COLUMBIA, Md.—The slowdown in the economy over the past several weeks has been chronicled in a variety of ways: retail sales fell, the housing market sank to levels not seen in close to two years, the financial markets stumbled in reaction to one global threat after another and the Credit Managers’ Index (CMI) is slumping dramatically as well—from May’s 55.9 to 54.1 for June—for the same reasons affecting much of the economy.
Sales levels have dipped all the way back to numbers not recorded since the end of last year. The last time sales registered below 60 was in Dec. 2009 when it hit 56.7. It is now at 59 after being as high as 65.7 as recently as April.
This decline is consistent with observations made on consumer activity in general.
Personal income may have risen by a somewhat respectable 0.4 percent, but spending has only increased by 0.2 percent and that is a far cry from the 3 percent growth registered in the first quarter of the year.
Other signals are also suggesting economic distress. Although there was a consistent rate of new credit applications, the number of applications granted fell to a point not seen since Dec. 2009. Comments within the credit community suggest lending and credit have tightened considerably in the last few weeks and months. There was not as much activity in negative factors, but there was significant expansion in the number of credit applications rejected as well as accounts placed for collection.
“There is simply a sense that stress has reentered the system in a big way and that is consistent with the kind of data that started to emerge in the consumer sector over the last month,” said Chris Kuehl, Ph.D., NACM economic advisor, who prepares the CMI for the National Association of Credit Management (NACM). “This is a trend the CMI began to note in the May numbers and now the indications are that this is accelerating.””
There are two factors that have been hanging over the financial community the last two months and both have started to show movement.
“It will be interesting to note what happens with factors like credit extension as well as credit applications as these issues are dealt with to some degree,” said Kuehl. “The banks have been close to paralysis waiting for the financial reform picture to clarify and it appears that some of the smaller and regional banks escaped the most onerous burdens. That may allow them to loosen up and start to make more money available, but much depends on whether these same banks have been able to contend with their remaining non-performing loans. There is also the fact that FDIC insurance has been extended to $250,000, which is retroactive to Jan. 2008. This additional burden will force the FDIC to collect more money from banks to pay for the insurance and that could well serve to stall lending yet again.”
The consumer has not yet engaged in the economic recovery and is stalling the rebound dramatically. Spending levels will not recover until there is some confidence restored in the consumer and that will require improved jobless numbers and some solid recovery of people’s financial position; these appear to be off some time in the future.
“If there is any good news in this month’s data, it is that the other negative factors have not yet manifested,” said Kuehl. “There has not been an increase in disputes or bankruptcies and there has even been a decline in the dollar amounts beyond terms. The sense is that most companies avoiding getting overextended again and the return of the more cautious credit environment have meant that companies are not getting into as much financial distress as they had in the past. They are simply not growing at a pace that will allow much economic gain in the short to medium term.”