Credit Management Association

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.

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Delayed until 12/31/10

At the request of several Members of Congress, the Federal Trade Commission is further delaying enforcement of the “Red Flags” Rule through December 31, 2010, while Congress considers legislation that would affect the scope of entities covered by the Rule. Today’s announcement and the release of an Enforcement Policy Statement do not affect other federal agencies’ enforcement of the original November 1, 2008 deadline for institutions subject to their oversight to be in compliance.

“Congress needs to fix the unintended consequences of the legislation establishing the Red Flags Rule – and to fix this problem quickly. We appreciate the efforts of Congressmen Barney Frank and John Adler for getting a clarifying measure passed in the House, and hope action in the Senate will be swift,” FTC Chairman Jon Leibowitz said. “As an agency we’re charged with enforcing the law, and endless extensions delay enforcement.”

The Rule was developed under the Fair and Accurate Credit Transactions Act, in which Congress directed the FTC and other agencies to develop regulations requiring “creditors” and “financial institutions” to address the risk of identity theft. The resulting Red Flags Rule requires all such entities that have “covered accounts” to develop and implement written identity theft prevention programs to help identify, detect, and respond to patterns, practices, or specific activities – known as “red flags” – that could indicate identity theft.

The Rule became effective on January 1, 2008, with full compliance for all covered entities originally required by November 1, 2008. The Commission has issued several Enforcement Policies delaying enforcement of the Rule. Most recently, the Commission announced in October 2009 that at the request of certain Members of Congress, it was delaying enforcement of the Rule until June 1, 2010, to allow Congress time to finalize legislation that would limit the scope of business covered by the Rule. Since then, the Commission has received another request from Members of Congress for another delay in enforcement of the Rule beyond June 1, 2010.

The Commission urges Congress to act quickly to pass legislation that will resolve any questions as to which entities are covered by the Rule and obviate the need for further enforcement delays. If Congress passes legislation limiting the scope of the Red Flags Rule with an effective date earlier than December 31, 2010, the Commission will begin enforcement as of that effective date.

In the interim, FTC staff has continued to provide guidance, both through materials posted onwww.ftc.gov/redflagsrule, and in speeches and participation in seminars, conferences and other training events to numerous groups. The FTC also published a compliance guide for business, and created a template that enables low risk entities to create an identity theft program with an easy-to-use online form (www.ftc.gov/bcp/edu/microsites/redflagsrule/get-started.shtm). The FTC staff also has published numerous general and industry-specific articles, released a video explaining the Rule, and continues to respond to inquiries from the public. To assist further with compliance, FTC staff has worked with a number of trade associations that have chosen to develop model policies or specialized guidance for their members.

As was the case previously, this enforcement delay is limited to the Red Flags Rule and does not extend to the rule regarding address discrepancies applicable to users of consumer reports (16 C.F.R.§641), or to the rule regarding changes of address applicable to card issuers (16 C.F.R.§681.2).

For questions regarding this Enforcement Policy, please contact Naomi Lefkovitz or Pavneet Singh, Bureau of Consumer Protection, 202-326-2252.

Jacob Barron, Writer/Editorial NACM

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CMI

The most striking aspect of this month’s Credit Managers’ Index (CMI), issued by the National Associationof Credit Management (NACM), is that sales in both the manufacturing and service sectors jumped—and ata pace not seen in over a year. This reinforces the news from consumer demand studies showing that spending was up last month. The increase in sales was nearly five points, faster than any increase since early 2008. This burst in sales occurred despite the fact that new credit applications were flat. There was aslight extension in the amount of credit extended, but the majority of that increase seems to have originated from companies working with the suppliers and contacts they have had for years as opposed to new additions to the business fold.“The pace of growth in the overall economy has been uneven thus far, but is about what was expectedfrom most analysts,” said Chris Kuehl, Ph.D., NACM economic analyst. “All along, the assumption has been that this would be a recovery marked by slow and methodical reactions to demand that was expected to be spotty and very much affected by the pace of consumer attitude recovery. The fact that consumers added 0.3% to their activity despite some of the worst weather this winter appears to indicate some significant pent‐up demand.” CMI data bolsters this assessment.

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The growth manifested in January has been interrupted. However, the drop in activity in February was not enough to plunge the Credit Managers’ Index (CMI) back into negative territory. In fact, a marginal gain moved the combined index from 55.1 to 55.2 and was somewhat anticipated due to the inspiring recent expansion in the manufacturing sector. Still, it feels more like a decline when compared to the big gains made in January.

“Starting in the latter part of 2009, manufacturing sector businesses began rebuilding inventories back to respectable levels; a process the CMI predicted,” said Chris Kuehl, Ph.D., economist for the National Association of Credit Management, which issues the CMI report each month. During the depths of this recession, most businesses did everything possible to reduce costs and protect cash flow. For several months, the CMI illustrated this point with reports of worsening unfavorable factors: more disputes, rejections of credit applications and dollars beyond terms. By the end of 2009, the CMI began to show a shift—businesses that owed money started the process of paying down debt in anticipation of needing access to credit in the near future. This shift in attitude has historically shown that expansion begins within a month or two, which is what started to transpire in December 2009 and January of this year.

“The development in manufacturing was matched to a lesser extent by similar movement in the service sector, and other economic indicators added to the notion that something was stirring in the economy,” said Kuehl. Fourth quarter GDP numbers for 2009 were up 5.9%, and the Purchasing Managers Index climbed to the mid-50s with new orders all the way up to the mid-60s. “There now appears to be a reversal under way, but it may be more accurate to refer to this as a breather,” Kuehl said.

“The first phase in an economic recovery is the replenishment of reduced inventory and there can’t be growth without the supply to meet expected demand,” said Kuehl. “If there had been no effort to bolster inventory levels, the arrival of demand would have provoked massive shortages, bottlenecks and ultimately inflation. For now, businesses are looking at low interest rates, commodity prices and labor costs. This is the safest time to build that base, but now they have to wait for the second phase—consumer confidence, which remains in the doldrums to an extent.”

Conference Board reports show a big drop in consumer confidence because of concerns about the employment situation. At the same time, there are reports coming in from big retailers such as Lowe’s and The Home Depot suggesting that consumers are shopping again. The consumer has yet to commit and until that happens, the economy remains in a waiting position.

The CMI shows that sales were flat in February after a major jump in January, but slight increases in new credit applications and the amount of credit extended indicate that credit remains somewhat accessible. Among the negative factors, the biggest changes took place in disputes and bankruptcies. Neither was unexpected: more companies are struggling with debt and will be maneuvering for more time, and the end of a recession is often harder on companies than the recession itself as they start to see pressure from competitors and may not have the ability to respond.

Special CMA Note: Dr. Chris Kuehl, quoted in this press release, will be the keynote speaker at CMA’s Annual Meeting April 14, 2010 in Montebello, CA. Click here for more info.

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