ChrisKuehlThis month’s version of the Credit Manager’s Index is surprising on a number of levels.  It was expected to show some distress and that was reflected in the down numbers for the service sector.  At the same time the manufacturing sector looked as good as it has since the end of the recession.  What follows is an excerpt from the latest CMI.

The data that has been coming from a variety of sources this week indicate that analysts are really not all that clear as to the impact of the government shutdown. In truth the worst of the economic impact was avoided with the extension of the debt ceiling and the shutdown of the government didn’t last long enough to throttle the economy. The real impact was the extension of the uncertainty that business has complained about for years.  That makes the readings from the CMI all the more interesting.

Dr. Chris Kuehl, Chief Economist of the NACM provides his analysis:  This may have been the most watched month in years. The dominant story for the bulk of the last quarter has been the political impasse that resulted in a government shutdown of three weeks duration along with the threat to the US credit rating.  Everyone has been hanging on the edge of their seat to see what all this has been doing to the economy as a whole and the predictions have ranged widely from assertions of utter financial chaos to no real response at all.  Most of the economic indicators that have been released in the last few weeks show there has been damage – retail sales are down, consumer confidence has been shaken, industrial production slumped and so on.  The Purchasing Managers Index (PMI) slipped a few points this last month as well.

Then there is the Credit Managers Index and it is telling a slightly different story.  The reading last month for the combined index was a respectable 56.6 – the highest reading seen in over a year and a half. The reading this month was 56.7. It is good to remember at this stage that the CMI tends to be a leading indicator. The credit decision is very early in the business process and thus signals future intent. The sense thus far is that all the political turmoil did not have an impact on the future plans for business and that comes across very clearly when the manufacturing data is examined apart from services.

The most surprising data comes with the favorable index numbers.  The combined reading for these sectors is 61.5 and that is a significant improvement over the reading of 60.9 in the last month. The “sales” category slipped just slightly from 62.7 to 62.5 but the important aspect of this reading is that it has been over 60 since April of this year.  The “new credit applications” reading rose from 57.4 to 58.5 and that is a very good sign. There are still many operations seeking additional credit and that indicates they are seeking to grow and expand.  This alone would not be a cause for great celebration as there are many occasions that companies seek credit but are doing so from a position of weakness. The better news is that “amount of credit extended” also increased from 62.9 to 63.8 and that suggests that those asking for additional credit are good companies with solid credit ratings. These are the companies that are expecting improvements in the economy by next year. The most encouraging signal in all of this is that three of the four favorable factors are all in the 60 range now as “dollar collections” moved from 60.6 to 61.4. The economy as a whole may have been at risk from Congressional action (or inaction) but the fact is that there was a rescue of sorts engineered at the very last minute and this avoided the direst of predictions at the last minute.

When one looks at the unfavorable factors there is equally good news although not quite as spectacular as in the favorable category. The overall index of unfavorable factors declined a little – down to 53.6 from the previous month’s 53.8. The movement in the sub-categories was varied. The “rejections of credit applications” slipped from 53 to 52.1 and that suggests that some of these new applications for credit were coming from companies that are in some financial distress and were hoping to buy some time at the expense of a creditor. There was also a slide in the “accounts placed for collection” category as it moved from 54.3 to 53.3. There are more companies having issues and that may be directly related to the government shutdown and related stress given that 156,000 companies do work for the government. There was a slight improvement in the “disputes” category as it moved from 51.7 to 51.8 and there was also an improvement in the “dollar amount beyond terms” as it went from a reading of 52.2 to 52.7. Likewise, there was a slight improvement in “dollar amount of customer deductions” as it moved from 51.7 to 51.8. These improvements have been minor but the important point is that they have been stable and trending in the right direction. There was a slight decline in the “filings for bankruptcy” category – moving from 59.8 to 59.6.

The contrast between the manufacturing sector and the service sector could hardly be starker. As far as the manufacturing community is concerned it would appear the political impasse was of little consequence – at least for the time being. The overall index moved up from 56 to 57.3 and that is the highest reading since the start of the recession – much closer now to the 60s than at any time in the last few years. The real progress was seen in the index of favorable factors as this rose from 60 to 62.4. A jump of over two points in the readings is unusual and this is especially true given all the turmoil of late. The most surprising reaction was in “sales” as the index moved from 61.6 to 64.3. This is another reading that has not been this high since the recession started and suggests that some sectors of manufacturing are set to expand impressively in the months to come. All through the favorable categories there were significant increases. The “new credit applications” moved from 55.6 to 58.9 while the corresponding “amount of credit extended” moved from 62.4 to a startling 64.8. All of these numbers are at levels not seen in over five years. Even “dollar collections” moved from 60.5 to 61.4. The spectacular performance of the manufacturing sector seems inexplicable given the turmoil connected to Congress but this is data that is designed to be predictive. The bulk of the manufacturing community seems to be shrugging off the Washington drama as they anticipate a more productive 2014. The one caveat to note is that service sector numbers are far less impressive than the manufacturing readings and there is a chance this sector drags everything down.

The good news has extended to the unfavorable factors as well. The overall score improved from 53.3 to 53.9 and that puts the reading as high as it has been in over three years. Each of the sub-categories showed some positive trending as well. The “rejections of credit applications” index slipped just slightly from 52.4 to 52. This is not all that shocking given that there are some businesses that have been stressed in the last few months. They are asking for credit but are not in a good position to have that request granted. The “accounts placed for collection” reading went from 53.7 to 54 and “disputes” improved from 50.8 to 52.1. This category has spent much of the last two years in the 40s – in August it was still at 49.8. This marks the second month in a row that it has been above 50 and that is a good sign.

For the rest of this report and the section on services check out www.nacm.org later this week.

Courtesy of Dr. Chris Kuehl, Armada Corporate Intelligence and a contributing editor of BIIA