eNews December 28, 2017

Lower Sales Drag NACM’s Credit Managers’ Index Down in December

Whether it’s an unusual blip or a harbinger of volatile economic conditions to come, NACM’s Credit Managers’ Index (CMI) in December dropped to its lowest reading since May, dragged down by lower sales and other factors.

“In November, the sense was that real progress was ahead and many people have been speaking of 2018 with great expectations,” said NACM Economist, Chris Kuehl, Ph.D. Commercial credit activity precedes a good portion of the business cycle, and the CMI is often read as an early warning system. Despite many of the large declines in this month’s index, the overall reading remains comfortably above the expansion threshold of 50, while the favorable categories have been near record levels much of the year.

Trade creditors saw better outcomes as reported in the overall unfavorable categories in December, with little movement and even some gains—disputes, for instance, improved a bit but still remained in contraction territory (below 50). “The dollar amount beyond terms has been a challenge all year as the slow pays show up one month and not so much the next,” said Kuehl. “This time the reading was better than it was the month before, but still hovers in the 40s.” The dollar amount of customer deductions gained slightly, while bankruptcy filings stayed stable and well into expansion territory.

The overall index reading fell to 54.2 in December from November’s 56.6. Much of the decline reported by commercial credit managers can be attributed to a drop in the favorable factors, which decreased more than five points to 59.4. This marks the first time the category has fallen below the 60s in over a year, Kuehl noted. The sales category decreased by nearly 10 points, reaching a low not seen since December 2016. New credit applications and dollar collections also fell.

– Nicholas Stern, managing editor

Click here for a complete breakdown of the manufacturing and service sector data and graphics. CMI archives may also be viewed here.

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Know Your Contract and Position on the Project

Two of the biggest factors that plague material suppliers and construction trade creditors are understanding your contract and knowing where you fit within the supply chain of a project. This is obviously easier said than done. Construction contracts can be pages and pages long, and project information isn’t always at the forefront. This can lead to much-needed further investigation into your customer, your customer’s customer, if there is one, and the project itself. This is all on top of having accurate job information, which can include project type—e.g., private vs. public. Cases surrounding the two biggest factors have been in the courtroom recently.

In Mississippi, a ruling this month has caused a sub-subcontractor to potentially miss out on more than $36,000 for work that was completed in July 2012. JSI was subcontracted by subcontractor Tackett Electric to install cabling at an office building at the Mississippi State University Delta Research and Extension Center. McMillan-Pitts Construction was the prime contractor. In a separate, unrelated situation, a Tackett creditor served a writ of garnishment on McMillan-Pitts for funds they owned Tackett, and McMillan-Pitts tendered to a chancery court more than $19,000 it owed Tackett, according to The court also released McMillan-Pitts from further liability for its subcontract with Tackett.

In November 2012, the payment bond company, Travelers Casualty & Surety, denied JSI’s claim on the bond, stating the chancery court’s ruling released it from the obligation of paying JSI. In 2015, the U.S. Court of Appeals for the Fifth Circuit overturned the judgment, but on remand, a U.S. District Court returned a ruling this month in favor of Travelers. “The district court determined that Travelers demonstrated an arguable reason for denying JSIs’ claim and that JSI failed to meet its burden to show otherwise,” said the panel, according to Business Insurance.

In Virginia, a District Court ruled in favor of payment for a subcontractor, rejecting a surety’s claim that it does not have to pay for non-damage-for-delay, which was a clause contained in the subcontract. Kitchens-to-Go was subcontracted by prime contractor John C. Grimberg for a project at the FBI Academy. The prime contractor submitted Kitchen-to-Go’s payment request to the owner (U.S. Department of the Navy), which included more than $600,000 for the extended rental and kitchen facility use. The Department of the Navy rejected the request, resulting in a claim against the bond surety, Hartford Accident and Indemnity Company.

The Court rejected Hartford’s motion that the subcontract clause only pertains to delay costs recovered by the owner. “The Court determined that the no-damage-for-delay clause improperly added an additional condition to a cause of action on the bond, prohibiting the Subcontractor from bringing a claim unless the Prime Contractor was paid by the Owner,” said a construction law blog from law firm Pepper Hamilton LLP. The Court gave several other reasons for denying the surety’s argument under the Miller Act such as the act was established to make sure claimants like Kitchens-to-Go are paid when the principal does not.

These cases are a friendly reminder that sometimes things don’t go your way; sometimes they do, and you should be prepared for any outcome. The first case shows you that Mississippi is an unpaid-balance state, and as a lower-tier entity, you should file all necessary documents timely. You can learn more about that topic by reading last week’s eNews. The latter scenario shows you how complicated contracts can be, even when working under the Miller Act on a federal project.

– Michael Miller, associate editor

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Asian Growth Expands as 2017 Ends

Economic expansion is alive and well in Asia, according to this month’s forecast from the Asian Development Bank (ADB). ADB upgraded its 2017 gross domestic product (GDP) growth outlook by 0.1% to 6% compared to the previous prediction in September. This is due in part to “stronger than expected exports and domestic consumption fuel growth,” noted a release on the report.

There was strong expansion in Central, East and Southeast Asia, which helped carry the weight left by the downward expansion forecast for South Asia. Despite a solid close to 2017, growth is expected to slow in 2018. Newly industrialized economies such as China, Korea and Taipei also saw an upward revision this month.

Regional trade picked up steam this year following setbacks in 2015 and 2016. “Developing Asia’s growth momentum, supported by recovering exports, demonstrates that openness to trade remains an essential component of inclusive economic development,” said ADB Chief Economist Yasuyuki Sawada. “Countries can further take advantage of the global recovery by investing in human capital and physical infrastructure that will help sustain growth over the long term.”

Growth in East Asia, led by China and Hong Kong, is expected to drop off slightly next year. China’s GDP dip from 2017 to 2018 will be caused by a decline in investment and a subpar track record of investments in heavy industries. The outlook of export-oriented industries is also unclear. Consumers and businesses in Korea remain confident following improved relations with China and a tourism revival. Domestic spending and global demand are among the key drivers for Hong Kong. South Asia is anchored by India, which has been hurt recently by lackluster agriculture and construction industries.

Southeast Asia has seen a positive movement in investments and exports. Indonesia, the Philippines and Thailand GDPs were helped by infrastructure investments, while Malaysia’s growth can be attributed to exports recovery, among other factors. Private consumption was a key aspect for many countries’ growth expectations in the region. Central Asia and the Pacific are predicted to grow 3.9% and 3.2%, respectively.

Inflation projections in Asia are modest overall, yet they vary from region to region. Inflation is expected to rise slightly to 2.9% in Asia. Many countries range from 2% to 5% in 2018, yet there are some outliers, such as Central Asia, which is predicted to decline to 7.8% next year.

– Michael Miller, associate editor

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Strong Global Growth as 2017 Winds Down

Global growth has been on a tear in 2017, bringing expectations of 3.5% GDP growth for the year in line with the average since 1980 and over that in 2012 to 2014.

A fourth quarter sector risk analysis by credit insurer Euler Hermes found 30 upgrades, with nearly three times more upgrades than downgrades, as demand and liquidity show more positive net upgrade balance than profitability indicators. Western Europe led the way with 22 net upgraded risk ratings in the fourth quarter. Wells Fargo analysts found business sentiment robust in the eurozone as the unemployment rate fell 0.8 percentage points to 8.8% through the first 11 months of the year.

The U.K. has been one of the few countries to see lagging economic growth, thanks to Brexit uncertainty and inflation, but some sectors have still realized gains, including capital goods production, which has ramped up over 8%, year-over-year, through October, Wells said.

Elsewhere, the North American automotive sector was boosted by demand momentum in Europe and recovery in Brazil, while the machinery sector received a net upgrade thanks to global demand, Euler Hermes analysts said.

At the global level, economic growth has been underpinned by strengthening demand in both developed and emerging markets, according to a recent report by Wells Fargo. In the U.S., real GDP accelerated in the third quarter to a 3.3% annualized rate and a 3.1% gain in the second quarter. Growth was more balanced between personal consumption and business investment, as well as the increasing role played by the external sector. “We expect real GDP growth in the United States to strengthen a bit next year, with full-year economic growth coming in at 2.7%,” Wells analysts said.

Stabilizing energy prices have helped push the Canadian economy to realize real GDP growth of 3%, year-over-year, Wells said. Consumption looks to be leading growth, though household debt is increasing to a level that could hamper future consumption levels. Other fundamentals such as improving business activity and a low unemployment rate of 5.9% will help the Canadian economy grow 2.9% for all of 2017, Wells analysts predicted.

Asia-Pacific Corporates

Global economic growth, stable commodity prices and modest capital expenditures will also help boost the outlook to stable for Asia-Pacific corporate in 2018, according to a recent analysis of 356 corporates in the region by Fitch Ratings.

The ratings firm gave stable sector outlooks to 13 of its 14 sector-specific 2018 outlook reports across the region, with the only exception being the Hong Kong retail property sector, Fitch analysts said. Ongoing weak retail sales thanks to lower spending by Chinese tourists and rising brick-and-mortar vacancies are contributing factors to the negative outlook for the sector.

But, analysts expect to see the region’s overall net debt/EBITDA leverage ratio fall to 2.0x by 2019 from 2.2x in 2017. Strong overall revenue growth—8% in 2017—should remain at 6% by 2019, while capex/CFO (Cash Flow from Operations) should stay well below 100% for most sectors, excepting firms in the utilities and transportation sectors, Fitch said.

“Aggregate free cash flow generation should become positive by 2019, after turning negative in 2017 due to corporates in emerging Asia,” Fitch analysts said. “We expect sector leverage to fall for basic materials, energy, retail, leisure and consumer products (RLCP) and technology, media and telecommunications (TMT). Leverage should stay flat for industrials, utilities and transportation.”

Still, watch out for corporate defaults in heavy industries linked to property and infrastructure, which are likely to rise in 2018 “given signs of negative housing market growth, slower growth in fixed-asset investment and ongoing government efforts to cut excess capacity and curb pollution,” Fitch said.

– Nicholas Stern, managing editor

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