May 2010 Credit Managers' Index: Service Sector Under Stress

There has been a great deal of concern in the financial sector in the last month as the world reacts to the mounting threats from the "Greek disease." While it has been acknowledged that the crisis is disrupting the markets in Europe as well as the rest of the world, there has been relatively little impact on the rest of the global economy to this point. The data from May's Credit Managers' Index, issued by the National Association of Credit Management (NACM), seem to suggest that this turmoil is having an impact on the U.S. credit and business community-perhaps more than most people realize.

"Over the last few years the CMI has tended to be a harbinger of things to come as far as the overall economy is concerned as it presages the activity in the credit and financial communities," said Chris Kuehl, Ph.D., NACM economic advisor, who prepares the CMI report each month. The CMI dipped in 2008, three months before the rest of the economy started to react to the banking debacle that engulfed the U.S. and the rest of the world soon after. Now the CMI is dipping again-and dramatically-while at the same time the rest of the economic indicators have barely started to respond. "The sense among observers has been that the Greek crisis and its implications would soon have the same kind of impact on the credit environment that the sub-prime crisis had in 2008. Last month's data seems to bear this out."

Kuehl noted the growing signs of distress in credit circles in the last few weeks, the most obvious being the rise of the London Interbank Offered Rate (LIBOR) to a point not seen since July 2009. The LIBOR is the benchmark for banks making short-term loans to one another and often determines the rates that drive the rest of the economy, more so than the interest rates set by central banks. "A growing concern among bondholders, about the viability of the European economy, has caused some wild swings in both bonds and equities," said Kuehl. "The data from the CMI is both reflecting this and anticipating some more trouble in the future."

There has been deterioration in both the positive and negative factors across the board, although the service sector has been hit harder than manufacturing. Sales have slipped from 65.7 to 64.5 which is not a dramatic reduction, but comes after five months of steady increases. The level of dollar collections fell as well-from 62.1 to 59.7-as some business sectors struggled to keep pace with the nascent recovery. There was also a reduction in the level of credit as the financial system tightened again.

Some of the more urgent changes took place in the negative categories. The dollar amount of customer deductions fell from 55.7 to 51.8. There is a sense that accounts have become nervous again and have started to worry about their access to capital in the coming months as well as their ability to keep generating sufficient demand to maintain their growth expectations. "There is not the level of panic that existed in the months leading up to the credit meltdown, but there is far more concern about what is happening in the global markets than existed even a few weeks ago," said Kuehl. "The fact that the major concern is rooted in Europe is slightly better news than if it were motivated by another meltdown in the U.S., but it is entirely possible that the Greek disease will spread."

The full report, complete with tables and graphs, along with CMI archives may be viewed at

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