NACM Credit Manager's Index Slips Again in March

Businesses in both the service and manufacturing sectors have been particularly hard hit by the nation’s economic slowdown, continuing the decline in a major credit index produced by the National Association of Credit Management.

The seasonally adjusted Credit Manager’s Index (CMI) fell in March for the seventh time in eight months, losing 1.6%. According to commentary and analysis from Dan North, Chief Economist for global accounts receivable management service provider Euler Hermes ACI, the decline was driven by the dollar collections component which fell a record 7.8%, "but the weakness was widespread," he said. "Even without the drag of the dollar collections component, the combined index would have fallen, as a total of eight out of the 10 components fell." Collections problems also appeared in the accounts placed for collection component, which is now below the 50 level, signaling economic contraction.

"Weakness in collections suggest that businesses are having cash flow problems, reflecting the erosion of the economy as a whole," North continued. He believes that credit managers are starting to feel the effects of a deflating housing bubble and a slowdown in the economy caused by the Federal Reserve’s monetary tightening. This is evidenced by businesses in both services and manufacturing that have been particularly hard hit by the slowdown in construction spending and the dramatic fall-off in the demand for building materials. "With the median price of existing homes falling for seven consecutive months on a year over year basis, it would appear that the effects of the bursting housing market bubble will continue for some time,"
he said. "In the meantime, the plethora of negative data from the first two months of 2007, such as weak job growth, a dramatic fall in durable goods orders, slack retail sales, and of course deteriorating conditions in the sub-prime mortgage market, all reflect an economy is surely going to continue slowing."

The deflation of the housing bubble has been seen as a factor in slowed consumer spending, which is sending shockwaves throughout the economy and causing falling stock prices on Wall Street. "As of January 2007, asset value equivalent to 15% of GDP has disappeared from the housing market," North explained. "This fall in value will not only cause defaults to rise and credit conditions to deteriorate, but it also will destroy some of the equity built in the past few years, equity that has fueled consumer spending. The consumer accounts for two-thirds of all economic activity, so a faltering consumer will surely lead to a faltering economy. On a more intuitive level, asset value equivalent to 15% of GDP simply cannot disappear without significantly affecting the economy."

In a recent commentary, North compared the current housing slowdown to the popping of the stock market bubble in 2000. That analysis is available upon request.

Sector by sector analysis of the CMI follows:

Manufacturing Sector
The manufacturing sector fell 3.0% driven by a massive fall in dollar collections of  10%. However, the weakness was also pervasive as seven of the 10 components fell, and even without the fall in dollar collections the index would have fallen 2.2%. Comments from survey respondents point to an ".economic slowdown in (the) homebuilding industry.," ".customers .
demanding longer payment terms," and businesses "affected by Housing Starts
downturn."

Service Sector
The service sector fell 0.2%, also driven by a steep drop in dollar collections of 5.5%. Suppliers of building materials seem to be particularly hard-hit. One respondent stated that  the decline in the housing market has reduced ".our volume 50%." And another is engaging in the somewhat risky practice which started the woes in sub-prime mortgages, stating that,  "We are starting to take on credit for people that are less creditworthy than we have before."

March 2007 vs. March 2006
On a year-over-year basis, the combined CMI fell 3.1% as both the services and manufacturing sectors declined. Although all of the indexes remain above the 50 level, indicating economic expansion, their erosion over the past 12 months reflects an economy which has been on the wane, and one which is now likely to weaken even more rapidly.

A complete view of the CMI can be viewed online at www.nacm.org.