Credit Management Association

Is the recession truly over? Most of the evidence says “yes,” although there will be problems to contend with for the next few months. In many ways, the best way to characterize the situation is to say that the beatings on the economy have stopped, but that every bone has been broken. The recovery started slowly in the last few months and will continue to progress slowly and not without some reversals from time to time, but news from the last few days of October was especially solid with the third quarter GDP numbers stronger than anticipated—3.5% growth after four quarters in the negative category. Even more significant from the perspective of credit availability is that the Credit Managers’ Index (CMI) broke past the 50 neutral barrier for the first time in over a year. The index started in that direction in September when the service side of the equation improved to 50.1, but manufacturing still lagged, finishing at 49.6. Now both sectors are showing expansion and the CMI as a whole is pointing toward growth.

The significance of these findings is hard to overestimate given the kind of analysis taking place around the improved GDP numbers. The dominant theme is that four factors were at work with third quarter GDP: the impact of the stimulus package, the “Cash for Clunkers” program, the $8,000 new home-buyer credit and the Fed keeping interest rates low. These are all important factors, but are not the only ones at work—the CMI data makes this pretty clear. The private sector is also engaging in this economic comeback with the CMI tracking this activity in both the service and manufacturing sectors.

This month, progress was made in both the positive and negative indicators in contrast to the numbers in September where the majority of the progress was in the negative indicators. NACM’s Economic Analyst Dr. Chris Kuehl said that there were two streams of good news, “Not only has there been some expansion in terms of credit availability, but there continues to be evidence that companies are catching up on their debt. Over the last few weeks, I have spoken at several NACM events and have heard similar stories at each. Companies that had been behind in their obligations are catching up in anticipation of further growth and the need to ask for more credit in the future. By the same token, comments by attendees suggest that there is more money starting to filter into the system, making credit more accessible than it has been in some time.”

The CMI data show a significant improvement in dollar collections and that the amount of credit extended is higher than it has been in well over a year. There were also far fewer accounts placed for collection and fewer applications rejected. This latter point is important to note as one would expect more rejections in a much more restrictive credit environment. This means that many of the applicants are more creditworthy than they have been in past months.

To view the full CMI report for October, click this link CMI_nov09

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After six months of solid gains, the Credit Managers’ Index showed slower progress and registered declines in key indicators. There was still some positive movement in the Index as a whole, but there are obvious weaknesses showing up in terms of credit availability, credit applications and sales. There were also areas of concern in terms of dollar exposure, disputes and other negatives. There was a sense that bigger economic issues began to overtake the sector, slowing down some of the progress noted in the last few months. The Index
showed a dramatic decline from the levels in July, but overall the Index gained and moved a little closer to the magic number of 50, climbing from July’s combined index score of 48 to the August score of 48.1.

These numbers are a little sobering given the sense that the economy had started to come out of the recession in July’s report. This suggests that the proposed recovery is a little weaker than some of the indicators reflect, especially in terms of availability of money. The reduction in credit applications indicates that there is less willingness to lend and that companies seeking credit are being put through more hoops than in the past. The number of additional disputes and delinquencies also suggests that some sectors of the economy are still struggling.

NACM Economist Chris Kuehl, Ph.D. stated that these readings do not necessarily mean that the other signs of economic recovery are not accurate but, he indicated, “the credit system has not healed and it may be some time before there is a sense that the biggest issues are behind the economy. There are some shoes left to drop, most notably the commercial property sector.” It had been assumed that the August index would crest over 50—signaling expansion—which correlated to the Purchasing Managers’ Index (PMI) that had also risen to levels
very near the 50 level. “It is mildly encouraging to note that the index has not fallen, but an anemic .1 gain was much less than had been anticipated,” said Kuehl.

Other data that has been used to assert that the recession has started to bottom out is accurate and encouraging. Housing starts are returning back to growth and it is encouraging to see durable goods orders back to normal, but the money situation remains a solid concern for business as it seeks to expand into other sectors to capture some newly available market share.

The issues are the same as they have been for the last few months: consumer confidence and investor confidence. At the moment, the investment community is more encouraged than the consumer, and that creates a problem in the not‐too‐distant future. Until consumers start to draw on the rebuilding inventory levels, there is nothing to suggest that producers should start gearing up again. This is part of what seems to be making credit scarce—a concern that the current growth is somewhat artificial, motivated by inventory gains in anticipation of demand or programs like “Cash for Clunkers.”

“Overall there were more down sectors than positive ones this month,” said Kuehl. “There is a small amount of solace to be taken in the observation that none of these areas declined a lot, but growth was expected.” The biggest improvement was in number of bankruptcies, but that may be connected to the fact that most of those companies threatened with collapse have already been forced into that procedure.

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For the sixth straight month, the Credit Managers’ Index indicates that there is growth in the availability of capital. The recovery in the index started in February of this year, supporting the notion that the economy was starting to show some rebound and “green shoots.” The July index also moved much closer to the magic number of 50, signaling expansion is taking place. The reading is now at 48.

Over the last two months, the dominant economic debate has focused on whether the recession has already ended, is ending now or is in the process of ending. The data coming from the housing sector is generally very positive with sales of both existing and new homes up. There are improvements in some of the manufacturing indicators, and some data suggests overseas sales have been improving. At the same time, there are concerns about the continued high rate of unemployment and the lingering impact of the downturn.

At the core of this debate is consumer confidence. Data from the Conference Board and the University of Michigan show some erosion of confidence lately, but at the core of that measure is whether consumers and businesses are seeing improved access to capital. The latest Credit Managers’ Index suggests that credit markets are continuing to edge toward expansion. If the trend of the last several months continues, the index may soon break above 50. The current score for the combined index is 48, up from June’s number of 46.4. Once the index crests 50, it will signal that expansion is taking place.

“This marks the sixth straight month of improvement in the index, and it now looks likely that expansion will be under way by the end of the third quarter,” said Dr. Chris Kuehl, NACM’s economic analyst. The specific improvements in performance are even more encouraging. Sales and the amount of credit extended both jumped dramatically. Sales were up from 44.8 in June to 48.6 in July, while the credit extended measure went from 46.1 to 48.2. The index of favorable factors as a whole reached the critical 50 point and two of the
measures moved into expansion territory as new credit applications moved to 52.6 and dollar collections went to 50.8. The unfavorable indicators also moved in the right direction as there were fewer disputes, fewer bankruptcies, fewer credit rejections and fewer dollars beyond terms. “The sense is that the weakest companies fell by the wayside as the economy toughened and now all that is left are the survivors,” said Kuehl. “The good news is that in a recession, this process allows the solid companies to pick up market share and recover much faster. There is some anecdotal evidence that this process istaking place. As some businesses vanish, their slice of the business is being absorbed by other competitors.”
cmi_july_2009

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Today, the Federal Trade Commission (FTC) announced that it would further delay enforcement of the “Red Flags” Rules by another three months, from August 1 to November 1, 2009. The commission also announced that it would redouble its efforts to educate small businesses and other entities about complying with the Rules and work to ease compliance by offering additional resources and guidance to clarify whether businesses are covered and what they must do to comply.

“Although many covered entities have already developed and implemented appropriate, risk-based programs, some—particularly small businesses and entities with a low risk of identity theft—remain uncertain about their obligations,” said the FTC in a release. “The additional compliance guidance that the Commission will make available shortly is designed to help them.”

Additionally, the FTC released a set of FAQs for the guidelines that address how the agency intends to enforce the Rules, noting that “Commission staff would be unlikely to recommend bringing a law enforcement action if entities know their customers or clients individually, or if they perform services in or around their customers’ homes, or if they operate in sectors where identity theft is rare and they have not themselves been the target of identity theft.” The full set of FAQs can be found here.

NACM has worked diligently with the FTC to increase awareness of the “Red Flags” Rules, most recently meeting with FTC officials just two weeks prior to the delay to discuss the lingering confusion surrounding the Rules and its application.

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The recovery from the recession of 2008‐2009 continues to be a controversial topic as there are arguments asserting that the economy really has touched bottom and is on the road to rebound, just as there are arguments that assert that the economy has been severely damaged by the downturn and is not yet ready for recovery. The
latest Credit Managers’ Index (CMI) tends to favor the first interpretation although the data is not without some warning signs. “The latest CMI is holding steady and showing stability in the credit sector. The data has not yet been enough to push past the point of contraction to expansion, but it is getting ever closer to that point,
suggesting that expansion is only a month or two away,” said Dr. Chris Kuehl, NACM’s economic analyst. Download the full CMA Report.

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