Chief Economist: Slowing Economy Affecting Business Payments

While the U.S. Federal Reserve once again lowered key interest rates in an
effort to stimulate the nation’s economy, the effects of three major economic
headwinds continue to put a drag on business conditions for manufacturers and
service providers. According to analysis from leading trade credit insurer Euler
Hermes ACI, the slowdown will continue well into 2008, but the chances for
recovery are very good.

In his monthly commentary regarding a national survey of credit managers in
the manufacturing and service sectors, Euler Hermes ACI Chief Economist Daniel
C. North said the survey data suggests that respondents’ customers are having
difficulty coming up with enough cash to pay their bills on time. "This
condition could be a result either of their own customers’ inability to pay on
time, or perhaps because they have built up too much inventory, which hasn’t
sold as quickly as planned," he explained.

Whatever the origin of the problem, North said the survey responses reflect
the weakness in the economy, which he believes is likely to turn worse over the
next few quarters. "So far, the credit managers have been able to contain the
triple threat of higher oil prices, the burst housing market bubble and the
lingering effects of tightened monetary policy conditions," he commented. "But
the responses from those surveyed suggest that the deterioration in the rest of
the economy may be starting to catch up with the credit managers."

North said the manufacturing sector slowed slightly from the month before,
but the comments from survey respondents were much more telling than the survey
data. "While a large portion of the comments centered on the housing slump,
there were comments from several other industries as well, suggesting that the
overall manufacturing landscape is being effected," he said.

Meanwhile, North said survey respondents in the service sector had a lot to
say about the economy in October, "and most of it was not good. The majority of
comments predictably focused on the damage the housing market decline has done,
but negative comments came from across many other industries, as well."

However, while the economy has continued—and will continue—to worsen, North
said he sees a light at the end of the tunnel. "I don’t think things are so out
of balance that we are looking at something really disastrous. I do think we’re
going to see very slow growth—if not an outright recession—next year. I don’t
think it will be deep or long, typically two quarters of some negative growth,
but the global economy certainly seems well balanced enough that we’ll be able
to come out of this alright. Plus you’ve got the Fed cutting interest rates
going forward, and that will certainly have a lagged effect that will cause us
to enter a recovery next year," he concluded.
Source: Euler Hermes
ACI

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