NACM Credit Managers Index August 2010

The trend in data this past week was hardly encouraging, resulting in another chorus of pronouncements regarding an imminent return to recession. The housing market remains in the doldrums, GDP numbers were revised down in reaction to the worsening trade deficit numbers and there was a decline in the markets. In the midst of all this gloom comes the latest iteration of the Credit Managers’ Index (CMI) and it is looking much like
a beacon of hope. Over the last several years, the CMI, issued monthly by the National Association of Credit Management, has proven over and over that it is somewhat prescient when it comes to bigger economic trends.

The precipitous decline in the CMI in June and July 2008 presaged the overall collapse of the economy three or four months later. The index started to gain as early as October 2009, followed by the rest of the economy, which showed some recovery by the end of the year (5% growth for the quarter). Worsening conditions began to appear in the CMI as early as May of this year followed by the economy as a whole in June and July.

“The good news coming from the August CMI is that the index showed some modest recovery, which was more dramatic in the manufacturing sector than in services,” said Chris Kuehl, Ph.D., NACM economic advisor. “If the past is any prologue, this may signal some slow improvements in the overall economy within the next month or two. This optimistic assessment is tempered by the fact that the service sector remains weak and, given the size
of this sector in the U.S. economy, as a whole remains a significant drag on overall recovery.”

The improvement in the index—from 53.0 to 53.3—stems from small adjustments in areas that traditionally signal distress. The number of accounts placed for collection improved, invoking a number of suggestions as to why this is the case. Part of the reason, Kuehl noted, is that many of the weakest creditors have now exited the system—they have folded. There is also some renewed patience on the part of creditors according to survey respondents’ comments: a willingness to work with accounts because improved business conditions may be on the horizon. The natural preference is to get paid by a customer and keep them in the system. Having to resort to collection usually means the relationship is destined to deteriorate. There is now a growing sense that patience may be rewarded should the economy stage any sort of turnaround in the coming months.

The fact that business bankruptcies fell a bit is another example of the change felt in the credit community. The weakest customers have already left the system and those that remain generally look strong enough to survive. In sales, there were some small changes in a positive direction and a pretty impressive improvement in dollar collections. Overall, the CMI is consistent with other observations made by economists this week.

Some parts of the economy are doing far better than others. Unfortunately, the down sectors are the bigger drivers in the overall economy—housing being at the top of the list. As is indicated by looking more closely at the CMI manufacturing numbers, the gains are being made in the industries that have been sustaining the economy for most of the last six months. Manufacturing has seen improved performance in sectors related to energy development, health care and, to a lesser extent, electronics. Even automotive has started to show a little improvement and, if recent numbers from the rail sector are any indication, there may be more manufacturing gains in the months to come. “Rail is often referred to as the canary in the coal mine for the economy and carloads have spiked in the last two months, a very good indicator of future manufacturing activity,” said Kuehl.

August CMI Report (479)

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