Responses Reveal Continuing Subprime Havoc and Other Problematic Conditions Impacting More Industries
Columbia, Maryland: December 3, 2007—The seasonally adjusted Credit Manager’s Index (CMI) fell for the third consecutive month in November, losing 0.7% as both service and manufacturing sector indexes declined. Although the drop was relatively small, all six unfavorable factors components fell, leaving five below the 50 level, indicating economic contraction. “This is the first time that there has ever been more than four components indicating contraction since the inception of the CMI in 2002, and it could well be a harbinger of things to come,” said Daniel North, chief economist with credit insurer Euler Hermes ACI.
North listed current conditions: gasoline prices are high, housing prices are low, the dollar is crumbling, consumer confidence is plummeting, holiday sales have been mixed at best, credit is drying up, bankruptcies and foreclosures are on the rise, the employment situation is decaying and conditions in the housing industry are getting worse. “It is a potent combination which could lead the economy into a recession in the first half of next year, yet both the economy and the CMI have remained resilient so far,” he said. “However, cracks are starting to show and the Fed will almost certainly cut the Fed Funds rate again at its December 11th meeting in an effort to forestall a recession. In all likelihood, the Fed will have to continue to cut the Fed Funds rate well into 2008, perhaps as low as 3.5%. Credit managers are facing tougher times ahead.”
The manufacturing sector fell 0.3% in November to a seasonally adjusted 52.7. Five of the 10 components fell, with bankruptcies plummeting 7.9%, the second largest drop on record. “As has been the case for months now, comments from the survey participants were mostly about the terrible conditions in the housing market, but this month there are some unhappy comments from other industries as well indicating more widespread weakness,” said North. Of note, a manufacturer of nuts, bolts, screws, etc. responded that manufacturing is cutting back to a four-day week. A petroleum refiner said, “We are seeing stress across industries due to rising energy and raw material costs.” And a manufacturer of cookies and crackers commented how the housing crisis is now directly affecting even the food industry: “We’re affected by the trauma of home builders, mortgage banks and title companies.” North commented that the bright spot of the report was that the sales component erased all of last month’s 5.2% fall.
The service sector index fell 1.1% on a seasonally adjusted basis in November. The decline was widespread as six of the 10 components fell. “Like in the manufacturing sector, bankruptcies led the way down, falling 5.9%,” North said. “Also like the manufacturing sector, most comments were negative ones about the housing industry, but downbeat comments from other industries are now ringing in.” North summarized the responses, saying, “One participant from the photocopying industry replied, ‘Even our best customers are paying beyond 100 days past due.’ Another from the plastics industry, referring to the impact of higher oil prices, said, ‘We have had several customers close their doors as a result.’ Finally, another from the tire industry described the state of the economy perfectly: ‘There appears to be no question that the economy is turning negative. With the housing industry in a slump and the price of gas over $3.00 a gallon, individuals simply do not have the money they once had to make retail purchases.’”
The Credit Manager’s Index over the past 12 months has fallen 2.2%. North said, “Although there were no dramatic year-over-year movements in any of the components, the decline was widespread as all 10 components fell. Manufacturing fell 2.4% and service fell 1.9%. In both indexes, eight of the 10 components fell, supporting the notion of a pervasive but slow decline.”
The CMI, a monthly survey of the business economy from the standpoint of commercial credit and collections, was launched in January 2003 to provide financial analysts with another strong economic indicator.
The CMI survey asks credit managers to rate favorable and unfavorable factors in their monthly business cycle. Favorable factors include sales, new credit applications, dollar collections and amount of credit extended. Unfavorable factors include rejections of credit applications, accounts placed for collections, dollar amounts of receivables beyond terms and filings for bankruptcies. A complete index including results from the manufacturing and service sectors, along with the methodology, is attached or can be viewed online at http://www.nacm.org/resource/press_release/CMI_current.shtml .
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