January CMI Reports Jump in Extension of Credit

"The assertion is that 2011 is the transition year 2010 was supposed to be," said Chris Kuehl, PhD, managing director for Armada Corporate Intelligence and economic advisor for the National Association of Credit Management (NACM). "The ‘green shoots' that started to appear about this time last year wilted and died by the end of spring, but 2011 is starting to show some signs of greater economic stability," he said. "This trend has been noted in several indexes and indicators and the Credit Managers' Index (CMI) is no exception." There was an overall improvement in the numbers-from 55.8 to 56.4-the highest point reached in the combined index since April 2010 when the index hit 56.5. What makes this latest number more encouraging is the expectation that the index will continue to see improvement over the next several months, noted Kuehl. Back in April that high point was followed by steady decline that took the index all the way back to 53 in August before a slow rebound got underway.

The most encouraging indicator this month is amount of credit extended. The jump from 61.7 to 64.8 is very significant as this is the signal that many have been waiting to see. While sales and new credit applications slowed a little in January, the numbers remain robust due to the overall increase in activity in these indicators over the past several months. Sales dropped from 65.9 to 63.5, which is still very respectable given that the holiday season had ended. New credit applications fell from 60.1 to 58.6, but that is also somewhat attributable to the arrival of a generally slow time of year as compared to the last quarter.

The fact that credit extended sharply increased despite the slowdown in sales and credit applications indicates more credit availability than in previous months-quite a bit more. This indicator has not seen such high readings since early 2008, and those were barely at 62, much less at 64.8. Banks are reporting a loosening of credit in the United States and since lenders are more active, more commercial credit is appearing as well. Companies are far more willing to offer credit and, as they start to consider expansion in the coming year, it will also create more opportunity to engage their clients.

This was not the only piece of good news in the CMI. There was improvement across the board in the negative factors. Rejection of credit applications was subdued and there was improvement in accounts placed for collection. Even disputes and bankruptcy data showed improvement. The positive development in these negative indicators over the last few months has been identified as an important trend in previous years.

"As companies start to see increased sales and begin to anticipate growth opportunities in coming months, it is important that they get positioned to take on more debt, if needed, for that expansion," said Kuehl. "If they are planning to access more credit, they generally have to catch up on their current debt first." In the midst of the downturn, companies tried to conserve cash flow at all costs, during which they are more prone to stretching out credit obligations. The result is reflected in the deterioration of unfavorable factors. As companies recover and catch up on their credit, they are in a position to request more and in a position to be granted that access. "This is what seems to be happening now," said Kuehl. "Companies are setting themselves up for more growth in the months to come. The data from the CMI is reflected in the latest economic numbers from the Purchasing Managers Index (PMI) as well as surveys from groups like the National Association of Business Economists and the Conference Board."

The index now stands at a level that normally signals more rapid expansion in the near future.

Click here to view the full report, complete with tables and graphs, along with CMI archives.

Source: National Association of Credit Management

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