Fed Faces Old Foe as Hazard Returns .

To seasoned investors, last week's sharp market swings were a fresh reminder of a problem tormenting financial markets: moral hazard.
Stocks jumped, then sank and then rose again, as investors tried to bet on whether the Federal Reserve is going to intervene again to support financial markets.
Economists sometimes refer to that kind of market behavior as moral hazard, which refers to risky investing done in the hope that government will bail people out of any trouble they get into.

Global Bank Capital Regime at Risk as Regulators Spar Over Rules

Capital standards designed to fortify the global financial system are eroding as European officials, beset by a debt crisis, rewrite the regulations and U.S. rulemaking stalls.

The 27 member-states of the Basel Committee on Banking Supervision fought over the new regime, known as Basel III, for more than a year before agreeing in December to require banks to bolster capital and reduce reliance on borrowing. Now, as they put the standards into effect in their own countries, European Union lawmakers are revising definitions of capital, while the U.S. is struggling to reconcile the Basel mandates with financial reforms imposed by the Dodd-Frank Act.

http://www.bloomberg.com/news/2011-08-19/global-bank-capital-regime-at-risk-as-regulators-spar-over-rules.html

Equipment Finance Industry Confidence Declines in August

 Washington, DC, August 19, 2011 –- The Equipment Leasing & Finance Foundation (the Foundation) releases the August 2011 Monthly Confidence Index for the Equipment Finance Industry (MCI-EFI) today.  Designed to collect leadership data, the index reports a qualitative assessment of both the prevailing business conditions and expectations for the future as reported by key executives from the $521 billion equipment finance sector.  Overall, confidence in the equipment finance market is 50.0, down from the July index of 56.2, indicating apparent industry reaction to U.S. economic conditions and federal government fiscal management and policies.

When asked about the outlook for the future, survey respondent Russell Nelson, President, Farm Credit Leasing Services Corporation, said, “Pent-up demand for replacement assets and improving conditions in select industries may continue to drive strong results for the remainder of 2011.   The key to future business confidence rests with leadership in Washington, DC, and their ability to craft a budget that Wall Street, Main Street, and the global community view positively.”

August 2011 Survey Results:

The overall MCI-EFI is 50.0, a decrease from the July index of 56.2.

•  When asked to assess their business conditions over the next four months, 13.2% of executives responding said they believe business conditions will improve over the next four months, slightly decreased from 14.0% in July.  65.8% of respondents believe business conditions will remain the same over the next four months, a decrease from 81.4% in July.  21.1% of executives believe business conditions will worsen, a sharp increase from 4.7% in July. 
• 21.1% of survey respondents believe demand for leases and loans to fund capital expenditures (capex) will increase over the next four months, an increase from 14% in July.  57.9% believe demand will “remain the same” during the same four-month time period, a decrease from 74.4% the previous month.  21.1% believe demand will decline, up from 11.6% who believed so in July. 

• 21.1% of executives expect more access to capital to fund equipment acquisitions over the next four months, down from 23% in July.  73.7% of survey respondents indicate they expect the “same” access to capital to fund business, a decrease from 76.7% the previous month.  5.3% of survey respondents expect “less” access to capital, the first time in nine months any respondents said they expect “less” access to capital.
• When asked, 23.7% of the executives reported they expect to hire more employees over the next four months, down from 32.6% in July.  65.8% expect no change in headcount over the next four months, an increase from 58% last month, while 10.5% expect fewer employees, an increase from 9.6% in July.   

• 55.3% of the leadership evaluate the current U.S. economy as “fair,” down from 72% who did in July.  44.7% rate it as “poor,” up from 27.9% last month. 

• 5.3% of survey respondents believe that U.S. economic conditions will get “better” over the next six months, down from 9.3% in July.  63.2% of survey respondents indicate they believe the U.S. economy will “stay the same” over the next six months, down from 79% in July.  31.6% responded that they believe economic conditions in the U.S. will worsen over the next six months, up from 11.6% who believed so last month.   

• In August, 28.9% of respondents indicate they believe their company will increase spending on business development activities during the next six months, down from 44.2% in July.  68.4% believe there will be “no change” in business development spending, up from 55.8% last month, and 2.6% believe there will be a decrease in spending, up from no one who believed so last month.  

 August 2011 MCI Survey Comments from Industry Executive Leadership:

Depending on the market segment they represent, executives have differing points of view on the current and future outlook for the industry.

Bank, Middle Ticket

“Until such time that the federal government can remove the unpredictability related to taxes and fiscal policy the economy will continue to sputter as the business community will be very cautious with respect to additional investment. This scenario will not bode well for the equipment finance industry.”  Executive, Middle Ticket, Bank

Independent, Middle Ticket

“Growth is slower than expected but we are seeing some positive signs of larger capital expenditures.”  Aylin Cankardes, President, Rockwell Financial Group

 Bank, Small Ticket

“Recent actions in D.C. make our environment very uncertain.” Executive, Small Ticket, Bank

Why an MCI-EFI?

Confidence in the U.S. economy and the capital markets is a critical driver to the equipment finance industry. Throughout history, when confidence increases, consumers and businesses are more apt to acquire more consumer goods, equipment and durables, and invest at prevailing prices. When confidence decreases, spending and risk-taking tend to fall. Investors are said to be confident when the news about the future is good and stock prices are rising.

Who participates in the MCI-EFI?

The respondents are comprised of a wide cross section of industry executives, including large-ticket, middle-market and small-ticket banks, independents and captive equipment finance companies.  The MCI-EFI uses the same pool of 50 organization leaders to respond monthly to ensure the survey’s integrity.  Since the same organizations provide the data from month to month, the results constitute a consistent barometer of the industry's confidence.

How is the MCI-EFI designed?

The survey consists of seven questions and an area for comments, asking the respondents’ opinions about the following:

1. Current business conditions
2. Expected product demand over the next four months
3. Access to capital over the next four months
4. Future employment conditions
5. Evaluation of the current U.S. economy
6. U.S. economic conditions over the next six months
7. Business development spending expectations
8. Open-ended question for comment

IASB Pushes Back

Decision On Lease Accounting Rule Changes Likely Pushed Back Until 2012

Inundated with comments and complaints, international accounting rule makers have decided to resubmit proposed changes on how companies account for real estate and capital equipment leases for public comment, a move that will probably delay issuance of a new lease accounting standard until well into next year.

Equipment Finance Industry Concerns Linger in May

The Equipment Leasing & Finance Foundation said the May 2011 Monthly Confidence Index for the Equipment Finance Industry (MCI-EFI) showed overall, confidence in the equipment finance market is 52.6, down from the May index of 63.2, indicating lingering industry concerns over the sputtering economic recovery and uncertainties in lease accounting changes.

June 2011 Survey Results:

• When asked to assess their business conditions over the next four months, 5% of executives responding said they believe business conditions will improve, a decrease from 30% in May. 79.5% of respondents believe business conditions will remain the same, an increase from 70% in May. 15.4% of executives believe business conditions will worsen.

• 12.8% of survey respondents believe demand for leases and loans to fund capital expenditures (capex) will increase over the next four months, a decrease from 22% in May. 77% believe demand will “remain the same” during the same four-month time period, a slight decrease from 78% the previous month. 10% believe demand will decline.

• 23% of executives expect more access to capital to fund equipment acquisitions over the next four months, down from 44% in May. 77% of survey respondents indicate they expect the “same” access to capital to fund business, up from 56% the previous month. In the last seven months’ surveys, no one responded that they expect “less” access to capital.

• When asked, 33.3% of the executives reported they expect to hire more employees over the next four months, down from 41% in May. 53.8% expect no change in headcount over the next four months, an increase from 52% last month, while 12.8% expect fewer employees, an increase from 7.0% in May.

• 66.7% of the leadership evaluate the current U.S. economy as “fair,” down from 93% who did in May. 33.3% rate it as “poor,” up from 7.0% last month.

• Five percent of survey respondents believe that U.S. economic conditions will get “better” over the next six months, down from 30% in May. 82% of survey respondents indicate they believe the U.S. economy will “stay the same” over the next six months, up from 63% in May. 12.8% responded that they believe economic conditions in the U.S. will worsen over the next six months, up from 7.0% who believed so last month.

• In June, 28% of respondents indicate they believe their company will increase spending on business development activities during the next six months, down from 37% in May. 69% believe there will be “no change” in business development spending, up from 56% last month, and 2.6% believe there will be a decrease in spending, down from 7.0% who believed so last month.

MCI-EFI respondents are composed of a wide cross section of industry executives, including large-ticket, middle-market and small-ticket banks, independents and captive equipment finance companies. The MCI-EFI uses the same pool of 50 organization leaders to respond monthly to ensure the survey’s integrity. Since the same organizations provide the data from month to month, the results constitute a consistent barometer of the industry’s confidence.

The Equipment Leasing & Finance Foundation is a 501c3 non-profit organization that provides vision for the equipment leasing and finance industry through future-focused information and research. Primarily funded through donations, the Foundation is the only organization dedicated to future-oriented, in-depth, independent research for the leasing industry. Visit the Foundation online at http://www.LeaseFoundation.org.

Follow the Foundation: Twitter @ LeaseFoundation Facebook: Equipment Leasing & Finance Foundation Linked In: http://www.linkedin.com/groups?gid=89692.

Companies Spend on Equipment, Not Workers

Companies that are looking for a good deal aren’t seeing one in new workers.


 Workers are getting more expensive while equipment is getting cheaper, and the combination is encouraging companies to spend on machines rather than people.

“I want to have as few people touching our products as possible,” said Dan Mishek, managing director ofVista Technologies in Vadnais Heights, Minn. “Everything should be as automated as it can be. We just can’t afford to compete with countries like China on labor costs, especially when workers are getting even more expensive.”

Vista, which makes plastic products for equipment manufacturers, spent $450,000 on new technology last year. During the same period, it hired just two new workers, whose combined annual salary and benefits are $160,000.

Two years into the recovery, hiring is still painfully slow. The economy is producing as much as it was before the downturn, but with seven million fewer jobs. Since the recovery began, businesses’ spending on employees has grown 2 percent as equipment and software spending has swelled 26 percent, according to the Commerce Department. A capital rebound that sharp and a labor rebound that slow have been recorded only once before — after the 1982 recession.

With equipment prices dropping, and tax incentives to subsidize capital investments, these trends seem likely to continue.

“Firms are just responding to incentives,” said Dean Maki, chief United States economist at Barclays Capital. “And capital has gotten much cheaper relative to labor.”

Indeed, equipment and software prices have dipped 2.4 percent since the recovery began, thanks largely to foreign manufacturing. Labor costs, on the other hand, have risen 6.7 percent, according to the Labor Department. The rising compensation costs are driven in large part by costlier health care benefits, so those lucky workers who do have jobs do not exactly feel richer.

Corporate profits, meanwhile, are at record highs, and companies are hoarding cash. Many of the companies that are considering hiring say they are scared off by the uncertain future costs of health care and other benefits. But with the blessings of their accountants, these same companies are snatching up cheap, tax-subsidized tractors, computers and other goods.

“We had an opportunity to buy equipment at a very discounted rate,” Mr. Mishek explains of his decision to make bigger investments in equipment than in workers. “Now that the economy has turned around a little bit, it made sense to upgrade.”

Hiring has some hidden costs, as well as the expenses of salary and benefits, Mr. Mishek added.

“I dread the process we have to go through when we want to bring somebody on,” he said. “When we have a job posting these days, we get a flurry of résumés from people who aren’t qualified at all: people with misspellings on their résumés, who have never been in the industry and want a career move from real estate or something. It’s a huge distraction to sort through all those.”

Culling the résumés takes three days. Then he must make time to interview applicants, and spend $150 for each drug test.

Once a worker is hired, that person must complete a federally mandated safety program, which Vista pays an outside contractor a flat fee of $7,000 annually to handle. Finally, Vista’s best employees spend several months training the new hire, reducing their own productivity.

“You don’t have to train machines,” Mr. Mishek observes.

Usually economists cheer on capital spending, and have supported Congress’s tax breaks for capital investment, like bonus depreciation, which lets companies expense the full cost of purchases immediately instead of waiting several years. That is because capital and labor can be complementary: a business that buys a new truck often hires a new driver, too.

But with the rising costs of hiring, companies like Vista are finding ways to use capital to replace workers whose jobs are relatively routine.

“If you’re doing something that can be written down in a programmatic, algorithmic manner, you’re going to be substituted for quickly,” said Claudia Goldin, an economist at Harvard.

To add insult to injury, much of the equipment used to replace American workers is made by workers abroad, meaning that capital spending is going overseas. Of the four pieces of equipment Vista bought last year, one was made domestically. The others came from Israel, Switzerland and Germany. (“I try to avoid buying Chinese at the workplace and at home,” Mr. Mishek said.)

Of course the shift to more automated production predates the Great Recession. And in the long run, better technology lowers prices, raises living standards and helps workers move into higher-paying jobs. This was the case with the mechanization of farming, which a century ago employed 41 percent of the American work force.

“We don’t have 11 million unemployed farmers today because over time farmers and their children transitioned into different sectors,” says William C. Dunkelberg, chief economist at the National Federation of Independent Business. “We don’t usually have this kind of shock, though, that displaces a lot of workers at once.”

Better technologies may eventually offer better job opportunities, but only if people can upgrade their skills quickly enough to qualify. That is hard to do in the short run, especially when so many displaced workers need to be retrained at once.

“People don’t seem to come in with the right skill sets to work in modern manufacturing,” Mr. Mishek said, complaining that job applicants were often deficient in computer, mathematics, science and accounting skills. “It seems as if technology has evolved faster than people.”

Some economists support policies that might shift the balance away from capital spending. Andrew Sum, an economist at Northeastern University, advocates tax incentives for hiring that mirror those for capital investment. Congress passed a hiring tax credit along these lines last year, but it was not well publicized, and some said it waspoorly devised. The proposal is reportedly floating around Washington once again.

Made in America: Manufacturing Jobs Are Coming Home

The tale of American manufacturing has long been one of woeful decline. Just about a year ago, China replaced the U.S. as the world’s No. 1 maker of things, and that seemed a sure sign that the glory days had faded for good. But all of a sudden the talk is of a “manufacturing renaissance,” to quote a new study by the Boston Consulting Group.
The BCG study, “The Return of U.S. Manufacturing,” makes an interesting case. China’s wages are rising by 15 to 20 percent a year, while its productivity will improve at half that rate. The yuan is gaining in value, too, and Chinese-made products are destined to become more expensive. There is a shortage of skilled workers even in major manufacturing centers such as Shanghai and Tianjin.
In the U.S., wage increases have been minimal for years and will remain at 3 percent or so annually. U.S. productivity will remain higher than China’s by a wide margin, and government incentives are also a factor in attracting U.S. manufacturers back home. “Reinvesting in the U.S. will accelerate,” the study says, “as it becomes one of the cheapest locations for manufacturing in the developed world.”
The math that went into this study is impressive, and it works like this: Right now, labor costs in China are slightly less than half those of the U.S. when the difference in productivity is factored in. In five years’ time, labor costs on the mainland will be 70 percent of the U.S. figure. Counting costs such as inventory and shipping, the study says, the Chinese cost advantage will drop to single digits or disappear entirely.
It’s a convergence theory of a kind, and one forecasted result is that outsourcing jobs to China will turn out to have a beginning, middle, and end. “China will no longer be the default low-cost location for supplying the U.S. market,” the BCG study asserts. “The economics are becoming marginal for many products.”
Some interesting figures support the study’s argument. U.S. manufacturing grew at an estimated annual rate of 9.1 percent in the first quarter of this year, compared with a disappointing 1.8 percent for the economy as a whole. There are also some curious cases of prodigal industrial companies already returning home:

• Caterpillar, which has a major presence in China, is building its next plant to make excavating equipment in Texas, tripling its capacity for such equipment in the U.S.
• Ford is repatriating 2,000 jobs from China after reaching an agreement with the United Auto Workers that it says it can live with.
• NCR has already brought its production of automated teller machines back from China to shrink the time from production to market, to stitch divisions closer together and lower operating costs.
• The toy maker Wham-o (and this is my favorite) is repatriating half of its production of Hula Hoops and Frisbees, most from China, some from Mexico.

“It’s very early days, but this trend’s beginning,” says Hal Sirkin, a senior partner at Boston Consulting. “It’s all based on simple economics: wage rates, relative exchange rates, and productivity levels. Over four or five years, manufacturers will be indifferent to producing in China or the U.S. If it’s for the Chinese market, make it in China; if they’re producing for U.S. consumption, make it in the U.S.” 
A couple of myths seem about to explode. One was that manufacturing is finished in the U.S., another that we live in a post-industrial economy. The first is patently untrue—though manufacturing as a share of GDP has been declining for half a century, and steeply for the past decade. As to the second, there is no such thing, in my view, as a post-industrial economy. No one survives without making things.
President Obama is entirely on the right track in declaring a revival of industrial production as one of his economic priorities. But the Boston Consulting study starts to look more than a touch rosy (and too statistics-driven) when you consider a few of the harder facts:

• Recent growth in manufacturing is due partly to a come-from-behind context. True, the U.S. has added 250,000 manufacturing jobs since the start of 2010. Also true: It lost almost 6 million jobs in the past decade, including a third of all employment in manufacturing. 
• Growth in industrial production is concentrated in a few sectors such as oil and computers. “The Case for a National Manufacturing Strategy,” a new study by the Information Technology and Innovation Foundation, a Washington public-policy group, indicates that 15 of 19 sectors, accounting for almost 80 percent of U.S. industrial output—apparel, metals fabrication, machinery, printing, and so on—declined over the past decade.
• The U.S. strategy, such as it has one, is fundamentally different from those of Europe and Japan. Their manufacturing sectors are stable or better because they have automated drastically (Japan) or gone into high-end production (much of Europe). The U.S., by contrast, has lagged in capital investment and appears set to compete primarily by way of low wages and often costly packages of tax breaks and other incentives.

The question is obvious: Do Americans want to make their country a low-cost production platform? Ford is coming (fractionally) home because it can pay auto workers $14 an hour—about 10 bucks less than it paid them when it eliminated those jobs. Henry Ford famously thought his workers should be able to afford the products they made; he believed in a vital middle class. So other questions are obvious, too: What will a manufacturing renaissance, if it arrives, do for this country’s middle-income wage-earners? What will a decade or so of intense outsourcing have cost them in net terms when the jobs come home?
Related Links:
Manufacturing Is Expected to Return to America as China’s Rising Labor Costs Erase Most Savings from Offshoring (Boston Consulting Group)
The Case for a National Manufacturing Strategy (Information Technology and Innovation Foundation)
U.S. Manufacturing Rebound Is a Myth (The Market Oracle)
China Poised to Eclipse U.S. Manufacturing (Open Salon)