July 7, 2022

 

Q&A with Economist Amy Crews Cutts Highlights Recession Risk

Annacaroline Caruso, editorial associate

Many experts agree the economy is on track to enter a recession, but the warning signs are shaping up to be much different than past financial crises. Inflation sits stubbornly at a 40-year high driven by severe supply constraints. The labor market remains red hot with nearly two job openings for every unemployed person. And the Federal Reserve is playing a dangerous game of chicken with inflation by aggressively raising interest rates. NACM Economist Amy Crews Cutts, Ph.D., CBE, explains what exactly today’s economic trends mean, and which factors credit professionals should keep close watch on.

Q: The June Credit Managers’ Index fell for the second-consecutive month to its lowest reading since October. What does that mean for credit conditions?

Cutts: We sometimes get caught up in which part of the index went up or down each month; but the Credit Managers’ Index, if we take the big picture view, is still showing extraordinary resilience in the economy. The combined index has been hovering in the mid to high 50s for a very long time; so, if we look at it from that view, the economy is doing well. However, different factors within the combined index are beginning to play a different role. The favorable factors are declining strongly at the moment. For example, sales came down sharply, which is a sign of a slowing economy, but we are not yet in contraction territory. The pace of expansion is slowing a bit, but we are still in the expansion zone.

Q: What are the biggest trends that credit professionals should keep an eye on in today’s economy?

Cutts: For a long time, more so on the manufacturing side, companies could not get inventory because of logistics issues. So, many companies over ordered product to compensate. I think one of the biggest worries now will be a combination of declining sales along with the bigger issue of companies not being able to pay for product. Companies have been very lucky to pass on cost increases, but now companies that ordered too much product are having to offer deep discounts. That’s where I worry about their ability to pay back the amount owed.

Q: U.S. job openings slipped slightly in May, but demand for workers remains strong. How does the labor market play into recession risk?

Cutts: There’s a lot of discussion right now in economic circles about what this recession will look like when it comes. I know there is going to be a recession, and I think it will hit sooner rather than later. But the question of what it will look like is an important one. There is skepticism among economists about whether this will look like the typical labor market recession where we see big layoff because companies have had such a hard time getting workers that the thought of them turning around and firing them all seems a bit shortsighted. Instead, I think we will see more flexible staff management and hiring freezes rather than the outright layoffs. Now having said that, if you’re not getting sales and you can’t afford to pay workers, layoffs may need to happen. I’m not seeing wages go up to tell me this is such a tight labor market. I’m still seeing people worried about a wage-price spiral of inflation; but the wages are so far away from what the inflationary values are, that’s not even close. So, I think this [recession] will look a little different in that if companies want to keep good workers, they are going to have to protect them, and the idea of layoffs will just hurt their competitiveness. But we will see because we have never been in this territory before going into a recession.

Q: How has new factors playing into recession risk changed your outlook in recent weeks?

Cutts: We knew the Fed was going to be aggressive but the 75 basis points was quite a shocker. The Fed is trying to slow down demand but they are slowing demand in a situation where supply is still tight. The supply problems happened independent of demand change. I think the Fed’s actions are certainly going to increase recession risk, especially as other central banks raise interest rates as well. My recession risk has been in the 70%-75% range, and the Fed being so aggressive has just solidified my outlook that we will certainly see a recession in the next year.

Q: What are your thoughts on the Federal Reserve rate hikes, and will they succeed in taming inflation?

Cutts: I think the Fed will succeed in bringing down demand. Will they tame inflation? I don’t know because some of these issues are so big. Think about oil prices—think about how quickly oil prices went to over $100 a barrel. There is every economic incentive now for anyone in the oil industry who had any available wells to capitalize. But the fact that we have not seen a big supply response says to me that this is a bigger issue. Output has not responded yet which means there is more going on here, so I don’t see how the Fed’s actions are going to solve these global supply issues. I do not think they will be able to bring down inflation to the levels they want, even if it comes down a bit, the cost is a recession and that is not cheap.

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Iowa Supreme Court Issues Opinion Re: Subcontractor Preliminary Notices

Jodie McDougal, shareholder, Fredrikson & Byron, P.A.

On June 17, 2022, the Iowa Supreme Court rendered a decision in the Borst Brothers Const. vs. Finance of America case involving a mechanic’s lien, which addressed one aspect of the pre-lien notice requirement for Iowa subcontractors on residential projects. As detailed below, the Iowa Supreme Court held that the 10-day deadline for posting of a Commencement of Work Notice on the MNLR does not apply to subcontractors when they are forced to file such notice on behalf of a general contractor or owner-builder that has failed to do so.

Background on Iowa Law

As addressed in prior blog posts dated April 30, 3012, and April 7, 2017, the Iowa lien law was substantially changed by a law that was signed in 2012, effective as of Jan. 1, 2013. Among the law’s major changes, the state of Iowa implemented a mandatory, centralized online filing system called the Mechanic's Notice and Lien Registry (MNLR), for all pre-lien notices and mechanic’s liens.

As a reminder, under that new Iowa law effective Jan. 1, 2013:

  1. General contractors and owner-builders on residential projects are required to post a “Commencement of Work Notice” MNLR (and provide an owner notice) within 10 days of the commencement of the construction, and
  2. Subcontractors and suppliers are required to file a post a “Preliminary Notice” on the MNLR, on every residential project to preserve their lien right. If one does not timely file the applicable notice in the MNLR regarding a residential project, such person or entity generally loses the right to enforce a mechanic’s lien in the future.

While there is a 10-day deadline for the filing of Commencement of Work Notices, there is no exact deadline for Preliminary Notices. Instead, the Iowa Code provides as follows: A subcontractor shall post a preliminary notice to the mechanics’ notice and lien registry internet site. A preliminary notice posted before the balance due is paid to the general contractor or the owner-builder is effective as to all labor, service, equipment and material furnished to the property by the subcontractor. 572.13B(1).

The Iowa Code also provides as follows: A mechanic’s lien perfected under this chapter is enforceable only to the extent of the balance due the general contractor or the owner-builder at the time of the posting of the preliminary notice specified in subsection 1 [i.e., 572.13B(1)]. 572.13B(3)(a).

Mechanically speaking, on the MNLR system, before a Preliminary Notice can be posted, there must be a Commencement of Work Notice on file for the project. This is expressly set forth in the Code as follows: If a general contractor or owner-builder fails to post the required notice of commencement of work to the mechanics’ notice and lien registry internet site pursuant to subsection 1, within ten days of commencement of the work on the property, a subcontractor may post the notice in conjunction with the posting of the required preliminary notice pursuant to section 572.13B. A notice of commencement of work must be posted to the mechanics’ notice and lien registry internet site before preliminary notices pursuant to section 572.13B may be posted. 572.13A(2).

Thus, when a subcontractor attempts to a post a Preliminary Notice, but there is no Commencement of Work Notice posted, the subcontractor must then post the Commencement of Work Notice on the general contractor’s (or owner-builder’s) behalf.

Most legal practitioners, including myself, have interpreted the statute to mean that in the situation of a subcontractor who has to file a Commencement of Work Notice in order to file its own preliminary notice, such Commencement of Work Notice does not need to be filed within 10 days. In particular, the contrary interpretation would mean that subcontractors are denied the right to even post a Preliminary Notice whenever a general contractor (or owner-builder) chooses not to timely file a Commencement of Work Notice, as most subcontractors (other than perhaps the excavation and foundation subcontractors) are not even aware of or working on the job at the start the general contractor’s work, but are instead hired and on the job at a later time. In any event, there was a lack of 100 percent clarity in the statute in this regard. That has been resolved by the Iowa Supreme Court with this decision.

Specifics of the Case and Supreme Court Holdings

In this case, an owner-builder did not post Commencement of Work Notices on the registry for five residential lots that it was developing. Accordingly, two subcontractors did so, several months after the construction work had begun. When the project went into default, a priority dispute arose between these two subcontractors and the commercial lender for the project. The commercial lender claimed that its previously recorded mortgages had priority; the subcontractors argued that their mechanics’ liens came first.

The district court found in favor of the subcontractors, as did the court of appeals. Thereafter, the Iowa Supreme Court heard the case. The Court’s opinion contained two major holdings. First, the Court held: We also conclude that the 10-day deadline for posting the notice of commencement to the registry applies to general contractors and owner-builders but not to subcontractors.

While the statutory language in isolation is potentially ambiguous, context provides clarity. It would not make sense to allow subcontractors to step in only if the general contractor or owner-builder fails to post the notice of commencement within 10 days, while requiring subcontractors to meet the same 10-day deadline. Meeting a missed deadline is impossible.

This confirmation by the Supreme Court is good news for subcontractors.

Second, the Court also confirmed the Iowa law remains unchanged as far as priority rules, stating that “under current law, as under prior law, a construction lender that recorded its mortgage before a particular subcontractor began its work gets priority over that subcontractor’s mechanics’ lien.” In the case, the lender at issue had recorded its mortgage after Borst’s work, so Borst’s lien was found to be senior.

In this regard, the Court held as follows:

Chapter 572 allows mechanics’ liens to obtain priority over other types of liens if certain conditions are met. Section 572.18 describes these conditions as follows:

  1. Mechanics’ liens posted by a general contractor or subcontractor within ninety days after the date on which the last of the material was furnished or the last of the claimant’s labor was performed and for which notices were properly posted to the mechanics’ notice and lien registry internet site pursuant to sections 572.13A and 572.13B shall be superior to all other liens which may attach to or upon a building or improvement and to the land upon which it is situated, except liens of record prior to the time of the original commencement of the claimant’s work or the claimant’s improvements, except as provided in subsection 2.
  2. Construction mortgage liens shall be preferred to all mechanics’ liens of claimants who commenced their particular work or improvement subsequent to the date of the recording of the construction mortgage lien.

The first condition that Kelly and Borst had to satisfy to attain priority over other types of liens was to post their mechanics’ liens “within ninety days after the date on which the last of the material was furnished or the last of the claimant’s labor was performed.” Iowa Code § 572.18(1). Next, Borst’s and Kelly’s notices of commencement and preliminary notices had to be “properly posted” to the MNLR website. Id. We have already determined that this occurred. Finally, the subcontractors had to commence their work on the properties before FAC recorded its mortgages to get priority over FAC. … That being so, Borst’s and Kelly’s mechanics’ liens have priority over FAC’s inferior mortgages.

Again, this confirmation by the Supreme Court is good news for subcontractors.

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Do You Have the Tools Needed to Be a Successful Credit Professional?

Annacaroline Caruso, editorial associate

Many of the qualities required to be successful in the workplace come from within—for example, leadership, accountability, teamwork and flexibility are not tangible tools, but rather skills an employee either already possesses or can learn over time.

“Studies have shown that flexibility often begins at the top of any team and influences positive outcomes,” reads an article from Forbes. “When building a new team, flexibility should be a prized skill: Today’s goal might not matter tomorrow, so focus on building your team to succeed when empowered to solve a new challenge or achieve a new target. More importantly, nimble leadership will create opportunities for team-building amid system changes.”

But as times change and the credit profession grows, some outside resources may be required for the credit team to stay efficient. According to a recent eNews poll, 29% of credit professionals do not feel they have all the tools and resources needed to perform their jobs successfully. Of those, 80% say more technology to automate mundane tasks would help improve job performance and add value.

“There’s a lot of great ways technology and automation can help credit professionals, but one of the simplest ways is time,” said Charles Edwards, CCE, director of credit operations at SRS Distribution Inc., (McKinny, TX). “These tools can give credit professionals valuable time back into their days, either by automating repetitive work or helping them prioritize and focus their efforts on the most critical tasks and customers.”

Roughly 56 million hours are wasted each year in the U.K. pursuing overdue payments, Mert Oncul, collection process expert with UPM-Kymmene Corporation (Warsaw, Poland), said during FCIB’s Automation Workshop: Collection Automation Processes. “Manual processes can create so many challenges for creditors and collectors. When done correctly, automated collection processes can help you recover lost revenue due to payment failures, prevent you from losing customers and save lot of time. The collections sector usually feels a bit outdated when it comes to driving innovation, but that’s where automation can make a difference. It reduces the human error and improves productivity.”

According to an article in TechRepublic, “The last few years have highlighted the divide between early adopters and laggards of automation and digitization. Buyers and suppliers that invest in integration capabilities between eCommerce platforms and eProcurement systems have outshone their competitors—and they are reaping the benefits via improved efficiency and stronger trading partner relationships. … As the B2B sector embraces digitization, it is time for businesses to modernize time-consuming buying and selling processes while scaling connectivity.”

While technology and automation are the most coveted keys to success in credit management, technical skills (60%) and more credit and collections staff (60%) also are needed to enhance success, according to the eNews poll. One respondent said “better access to metadata and reports to be able to review large amounts of data quickly” would also help improve job performance.

The last step is getting upper management on board with any technological updates, Edwards said. “There are two things that I find often speaks loudly to executives. The first is values—many company cultures have a strong set of value; and if you find ways to show that tech will serve the company’s values and culture, that will often make a strong case to leadership. The other is money—this is where a well thought out business case with a clear cost benefit analysis can help you make a strong case. Appeal to their head and their heart, and you’ll earn their support.”

If you want to learn more strategies to become a better credit team, be sure to register for this month’s FREE Author Chat, Growing on Purpose: The Formula to Strengthen Your Team AND Improve Your Customer Experience on July 21.

To read more about how automation improves the collections process, be sure to keep an eye out for the July/August issue of Business Credit magazine.

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Evaluate Your Thinking with One Critical Question

Larry Robertson, Lighthouse Consulting

As leaders, we most often look to blogs, books or boardroom meetings for guidance, and yet sometimes it’s everyday life that hands us the best leadership insights. Recently life gifted me just such a lesson: the importance of asking, “How is this different?”

While preparing for work in another part of the world, I took part in a security briefing. The conversation was sobering. The subject of crime in that part of the world took center stage. We were warned to watch out for everything from petty theft and homicide to local crime and terrorism. I started to wonder why I would leave my home to go to this new place and expose myself to the possible dangers—that is, until a colleague asked a question. “How is this different from life in my city back home?” she asked. 

It was a fair question, a good question. It was also a question the presenter—who had likely taken part in hundreds of these briefings—not only did not anticipate but, stranger still, had never been asked and was unprepared to answer. “Huh,” he said more than once in response. Then, after having given it thought, he said, “Actually it’s far safer there than at home.” It was a mindset-flipping revelation to all of us. And a seemingly innocent question had made it so. 

In our briefing we’d been told a part of the story, crafted out select facts. Mind you, the intent was good: to focus on the details that would keep us safe. The fact remained, however, that the approach had been deeply skewed—until those four key words: How is this different?

Why questioning is important

What if that question had never been asked, or maybe allowed? How much would each of us headed to this new place have closed off to it, to its people, to their ideas? What limitations would that have placed on our ability to gain value from our work? Would we also have unknowingly hardened into our well-trodden ways and missed the implied opportunity of going to this new place? Here’s a question for you: 

What’s happening, or not happening right now—in your organization, with your team, because you’re not asking: How is this different?

As you think about it, consider a familiar example: annual strategic planning. Most organizations do some form of this, yet fail to ask: How is this—this time, this coming year, this business environment—different? The data show that in most organizations, planning—a time-consuming, even distracting process—tends to follow a rote, almost fill-in-the-blank exercise. If something isn’t glaringly out of whack, leaders and their teams mostly adjust a few numbers and rubber stamp old plans tied to old assumptions with new dates. 

But what if something is different from the last time? You’d think if it was, it would be obviously so, but as my security briefing story highlighted, maybe it’s not. There’s just one way to know: Ask, “How is this different?”

Status quo has changed

In a time past, things changed, just not much. Many leaders and organizations came to expect a high degree of status quo in much of their work. If it was ever true, that’s passed. The world today is a deeply abnormal one, for everyone, even the mightiest. Walmart’s CEO Doug McMillon summed it up nicely. Where big strategic decisions used to change on an annual basis or maybe quarterly, he told Harvard Business Review, it’s now daily. He even joked that hourly was a more accurate description. 

It’s worth noting that he said this before the COVID-19 pandemic. The world hasn’t become more certain, but less, and by orders of magnitude. In a business environment like today’s, “How is this different?” must become the bellwether of, well, everything.

There’s a part two to this lesson worthy of note: A growing number of leaders see the value in these four words, but they see that value as something applying to and used only by them, as the leader. Especially in this environment, it’s a graver mistake than to have never asked, “How is this different?” at all. 

It’s time for change—and questions

With the changing landscape, leadership must change too. It simply is not possible for one person at the top to see it all, sense it all or conceive how to adapt to meet it all. Operating in that way is like being the person giving my security briefing—and not taking any questions. 

The real power in “How is this different?” is in making it the guide to the collective conscience of the organization. When a team asks, “How is this different?” each member inevitably answers from their own vantage point. When all are expected to ask and answer, each person begins to take note—not only of their own inevitably limited view but of their fit in and ownership of what the collective is trying to deliver. 

Shockingly, it’s all too common that most in the organization, regardless of level, can’t even tell you how they fit, or even what they fit into. Why? Because they never get asked or get to ask, “How is this different?” or any other probing question. At best, they just get briefed. If the opposite were true, everyone would exclaim, “Wow, this is different!” 

There’s a better way for all of us, and it starts with one simple question. 

This article was first published in SmartBrief.

Larry Robertson, named a Fulbright scholar in 2021, is the founder of Lighthouse Consulting and works, writes and guides at the nexus of creativity, leadership and entrepreneurship. 

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