When the specifics of the decline are examined, it is apparent that the real damage occurred in the volatile service sector.
Columbia, MD (PRWEB) July 31, 2012
The Credit Managers’ Index (CMI) dropped in July from 54.5 to 53.4. For the first time in over a year, sales fell below 60, and by a significant degree. The reading of 58.5 is worse than at any point in 2011. The new credit applications index sits at 57.2, a long way from the 61.9 registered in January when expectations were upbeat. There were also declines in dollar collections and amount of credit extended. Altogether, the favorable factor index slid from 60.2 to 58.9, marking the first time it has fallen under 60 since November 2011. It became obvious in May that another spring swoon was underway, and the summer is again becoming an extension of the deterioration.
The unfavorable factor index fell to 49.8 marking the first time since the end of 2010 that this index has been in contraction—below 50, the neutral line separating contraction and expansion. Only two unfavorable factors registered above 50 in July. In March, all six factors were over 50. Rejections of credit applications managed to remain stable and there was a small improvement in accounts placed for collection, but there were more disputes, which slipped deeper into the mid-40s to 47.6. Dollar amount beyond terms also fell, to 47.8, after managing to hit 50.5 in June. Finally, dollar amount of customer deductions slipped a bit and filings for bankruptcy worsened.
“This is a precipitous fall, and it is unlikely that a reversal will be swift,” said Chris Kuehl, PhD, economist for the National Association of Credit Management (NACM). “When the specifics of the decline are examined, it is apparent that the real damage occurred in the volatile service sector.”
The service sector index dropped from 55.3 to 54, the lowest reading since November 2011. It was the sector’s unfavorable factors that caused the CMI to drop. The unfavorable index now teeters on the edge of contraction, slipping from 52.2 to 50.3. All factors fell, and only two remain above 50, whereas, in April, all were above 50. Disputes, dollar amount beyond terms and bankruptcy filings all registered sharp drops.
The manufacturing sector index was not exactly promising, falling from 53.6 to 52.8. Sales fell from 59.1 to 57.2 and haven’t been this low since early 2011. “Much of this fall can be attributable to the slump in export activity as well as in inventory numbers,” said Kuehl. “In January, many companies started to build inventory in anticipation of projected growth. Then the economy stalled, and that inventory became an anchor: material and product that could not be sold or turned into anything useful. Now manufacturers have to clear that inventory before they can get engaged in new production, delaying recovery that much more.” The good news from this period had been fewer issues for the companies that survived the first round of economic downturn. It would appear that the companies applying for credit are the ones that are doing well, and approvals are not generally suspect.
The more worrisome data comes from the manufacturing’s dollar amount beyond terms, which slid to 47.8 from 49.2. “This is a concern. It signals that some customers are struggling to stay current and are perhaps having cash flow issues, and these will likely not dissipate in the immediate future,” said Kuehl.
In prior CMI reports, Kuehl had noted that the economy can survive a stall in growth, provided there is no further deterioration in business conditions. However, Europe’s continuing crisis affects exports, and now billions of dollars have been lost to the U.S. drought. The two sectors that had been pulling more than their own weight were manufacturing and farming. Thus far it is hard to see what impact the drought will have on the greater manufacturing and service economies, but given that the farm sector helped drive manufacturing last year, the sudden drop in demand for machinery isn’t welcome.
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