At about this time, one should be thinking that all of this is going to lead somewhere that may not be all that good for the overall economy.
Columbia, MD (PRWEB) March 30, 2012
The Credit Managers’ Index (CMI) for March is trending in a positive direction and is yet more reinforcement for the notion that the economy is doing better and that the recovery may be real. The combined index is now at the highest level seen in well over a year, even if the 56.2 reading is lackluster compared to the boom years of the last decade that featured index numbers well into the mid-60s and occasionally in the 70s.
The good news this month stems from an improvement in unfavorable factors, while favorable factors held their own. Sales, dollar collections and amount of credit extended all dipped a little, but stayed above 60. In fact, all favorable factors remained above 60. The more significant shifts took place in unfavorable factors. For the first time in more than a year, all unfavorable factors were over 50 and the combined total was a solid 52. The biggest jumps took place in the more sensitive indicators—accounts placed for collection moved from 50.9 to 52 and disputes moved from 49.7 to 50.9. Disputes have not been out of the 40s since July of last year and even that was only for one month. Dollar amount of customer deductions went from 48.5 to 51.1, which is only the third time it has been above 50 in the last year. Overall, the index of unfavorable factors reached the highest level in over a year. In the last four months, the numbers have been rising from the contractionary levels set last year. In November the index broke 50 by the barest of margins. Since then, the index has crept up in increments—50.4 in December, 50.3 in January, 51.1 in February and 52 in March.
What does all this really mean? One clue to these improvements is that bankruptcies have started to fall. The latest number is as strong as it has been in months and is a signal that most of the weakest companies have gone by the wayside, providing new opportunities for companies that survived the recession. “There is a dirty little secret among economists—some parts of a recession are helpful,” said Chris Kuehl, PhD, economist for the National Association of Credit Management (NACM). “The fact is that during a boom period, there are many companies surviving and even thriving in spite of themselves. They are not all that well run and succeed mostly because everybody is succeeding in the boom.” When conditions start to deteriorate these companies resort to tactics designed to boost cash flow at the expense of long-term profit. They become the low-cost providers and undercut their competitors, but usually in an unsustainable way. Eventually the race to the bottom ends and these competitors begin to fail and exit the market Kuehl said. This is the point when the stronger competitors are able to finally reassert themselves and get the pricing they need to succeed long term.
“At about this time, one should be thinking that all of this is going to lead somewhere that may not be all that good for the overall economy,” said Kuehl. “One would be correct. The next phase in the progression involves a boost in the inflation threat.” Kuehl explained that up to this point, the pressure of the recession and the plethora of low cost competitors have combined with a consumer who doesn’t have much tolerance for higher prices. With the cost cutters going bankrupt and the consumer feeling a little flusher, the remaining companies can now start to hike prices. This is certainly good for their bottom line, but will mean that prices will start to rise and that fuels inflation. The current commodity-led increase is enough of a threat, but once the general price situation shifts, the real inflation threat develops as this will stimulate wage hikes as well. The rise in inflation is a sign that the economy as a whole is on a real rebound and now the emphasis will be on figuring out how to restrain that inflation surge without sending the economy back into recession.
About the National Association of Credit Management
NACM, headquartered in Columbia, Maryland, supports more than 15,000 business credit and financial professionals worldwide with premier industry services, tools and information. NACM and its network of affiliated associations are the leading resource for credit and financial management information, education, products and services designed to improve the management of business credit and accounts receivable. NACM’s collective voice has influenced federal legislative policy results concerning commercial business and trade credit to our nation’s policy makers for more than 100 years, and continues to play an active part in legislative issues pertaining to business credit and corporate bankruptcy. Its annual Credit Congress is the largest gathering of credit professionals in the world.
NACM has a wealth of member experts in the fields of business-to-business credit and law. Consider using NACM as a resource in the development of your next credit or finance story.
Source: National Association of Credit Management