eNews March 2, 2017

Economic Growth Reflected in Latest CMI, but Watch for Ongoing Unfavorable Factors

The numbers in NACM’s Credit Managers’ Index (CMI) for February have maintained strength and are as good as they’ve been since the recession started in 2008, including a positive reversal in fortune for the service sector that is leading the way in several categories.

“This is almost entirely due to the resurgence of the consumer, as they have been buying more things and they have been buying more actual services as well,” said NACM Economist Chris Kuehl, Ph.D. “Retail has been having a surprisingly good quarter and construction has been up along with the medical economy.”

The combined CMI hit 55.4, a reading not seen since the Great Recession that reflects a stream of positive economic news reported since the end 2016. Favorable factors enjoyed their biggest leap to 63.6, but unfavorable factors, while improving slightly, remain a thorn in the side of firms still struggling amidst the broader recovery.

“There is most definitely growth, but there is also a drag on that growth from the damage that was done years ago,” Kuehl said. “The favorable [factors] are booming, but the unfavorable are not, although they are looking better than has been the case in the past.”

Manufacturers overall continued with the gains they’ve realized over the past two months, with a large increase in the number for dollar collections. “When manufacturers begin to get their accounts caught up, it’s a good signal that they are planning to start asking for more credit in the near future,” Kuehl said. Another key indicator for the sector—the amount of credit extended—also improved for manufacturers. “One of the observations that can be made here is that some of the larger customers are asking for more credit and these are the same ones that have been catching up on their obligations,” he said.

In the service sector, the overall score improved to a number not seen since last April, while new credit applications jumped to a level not seen since last March and the sales category reached its highest point in over three years. “This is as good as it has been in the years since the recession, a solid signal for continued growth,” Kuehl said. Unfavorable categories for the sector recovered modestly, as in manufacturing, and a similar story holds for those firms trying to claw back from the recession.

– Nicholas Stern, senior editor


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Push for Construction-Defects Reform Highlights Importance of Job Information

As construction of multifamily housing remained volatile in January and the latest overall starts numbers were down, developers in the U.S. say that construction-defects lawsuits have made insurance and financing for larger condo projects more expensive or difficult to obtain.

In Colorado, for instance, a small number of multifamily condos are being developed in the midst of a hot housing and rental market, said Mark Gruskin, Esq., of Senn Visciano Canges P.C. in Denver. The situation has presented a challenge for those seeking starter or entry-level homes.

A bipartisan group of lawmakers in Colorado are now working to pass a state law, known as Senate Bill 156, which would require condominium owners and builders to tackle disputes over construction defects and other issues through mediation or arbitration before filing a lawsuit, according to The Colorado Statesman. The bill would also require that homeowners’ association boards get the nod from a majority of owners before filing lawsuits and notify owners about the advantages and disadvantages of such litigation.

Lawmakers have been working for years in Colorado to pass a construction-defects reform law; 17 cities and one county have passed their own local ordinances to address the issue in the face of broader legislative inertia in the state. Gruskin said that, so far, he’s unaware of any court challenges to these local laws, but remains uncertain whether they’d survive a challenge to a claim that conflicts with or usurps the state’s existing construction defects statutes.

Regardless, “From a supplier’s perspective, getting caught up in a lengthy, multimillion-dollar class-action lawsuit can tie up payments for months if not years,” said Connie Baker, CBA, director of operations for NACM’s Secured Transaction Services. “Mediation or arbitration may have a more positive and quicker outcome to expedite the flow of funds. This bill could end up being a benefit to suppliers and their customers.”

Suppliers in most states should also note that a mechanic’s lien or preliminary notice has to be sent to the individual unit owners when work is being done within the condominium building, which can wind up costing hundreds of dollars, Baker said. In some cases, notifying a property owner, homeowners’ association and general contractor for work on, say, a common element such as a roof may be sufficient. Common elements are those parts of a condo complex that can be used by all owners, such as corridors, roofs, lobbies, etc.

Credit professionals should ensure that the job information sheet they have on any project is as complete as possible, whether the project is public or private construction and whether the work is on a common element or not, Baker said.


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Global Trade Reaches Milestone with TFA Implementation

A milestone for the global trading system was recently achieved when the World Trade Organization (WTO) received four additional ratifications for the Trade Facilitation Agreement (TFA), putting it over the 110 needed to enter it into force. The agreement aims to simplify and standardize customs procedures with the expected result of cutting trade costs.

“This would boost global trade by up to 1 trillion dollars each year, with the biggest gains being felt by the poorest countries,” said WTO Director-General Robert Azevedo. “The impact will be bigger than the elimination of all existing tariffs around the world. This is the biggest reform of global trade in a generation.” World trade growth could increase by 2.7% per year by 2030, with world GDP growth adding half a percentage point, according to Azevedo.

Developed countries have committed to implement the agreement’s series of trade facilitation reforms that are set to improve transparency of trade across borders. Improvements include publication of cross-border procedures, improved rights of appeal for traders, reduced fees associated with import and export and faster clearance procedures. Measures in the agreement also provide for cooperation between customs and other authorities in regards to facilitation of trade and compliance with customs procedures.

Full implementation of the TFA, with its expedited movement of goods across borders, is forecast to cut members’ trade costs by an average of 14%, with developing countries gleaning the most benefits. The agreement is also expected to reduce the time needed to import goods by a day and a half and to cut export time by two days. The number of new products exported by developing countries is expected to increase by 20%, with least-developed countries showing an increase of 35%. A Trade Facilitation Agreement Facility was set up at the request of developing and least-developed countries to provide assistance in reaping the full benefits of the TFA.

WTO members that have accepted the TFA include Canada, Mexico, the European Union, China and the Russian Federation. The United States is also a member, but it remains to be seen if the new administration’s policies may affect its relationship with the WTO.

“The latest iteration of the [U.S.] anti-trade position is the desire to bypass the World Trade Organization when there is a trade dispute,” said NACM Economist Chris Kuehl, Ph.D. “The U.S. wants to be able to pursue sanctions against countries that are deemed to be competing unfairly without having to go through the WTO process.”


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Real-Time Payments See Greater Worldwide Adoption

With the recent launch of the New Payments Platform (NPP) in Australia, which has an infrastructure designed and operated by financial messaging service SWIFT, real-time payment initiatives are coming to the fore in the payments industry. Real-time payments send funds and generate confirmation in a matter of seconds.

“As we move into a more mobile world, real-time experiences become the norm, and corporates may find they need to follow suit to deliver an enhanced value proposition,” said Judd Holroyde, head of Global Product Management and Delivery at Wells Fargo, on the bank’s website. “The reality is real-time; there are more than 40 new real-time payment initiatives in some phase of implementation around the world today.”

The U.K. implemented real-time payments eight years ago with its Faster Payments Service, followed by mobile services such as Paym and Barclays Pingit. Singapore’s Fast and Secure Transfers system, started in 2014, facilitates immediate transfer of funds between participating banks. The NPP in Australia is the first of its kind, covering payments for corporate, public institutions and consumers, according to SWIFT. The system features fast transfer of value between accounts serviced by Authorized Deposit-Taking Institutions (ADIs). Transfers are cleared, settled and posted in seconds on a “line-by-line” basis, meaning there is no settlement risk between the ADIs.

An innovative part of the NPP is the framework of overlay services that it offers. An organization may develop an overlay service to capitalize on the NPP’s 24/7 availability and rich data structure.

“It is likely that the transmission of data along with payments will mean business applications will be a key focus,” said NPP Australia’s CEO Adrian Lovney.

Adoption of real-time payments is slow in the United States, which has far more financial institutions compared to places such as Singapore, the U.K. and Australia, Holroyde said. Regulation, focusing on oversight and procedure, has also been an impediment to adoption in the U.S. Implementation is difficult due to the sheer size and complexity of the U.S.

Corporates in general may be slow to adopt real-time payments as well. “Many corporates still consider the transit time or ‘mail float’ a key component of check issuance strategy,” Holroyde said. “On the accounts payable side, the faster you pay, the faster you lose the use of those funds, and that’s a reason why corporates might not value real-time payments as much as consumers.”



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