NACM Credit Manager?s Index Shows Strength and Potential Weakness

January’s Credit Manager’s Index continues to suggest that the economy is reasonably strong, but it also shows a worrisome downward trend, advises Dan North, Chief Economist with credit insurer Euler Hermes ACI. While the Index now stands at 53.7, indicating modest economic growth, it is also down substantially from November?s 57.4, and three of the Index’s ten components are now below 50. The manufacturing sector has fallen for seven of the last nine months?six out of nine for services?and in January, seven of ten components fell in both the manufacturing and services sectors. This data reflects trends in some of the most recent macroeconomic data: weak fourth quarter GDP of 1.1 percent, a faltering housing market, and below expectations reports for both December job growth and from the Institute of Supply Management (ISM) Index.

“Once again, high energy costs, rising interest rates, a flat yield curve, and a weakening housing market are the major drags on the economy,” says North. “The consumer has been the offsetting factor, which has kept the economy growing and the CMI above 50, but consumers could hit a rough patch if their two sources of funding dry up?financing from home equity and credit cards, and incomes, which are falling below consumption. The overall picture suggests that business conditions could weaken in the spring, given the possibility of a consumer slowdown and the trends in the CMI.”

Manufacturing Sector Results
The first month of the new year saw little change to the manufacturing sector. The CMI ended January 2006 just slightly below the December 2005 level, down 60 basis points, to end at 52.4 percent. A look at the favorable factors shows all levels above 50, reflecting some economic growth. Although there was negative growth in three of the four factors, positive growth was seen in new credit applications, which increased 680 basis points.

The index of unfavorable factors fell 60 basis points to 52.4, down from 53 percent. Four of the six factors finished above 50, while disputes and amount of customer deductions finished somewhat below this mark.

Service Sector Results
The service sector ended January 200 points below year-end 2005. Much of the decline can be seen in the favorable factors?where there were lower levels of sales and amount of credit extended?down 780 and 650 points, respectively. At 54.9 percent, favorable factors recorded its lowest level in ten months.

Overall, unfavorable factors dropped 80 points, to end at 51.7 percent. Lower levels of accounts placed for collections were offset by dollar amount beyond terms. Five of the six factors showed some economic growth, posting levels higher than the 50 percent mark.

Comparison of January 2006 to January 2005
Comparing January 2006 to January 2005, we find an improvement in the overall CMI: the CMI finished 100 basis points higher than just one year ago. This modest growth was fueled by higher levels of sales and new credit applications. However, these positive signs were offset by a higher level of dollars beyond terms and rejection of credit applications.

Methodology Appendix
The CMI data has been collected and tabulated monthly since February 2002. The index, published since January 2003, is based on a survey of about 500 trade credit managers during the last 10 days of the month, with about equal representation between manufacturing and service sectors. The survey asks respondents to comment on whether they are seeing improvement, deterioration, or no change for various favorable or unfavorable factors. There is representation from all States, except some of the less populated such as Vermont and Idaho.