This month’s reading was not what was expected but that has suddenly become a common refrain as some of the other data releases are starting to show some similar trends. The short version of the reaction is that the economy is clearly not out of the woods just yet. The latest revision of first quarter GDP has been a shock as it now appears that the economy contracted by far more than originally reported. Add to this the latest data on durable goods and there is something amiss. The consumer confidence numbers have recovered to levels not seen since the start of the recession but that renewed level of enthusiasm has not been enough to pull the economy forward – or so it would seem. After the readings last month it was expected that the CMI would show continued progress but the manufacturing sector was flat and the service sector experienced a very sharp decline – enough to drag the combined index down.

It should be noted that the CMI numbers are still firmly in positive territory but they are not trending in the direction preferred. The reading this month is 56.1 and that is slightly higher than it was in April but almost a point lower than in May. In the last months of 2013 and the very beginning of 2014 these readings were closing in on the 60 mark (57.1 in November and 57.3 in January).

Analysis:   The damage seems to be greater in the unfavorable categories although there was some decline in the favorable as well. The combined index of favorable moved slightly down from 62.7 to 62.4 but that is still firmly in the 60 range, the third month in a row. The biggest drop was in “sales” which went from a several years high of 65.6 to 63.9. That is still a reading higher than at any point since November of last year but after the surge last month it was hoped that the trend would accelerate. The “new credit applications” reading went up and that could be either good news or bad. It is now over 60 for the first time since the recession – sitting at 61.5 after a 58.9 mark in the previous month. The problem is that there were more rejections of credit applications as well. When there are more applicants and more rejections it is a signal that more companies in financial distress are seeking credit in the hopes that somebody will help them survive. The category of “dollar collections” dropped out of the 60s as it went from 61.3 to 59.3. This is still a pretty respectable number but not trending in the right direction. The “amount of credit extended” slipped just a little but stayed very close to the record highs of late. It went from 65.0 to 64.8, remaining well into the 60 category.

The real shifts seem to be taking place in the unfavorable categories and that suggests a certain amount of economic and financial distress. The combined unfavorable category slipped by almost a full point – from 52.8 to 52 but the bigger news was the change in some of the categories contained within the combined number. The “rejections of credit applications” shifted from 52.7 to 52 and that suggests that there are more desperate applicants out there. The “accounts placed for collection” also shifted a little – from 53.8 to 52.5. This is a sign that more creditors are falling too far behind to ignore and that has sparked more collection activity. The “disputes” category slipped back under 50 again and is now sitting at 49.5 after being at 50.2 in the previous month. This is an area that has been worrying for a few months now and is another signal of some distress financially as companies try to change the terms of their arrangements using whatever leverage they can. There was also a major dip in the category of “dollar amount beyond terms” as it slipped below 50 for the first time since December of last year. It is now at 49.6 after being at 51.5 last month. The “dollar amount of customer deductions” also slipped under 50 for the first time in over two years as it is now sitting at 49.4 – a full point down from where it was last month. The category of “filings for bankruptcies” actually improved and is as robust as it has been in some time. The reading this month is 58.9 and last month it was 58.4. It will be interesting to see if this reading gets worse in future months as these other categories are now trending badly.

Courtesy Dr. Chris Kuehl Armada Corporate Intelligence