Latest CMI reflects ‘stuttering’ economy

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Published: August 3,2010

Tags: consumer spending, credit, debt, economy, factory orders

COLUMBIA, Md. — July’s Credit Managers’ Index (CMI) continued to show that the economy as a whole is stuttering. The overall index remains above 50, but not by much, and these levels have not been seen since late last year when the index was down to 52.9 in December.

As recently as April, the combined index was up to 56.5; it now sits at 53, and there are signs that this decline could continue into next month and possibly longer.

“The fall is not as dramatic as when the recession started to wind up in 2008, but the trend is far from encouraging as there are weaknesses showing up in both the positive and negative categories,” noted NACM economic advisor Chris Kuehl, Ph.D., who issues the CMI for the National Association of Credit Management (NACM) each month.

For the second consecutive month, sales declined, which is consistent with the data coming from the retail community and also with the reported declines in consumer confidence. The level of sales had exceeded 60 for five months and only barely slipped back to 59 in June, but has now dropped to 57.2. Much of this is tied to the slip in inventory buildup in the manufacturing sector, but the service sector is declining as well. The fact is that businesses and consumers alike have become cautious with their funds and that is manifesting itself in a retrenchment in sales.

When one looks at the CMI trends over the last several months, it is apparent that companies have been making some very careful decisions about cash flow and exposure, and it is evident that consumers are doing much the same thing.

“The last couple of months have seen some pretty solid earnings reports, but these extra profits in the corporate community have not been working their way into more job gains or into overall business expansion,” explained Kuehl. This money is being saved and the cash is being used to reduce financial exposure.

There has been some evidence in the data collected by the CMI that companies are getting more aggressive in terms of collecting debt. The number of accounts placed for collection has increased, and it appears that there is less patience than in previous months. The anecdotal discussions indicate that business does not want to be caught short by waiting to collect from a company that may be in trouble, and there is also a need to address the cash flow issues that companies are now facing.

A palpable decline in the number of credit applications filed and an equally sharp decline in the number of applications granted is evident. There are two related factors at work here. First, companies that would be offering credit have been cutting back as they focus on accumulating as much cash as possible; these same companies are not getting the access they once had to credit lines and loans in general, meaning they are far more reticent to offer credit. Second, companies that would be asking for credit are also stymied as they are not yet secure in assessments of the future and continue to avoid potential risks.

“The only real bright spot in the index is that the negative factors have not appreciably worsened from last month,” said Kuehl.

In the combined index there was no change at all, but there was a worsening of the situation in the manufacturing sector while conditions got slightly better in the service economy. There has been some conjecture as to whether the issues in the Gulf of Mexico have had an impact on the overall index and thus far there is not much evidence of this. The damage to industry has been highly localized and has affected the tourism and fishing industries more than any others. If there is an impact in the future, it will likely revolve around what is happening in the oil sector itself as this is by far the biggest industry in that part of the country. It remains on hold pending the decisions made about the oil drilling moratorium.

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