’s official Purchasing Managers Index was listed at a 13-month high in April at 53.3, it contradicts indexes, including one conducted independently by HSBC that finds the manufacturing PMI closer to 49.3 for the same period. It is the ninth straight decline noted by HSBC of private Chinese companies, and the level falls below the proverbial Mendoza line dividing growth and contraction. Fitch Ratings pointed out this very problem, and the issues/uncertainty it creates for investors and the credit profession, this week.
 
The U.S.-based ratings agency believes the divide can be chalked up to private sector companies experiencing a significant disadvantage in the area of credit availability when compared to its public sector competitors. Fitch noted the ‘official’ [government] PMI figure reflects positive returns from large state-owned enterprises in particular, whereas the HSBC index is almost exclusively comprised of information from private sector entities.
 
“The divergence of the indicators may reflect differential terms of access to credit, with the contracting HSBC index representing the tighter credit conditions for private companies, whereas the expanding official index reflects China’s large state-owned entities, which enjoy support for growth and expansion and have easier access to funding,” Fitch said in its statement. “This is perhaps not surprising from a credit perspective when considering a centrally directed economy trying to integrate a growing capitalist business sector.”
 
While perhaps not a “surprise,” the continued uncertainty continues to be a source of frustration among investors and credit-granters.
 
Brian Shappell, CBA, NACM staff writer

The Federal Reserve reports from New York and Philadelphia showed some very nice progress this month, a positive sign given the makeup of the manufacturing community in this region. The two reports cover some older industrial areas and represent diverse consumer sectors, from high tech and electronics to apparel to steel.

There also is a very large population affected by the reports, as these are some of the most densely populated cities in the nation. If there is progress in this region, it suggests that manufacturers are seeing gains across a wide variety of consumer sectors. Additionally, growth here is likely to make a more significant dent in the unemployment rate than growth in the energy regions such as the Dakotas.

The New York Fed saw its business index rise from 19.53 in February to 20.51 in March. This may not seem like a major jump, but this is the highest level the index has reached since 2010. There was a similar hike in the Philadelphia index as it moved from 10.2 to 12.5, which is the best reading it has seen since 2011. It was only a few months ago that both regions seemed to be slacking off and that had created some alarm.
    
Analysis: One of the most encouraging pieces of this data relates to both the slump in the last few months of last year and the recovery at the start of this one. One factor that led to the decline in the last quarter of 2011 was that these two regions are especially sensitive to the conditions in Europe.
Now that the numbers are looking better, does that mean that Europe is back in the thick of things again?

There has been some improvement in the prospects for the euro zone, but not enough to bolster the manufacturing sector that much. The fact is that companies in this region have broadened their markets considerably in the last year and that is starting to pay off. These companies are selling into Latin America and even to Asia, which makes them less vulnerable to the vagaries of business in Europe.

Chris Kuehl, PhD, NACM economist

Contacts in all 12 Federal Reserve Districts reported that the last six-week tracking period of the Beige Book economic roundup has brought continued growth with, stop us if you’ve heard this many times before, manufacturing leading the charge.

Manufacturing’s mid-winter increase was characterized as “steady” through the nation, with new orders, shipments and production up in most of the districts. Auto-related industries and those tied to capital spending, as previously noted in Business Credit and NACM eNews, continued to thrive.

Agriculture and real estate were more mixed bags, pending on the location – but, for the latter, anything above across-the-board stagnation for the reeling construction industry reads like a win.
Business credit quality and demand were stable or showed a slight uptick in districts including Cleveland, Richmond, San Francisco in Atlanta. There was particular middle-market strength in Dallas in that regard, and there was also a bump in large corporate lending in Chicago.

For overall growth, across all sectors, Philadelphia and Atlanta demonstrated the best six-week showing, according to Beige Book. The east-coast duo was followed by auto-friendly districts of Cleveland and Chicago as well as Kansas City, Dallas, and San Francisco.

The good news was well-timed for a long-battered Fed Chairman Ben Bernanke. The chairman was due on Capitol Hill Thursday to present the Semi-annual Monetary Policy report to the House Financial Services Committee, where he has faced sharp criticism before election-mode lawmakers in recent months.

Brian Shappell, NACM staff writer
 

The finance ministers of Europe seem on the verge of giving Greece another bailout—one that will allow the country to stumble on until the end of March before the whole process starts over again. The fact is that Greece will have had an election by the time this discussion starts up again and, if one looks at the polls, the next Greek government will repudiate the current deal and likely refuse to go along with most of the demands. The Greek population is violently opposed to the austerity plan, and there are parties from the radical right and radical left that are exploiting that fury.

At the same time that there is intense debate over the current deal, there is controversy regarding the ultimate goal for the Greek economy. It has become an article of faith that Greece has to reduce its debt to the point that it is 120% of its GDP. The prevailing wisdom is that anything over that figure is wholly unsustainable, while much under is unrealistic. And the Greeks will be very hard pressed to make this goal under the best of economic conditions. It would require Greek growth at a pace that has eluded the country for years and is far higher than the average of the entire EU.

Nations that drag themselves out of this debt or nations that can sustain a high ratio are those with a strong and reactive export sector that is generally based on possession of a key commodity like oil or a strong manufacturing base. Greece has neither of these. The commodities it sells are marginal at best, and there is no industrial sector to speak of. This is a nation that relies on tourism and the activity of the Greek shipping industry.

Analysis: Greece desperately needs the bailout if it wants to keep negotiating a solution to the more fundamental issue. That said, it is not a panacea by any stretch of the imagination. Getting a permanent solution for Greece is a matter of converting Greece into a modern economy that really belongs in the European Union as something other than a permanent ward of the state. To a somewhat lesser degree that is also the issue in Italy, Spain and Portugal. These are nations that have more resources at their disposal than Greece but face much the same problem as far as consistent competitiveness. The question as to whether Greece can sustain a budget that is 120% of its GDP is one thing, but there is a bigger question than that. Can Greece develop something resembling a modern economy that justifies its presence in a European organization at all?

Source: Chris Kuehl, PhD, NACM economist

U.S. exports of goods and services hit landmark, after landmark, after landmark in 2011. It seems appropriate then, that statistics released last week confirm last year as the biggest ever for U.S. companies selling abroad.

According to 2011 trade numbers released by the Commerce Department’s Census Bureau and Bureau of Economic Analysis, U.S. goods and services exports in 2011 were up by 14.5% or $265.5 billion from the same period of 2010, reaching a record annual total of $2.1 trillion. Most individual merchandise categories also experienced record export levels in 2011.

The Commerce Department’s most recent release also included figures for December 2011, which showed an increase of 0.7% in exports of goods and services from November’s numbers. December’s exports of services also set a single-month record of $51.7 billion.

All in all, over the last twelve months, exports have been growing at an annualized rate of 15.6% when compared to 2009, a pace greater than the 15% required to double exports by the end of 2014, a deadline set by President Barack Obama’s National Export Initiative. "U.S. exports posted a record $2.1 trillion in 2011, helping to fuel the positive momentum we have seen in the U.S. economy as a whole. Given the growth over the past two years, we remain on track to realize the president’s National Export Initiative goal of doubling U.S. exports by the end of 2014," said Commerce Secretary John Bryson. "The private sector has recorded 23 consecutive months of job growth, creating 3.7 million jobs, and U.S. manufacturers have added 404,000 American jobs in the last two years, the strongest growth since the 1990s."

Export-Import Bank (Ex-Im Bank) Chairman Fred Hochberg also cheered the news, and again pledged the bank’s resources to the continued success of international trade. "U.S. exports play an essential role in our economic recovery, and it's vital that we provide American business owners with the resources they need to compete in a 21st century global economy," he said. "Ex-Im Bank remains committed to reaching new customers and to helping level the playing field for our nation's exporters."

The major export markets with the largest annualized increase in U.S. goods purchases were Turkey (43.6%), Panama (38.6%), Honduras (35.0%), Argentina (33.2%), Hong Kong (31.7%), Chile (30.3%), Peru (30.0%), Brazil (28.3%), South Africa (28.0%) and Guatemala (26.6%).

To learn more about best practices in exporting and how to grow your company through international trade, visit FCIB’s website at www.fcibglobal.com.

Jacob Barron, CICP, NACM staff writer

Federal Reserve Chairman Ben Bernanke has been back in the usual hotseat before Congressional lawmakers itching to garner some T.V. coverage in an election year. And though news is mostly positive about the U.S. economy, the Fed appears ready to continue on its path, no matter how popular or unpopular it may be with members of the U.S. House and Senate.

Bernanke presented the semi-annual Economic Outlook and the Federal Budget Situation over two days on Capitol Hill, with his most recent appearance coming Tuesday. The report indicated the economy continued to growth, albeit at not an exceedingly robust pace, on strength in sectors such as manufacturing. Additionally, the gains were more than offsetting ongoing construction/real estate woes and concerns from economic problems abroad, primarily in the European Union. Of keen interest to U.S. businesses is predictions of spending on capital improvements and hope for continued improvement in credit conditions.

“More recently, the pace of growth in business investment has slowed, likely reflecting concerns about both the domestic outlook and developments in Europe -- However, there are signs that these concerns are abating somewhat,” Bernanke said. “If business confidence continues to improve, U.S. firms should be well positioned to increase both capital spending and hiring...and surveys indicate that credit conditions have begun to improve modestly for those firms as well.”

Another key topic of conversation was the positive January unemployment numbers that shocked market-watchers by falling to 8.3%. Still, the chairman reaffirmed the Fed would keep the target for the federal funds rate near zero. He also warned that unemployment numbers for one month do not paint a complete, reliable picture about a U.S. labor market that still faces some problems or the fact that unemployment numbers do track the many who have simply given up looking for a job as certain industry sectors and regions have seen an anemic rebound to date.

Brian Shappell, NACM staff writer

The U.S. economy added 243,000 jobs in January, an unexpectedly high number that dropped the nation’s unemployment rate to a three-year low.

“Today’s employment report provides further evidence that the economy is continuing to heal from the worst economic downturn since the Great Depression. It is critical that we continue the economic policies that are helping us to dig our way out of the deep hole that was caused by the recession that began at the end of 2007,” said Alan Krueger, chairman of the White House Council of Economic Advisers. “Most importantly, we need to extend the payroll tax cut and continue to provide emergency unemployment benefits through the end of this year, and take the additional steps that President Obama proposed in his State of the Union address to create an economy built to last.”

Analysts had originally expected a gain of only 150,000 jobs. Instead, last month employers created the most jobs since April, dropping the unemployment rate to 8.3%, down from 8.5% the month prior. Since August, the joblessness rate has fallen by 0.8%.

Although, according to NACM Economist Chris Kuehl, PhD, job growth is a very difficult figure to track, other figures from the private sector mirror the optimism of the government’s latest report. “Here is the good news according to the latest survey from ADP,” said Kuehl, referring to ADP, Inc.’s most recent National Employment Report. “They are seeing gains in the private sector as far as hiring is concerned, and the majority of these new hires are with smaller companies. This is critical as small and medium-sized companies with employee numbers between 50 and 500 are the primary employers in the U.S.”

Kuehl noted that if this sector isn’t hiring, then the chances for a solid recovery in employment are slim. Luckily, this doesn’t seem to be the case. “It is even more interesting that ADP reports that many of those companies that are hiring are in the manufacturing sector,” he added. “That bolsters the assessment of manufacturing as a robust sector of the economy.”

“This is not the definitive signal that all is well and that real gains will soon be showing in the overall levels of joblessness, but this is a step in the right direction,” said Kuehl.

Jacob Barron, CICP, NACM staff writer

From Federal Reserve:

"Contact reports from the 12 Federal Reserve Districts suggest that national economic activity expanded at a modest to moderate pace during the reporting period of late November through the end of December. Seven Districts characterized growth as modest; of the remaining five, New York and Chicago noted a pickup in the pace of growth, Dallas and San Francisco reported moderate growth, and Richmond indicated that activity flattened or improved slightly. Compared with prior summaries, the reports on balance suggest ongoing improvement in economic conditions in recent months, with most Districts highlighting more favorable conditions than identified in reports from the late spring through early fall.

Consumer spending picked up in most Districts, reflecting significant gains in holiday retail sales compared with last year's season, and activity in the travel and tourism sector expanded in most areas. Demand strengthened further for nonfinancial services, including professional and transportation services. Manufacturing activity generally continued to expand, although the pace of growth has slowed for selected subsectors such as technology products. Agricultural producers and extractors of natural resources reported generally robust conditions. Activity stayed sluggish in residential real estate markets, and conditions in commercial real estate markets remained somewhat soft overall but showed signs of ongoing improvement in several Districts. Reports from financial institutions generally indicated a slight uptick in loan demand by businesses, along with improvements in overall credit quality.

Upward price pressures and price increases remained quite limited for most categories of final goods and services, as the effects of prior increases in the costs of selected inputs have eased. Upward wage pressures were modest overall, although a few Districts noted substantial compensation increases for workers with specialized skills in selected sectors and regions."

Source: Federal Reserve

NACM’s monthly Credit Manager’s Index for December, to be unveiled in full Thursday afternoon at www.nacm.org, will illustrate solid games for the final month of the year. But, like most months, the service and manufacturing sectors aren’t exactly on the same page.

“Throughout the year, the manufacturing and service sectors exchanged positions with one another, and it was a rare month when both sectors were on the same track,” said NACM Economist Chris Kuehl, PhD. “December was no exception. The service sector grew much faster than manufacturing due to the strength of the retail segments of the index.”

The latter observation was to be expected, as sales usually surge on holiday gift shopping and manufacturing typically peters out late in the fourth-quarter. To wit, the service side of the CMI should show the highest readings since May though not quite to levels reached at the end of 2010. And favorable factors levels for the service sector remain high, with hope that anything that even closely resembles stability between 4Q2011 and 1Q2012 will be taken as a sign for much better economic growth in 2012. A key is avoiding some type of unforeseen catastrophe to shake confidence, like last year.

“This was the expectation at the end of 2010, but that was before the appearance of problems that beset the economy as a result of the supply chain disruption from the Japanese earthquake and tsunami as well as the impact on oil pricing from the Arab Spring and the violence that took Libya out of the oil markets for the foreseeable future,” Kuehl said.

However, favorable factors for the manufacturing sector going forward may be increasingly difficult to find.

(Editor’s Note: For the full data and analysis of the December CMI, check on www.nacm.org Thursday afternoon).

Brian Shappell, NACM staff writer

For the first time in three years the Chinese have seen a decline in their PMI numbers sufficient to slide into contraction territory. It is now sitting at 49, and that has set off some alarm bells all over the world.

The Chinese have been in the process of deliberately slowing their economy, which makes this number a little harder to interpret. If this was the US or Europe, such a decline would have analysts predicting the imminent return of recession. In China, the situation is much harder to interpret. This is a deliberate policy response more than a trend within the manufacturing community itself,  and that suggests that China can reverse course and start to grow again at any point it chooses to. It is obviously not quite that simple.
 
Analysis: China is trying to contend with dual problems that require actions that work in opposition to one another—a situation shared by the US and Europe. On the one hand the country has been grappling with a growing and serious inflation issue. The food inflation rate has been almost 10% and overall inflation has been almost 6% in the past few months. The only way to reduce the inflation threat has been to clamp down on credit and to restrict bank activity. For several months, these efforts had been largely unsuccessful but, since the end of the summer, there have been signs that China is going to pull off that soft landing.

At the same time the country still faces the monthly burden of providing 1.3 million new jobs
a month just to keep pace with normal population growth. This kind of demand for increased employment is contrary to the trends favored for inflation control. The assumption is that China will have to start turning its attention back to job growth sooner than later and, when that happens, the country will see growth in its industrial sector again. Until then, the Chinese are not providing the kind of demand that many other nations have grown dependent upon. For example, the slowdown in the Australian economy over the last six months is attributable almost entirely to the slower Chinese economy.

Source: Chris Kuehl, PhD, NACM economist

Following 18 years of negotiations, Russia will finally become a card-carrying member of the World Trade Organization (WTO) starting in December. The news came after Russian President Dmitri Medvedev, Minister of Economic Development Elvira Nabiullina, and the rest of Russia’s WTO negotiating team agreed to the terms and conditions for the country’s accession.

The WTO is expected to approve the terms and formally invite Russia to join the economic collective at a ministerial conference in Geneva next month.

Membership in the WTO is expected to lower tariffs on exports to its newest member, while also improving foreign access to Russia’s services markets, and holding the country accountable to a system of trade rules.  “Russia’s membership in the WTO will generate more exports for American manufacturers and farmers, which in turn will support well-paying jobs in the United States,” said President Barack Obama, following the accession agreement.  “Russia is also opening its services market in sectors that are priorities to American companies, including audio-visual, telecommunications, financial services, computer and retail services.”

From day one of its membership, Russia will have to comply with WTO rules on the protection and enforcement of intellectual property rights, along with rules governing legal transparency and general trade behavior.  “Upon Russia’s accession, the United States will be able to use WTO mechanisms, including dispute settlement, to challenge Russia’s actions that are inconsistent with WTO rules,” said Obama.

“This step marks a win for both the Russian people and the American people,” said U.S. Trade Representative Ron Kirk. “It will spur trade and support significant job growth in both countries as a result of lower tariffs and increased market access. It also brings Russia into a rules-based system, increasing transparency and predictability to the benefit of all businesses in Russia and ensuring that the Russian government is held accountable to a system of international trading rules governed by the WTO.”

Jacob Barron, CICP, NACM staff writer