Country Risk1 300The readings last month were a cause for some alarm and that peaked interest in this month’s version of the CMI.  This is a survey that is conducted once a month by the National Association for Credit Management. It is modeled on the Purchasing Managers Index as conducted by the Institute for Supply Management and the research firm Markit. Using the same diffusion index and the same basic premise the survey captures what is happening in the credit world from the perspective of those who are in the thick of both issuing credit and trying to collect on the credit that has already been issued. Should you want to see the entire report complete with all the nifty graphs and charts go to www.nacm.org. Over the nearly decade long evaluation of this survey data it has been interesting to note that the CMI often predicts the behavior of the PMI by around a month.

The slides in the CMI are often reflected in a slide for the PMI in the next month and likewise a gain in the CMI is reflected in the PMI gain. This makes a certain amount of sense given the function of the two – credit managers will likely weigh in before the purchasing manager is given a chance to do their job. The ebb and flow of credit is close to the overall performance of the economy as it details where there is progress and retreat. The Credit Manager’s Index has not exactly been the life of the party of late.  Many of the other indicators have been trending in a positive direction but the CMI has been sounding warnings like some kind of credit Cassandra. The latest set of data nationally has been improving somewhat – everything from consumer confidence to the “flash” estimates from the Purchasing Managers Index. In the past few months the CMI has trended down at the same time that other indices were up or at least stable. It now appears that the CMI has joined the ranks of the cautiously optimistic and for the right reasons given the state of the current economy.

Analysis:    The reading for the combined index is up from last month – going from 54.9 to 55.1. This is certainly not a spectacular turnaround as the index was at 55.8 in November and 57.0 as recently as October. The fact is that January’s reading is still the third lowest in the last year but the good news is that it is trending back in the right direction this month. The index of favorable factors remained just as it was last month – 60.5 – but there was some variability within the categories. The real changes seem to have taken place in the index of unfavorable categories as this moved from 51.1 to 51.5. Again, this is awfully close to the numbers from last month but this means more in the great scheme of things because the unfavorable numbers have been so close to the dividing line between contraction and expansion.

The breakdown of the favorable factors have been interesting. The “sales” category barely budged from what it was last month and remains low as compared to much of last year. The lowest level reached this year was last March when the reading fell to 59.1 and the highest levels was in October when it reached 65.7.  The current reading is about in the average range and is still above 60 – a very good number given the turmoil of the last several months. The “new credit applications” number fell somewhat this month – moving from 59.2 to 58.3, about what it was in November.  There is no real cause for alarm at this stage but a further slowdown in credit applications would suggest more caution in the business community and less expansion activity.

The “dollar collections” reading improved dramatically from 56.6 to 60.1 and that may well be the best news in the whole category as it signals that companies are paying their bills more regularly. The “amount of credit extended” category fell however – from 64.6 to 62.2. This is still well within the 60s and that is certainly good news but the fact is that there has been some pullback in credit activity and the real question is why. It seems that there is more caution within the credit community as a whole and that is affecting the number of applications as well as the amount of credit extended.      There has been more activity of note in the unfavorable categories starting with “rejections of credit applications” as this shifted from 51.5 to 51.9. It would appear that there may be fewer applicants but those who are applying are more creditworthy. The “accounts placed for collection” went from 51.1 to 50.1 and that is not a real positive sign as it further indicates that companies are in distress and unable to stay current with their debt. The “disputes” category improved a little but is still in the contraction zone as it moved from 48.5 to 49.5. At least this is trending in the right direction. The “dollar amount beyond terms” climbed out of the contraction zone as it moved from 48.7 to 50.6, something the “dollar amount of customer deductions” also did as that reading went from 48.5 to 50.2. The “filings for bankruptcies” went from 58.5 to 56.2 and this is something of a concern although the readings are in the solid mid‐50s. There is some suggestion that the weaker companies that have been in distress are finally giving up. The good news overall as far as the unfavorable category is concerned is that there is only one reading under 50 (disputes) and last month there were three. Nothing to suggest an imminent boom but it would appear that conditions have started to improve.

Source:  Courtesy Dr. Chris Kuehl, Armada Corporate Intelligence