Are there rays of hope coming from the Credit Managers’ Index (CMI)? It would certainly seem that way after looking at its September performance.
It all comes down to the nature of the credit manager’s world. For all intents and purposes, credit managers live in the future. They may be pleased that their customer had a good month, but what they are really interested in is whether that customer will have a good month when it is time to pay that invoice.
Much of what the credit function focuses on remains in the realm of 30, 60, 90 and 120 days from now. When credit professionals answer the monthly survey questions for the index, they are forecasting in many respects — and that’s the prime reason that the CMI, as a whole, tends to predict future economic behavior.
During the past eight years, the CMI repeatedly has projected the overall performance of the U.S. economy by at least a month. In the early part of 2008, the CMI started to show weakness and was in decline well before the economy as a whole tumbled. Likewise, there were more signs of recovery in the CMI earlier in 2009 than other economic data showed.
Breaking Down the Numbers
“This pattern makes the data for September all the more interesting,” said Chris Kuehl, economist for the Columbia-based National Association of Credit Management (NACM).
“For the past few months, there was a slow deterioration of key credit conditions, and many were expecting to see more declines this month,” said Kuehl. “Instead, the combined index returned to the levels set in July. Granted, the index had been higher than recent readings since October of last year, but moving from 52.7 to 53.8 is not insignificant, and it brings the combined index back to levels seen in the spring months.”
The better news is in the breakdown of favorable and unfavorable factors.
The recovery in favorable factors takes the index back to May’s levels and the lift was impressive — improving from 58.1 to 59.9. The index was last at 60 this past April. That gain was driven in no small part by additional sales, which moved solidly past 60 to 61.4 and is at the highest point since April.
There were corresponding solid index numbers in new credit applications, dollar collections and the amount of credit extended. These are all very good signs for future development and suggest that in the midst of all the gloom and doom provoked by political wrangling, there is business taking place and growth manifesting itself.
Negative Numbers Positive?
There were encouraging signs in unfavorable factors as well. The majority of the readings remain below 50, still signaling weakness, but the combined score moved up slightly, from 49.1 to 49.6. This is not cause for celebration, but at least the pattern has started to reverse and the expectation is that these readings will be back above 50 before too long.
The category that continues to show decline is rejections of credit applications, which is not all that shocking as more than a few companies are still trying desperately to get additional credit to hold on a little longer. The number of bankruptcies declined at the same time, signaling that perhaps somewhat fewer companies are struggling. It may also signal that the companies walking that financial tightrope have finally given up.
The fact that more credit applications have been submitted at the same time that more are being rejected would seem to suggest experimentation is taking place. The companies almost seem to be testing the waters to see what their options might be. Sales are up, and that is good news, and now there may be attempts underway to judge the enthusiasm of supplier companies to expand market presence.
More Info Needed
“The overall sense at this stage is that there is some life left in the economy. If one only looks at the numbers from July and August, it would be a very depressing story indeed,” said Kuehl.
“There is still not enough evidence to be convincing, but the most chronically optimistic could say that a recovery is at hand,” he said. “The data is sufficient enough to make the case that the precipitous plunge predicted for the end of the year may not be taking place after all. Not that there is no threat of sinking back into recession, but a deep plunge seems more and more distant.”
The online CMI report for September 2011 contains the full commentary, complete with tables and graphs. CMI archives may also be viewed at http://web.nacm.org/CMI/PDF/CMIcurrent.pdf.