Credit Management Association

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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The reports on the economy have been mildly encouraging at year’s end and now everyone’s attention is turned
to 2010—the year that is supposed to provide the anticipated recovery. The December CMI matched the mood
of the economy as a whole—essentially flat, but showing some mild progress. The most important aspect of the
report is that the index remained above the 50 mark that separates growth from contraction and even showed a
slight gain as it moved from 52.3 to 52.9. “This is hardly the kind of advance that provokes celebration, but given the gloomy assessments made about the 2009 holiday season, the gain is certainly preferable to what had been anticipated,” said Chris Kuehl, NACM economist.

The indicators that showed the least movement included sales and new credit applications. “This is to be
expected and is consistent with December readings in past years,” said Kuehl. “This is the period in which most
manufacturers are in semi‐hibernation unless the retail community is frantically trying to bolster inventory. That was not the strategy employed by retail this year; stores held the line on inventory and shoppers eventually
caved and bought what was available.” The retail numbers thus far showed a gain of around 4.5% over last year,
but these are still preliminary. What did show up as more positive was an increase in dollar collections and an
expansion of credit extended. Both of these data points bode well for the coming year, and the fact that there is
still evidence of companies seeking to catch up on their debt is making it a bit easier to advance credit. As has
been stated many times and from a variety of sources, the key to the economy’s healthy recovery is the rebound
in the credit markets. Thus far that recovery has been slow, but there continues to be a willingness to extend
new credit and there is some sense that more will become available in the coming year.

Other elements showing promise include the modest improvement in unfavorable factors—disputes,
rejection of credit applications and the like are still showing declines. But one unfavorable factor—filings for
bankruptcies—has deteriorated significantly. “There have been more bankruptcies and that poses some longterm problems. The growth of bankruptcy activity is not unexpected at this point in a recession, but until
these are worked through, there will be hesitation in the market to extend credit to any but the most healthy
companies,” Kuehl said. “As the economy rebounds, the companies that have been struggling to survive will
start to encounter more aggressive competition, which is often the straw that breaks the back of these
weakened companies.”

The overall conclusion from this month’s data is that the economy remains weak, but headed in the right
direction. The slow thaw in the credit markets is still taking place and there are signs of expansion in both the
manufacturing and service sectors. There has been no sign of explosive growth thus far, but that is consistent
with most of the other assessments on the economy. The improvement in 2010 looks more feasible, but there
are still no fireworks in the immediate future.

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Which of the following best describes your credit department?

Responsibilities are split – some staff focus exclusively on collection tasks while others focus exclusively on credit extension. — 24.67%

Responsibilities are shared – each staff member handles multiple tasks, including collections, credit extension and others. — 47.88%

Our credit department operates in a different way (please describe in the comments section below).— 8.70%

My company doesn’t have a credit department, or I am the only member of the credit department. — 18.74%

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Black Friday has come and gone and the results are mixed. On the one hand there was much more traffic in the stores than last year, but the average consumer has been spending a bit less and more cautiously. The same pattern seems to have emerged in the business community, as indicated by the shifts in the Credit Managers’ Index (CMI). For the first time in some months, the reports suggest that sales are rising at a pretty rapid clip. The index noted a jump from 51.1 to 55. Given that last year’s number was at 34.4, this is pretty encouraging news heading into the depths of the holiday season. There was also some positive movement in terms of new credit applications and dollar collections. The new applications number went from 52.7 to 55.4 and that is much improved from the 45.2 notched in November 2008. Dollar collections had been pretty steady for the past several months, ranging from 50 in November 2008 to 53.4 in September this year. For two months in a row that level has improved more dramatically—54.7 in October and 55.8 in November. These improvements in the positive factors are encouraging.

In general there was improvement in the non‐favorable category as well, but the pace has slowed from what it was in October and September. There have been fewer disputes and fewer rejections of credit applications and a marked reduction of accounts placed for collection. The data suggest that creditors are still working to get their financial affairs in order in anticipation of better times ahead. The pattern in the past has shown that creditors start to work toward catching up a few months before they anticipate getting back into higher levels of production. To do that means they need to get more engaged with their suppliers.

November marks the second month in a row that the CMI crested 50 and that mirrors the trends identified in the Purchasing Managers’ Index. The growth in credit availability remains a major concern in the business community as a whole and there are still some strong headwinds as far as the financial sector is concerned, but there is some renewed activity going into the Christmas season and that is construed as a good sign.

NACM’s economist, Dr. Chris Kuehl, indicated that this latest set of survey results reinforces some of the assessments that have been made about the future. “As sales increase and credit applications are granted, there is a sense that more business is optimistic about the coming year than not. It was revealed in a recent KPMG survey that business confidence is improving and the CMI provides a clue as to why. Access to credit remains a limiting factor for many businesses but there is evidence of the logjam loosening. In conversations with credit managers and through the comments sent along with the survey, there is a sense that there are growing opportunities for the best customers and a willingness to get engaged with those showing a plan and some progress.”

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