The January Credit Manager’s Index (CMI), to be unveiled Tuesday afternoon, is expected to illustrate a small positive increase from the holiday-assisted December index. It’s much like the positive out of the gates found by the CMI in January 2011 – but, this time, some key statistics within seem to predict a better follow-up to the strong start than one year ago.

Chris Kuehl, PhD, National Association of Credit Management (NACM) economist, noted the parallels between this and last year, but also spelled out the potential “staying power” behind this year’s January finish that was absent by Spring 2011. New sales in January will see a bump in the not-yet-public CMI results. In fact, January’s sales numbers will show themselves to be the best in many months. That said, nothing is a guarantee going forward in this up-and-down economic recovery

 “The next few months will bear watching to see if this sales trend is repeated and sustained longer than it was in 2011,” said Kuehl. One area Kuehl seems to believe will be a harbinger of a better late winter/early spring in 2012 is a bump in new credit applications:

 “The jump from December [to January] was nothing short of spectacular,” Kuehl foreshadowed. “The trend toward more credit applications suggests a lot of new activity; it is equally encouraging that there was a gain in the number of credit applications accepted.”

(Note: The online CMI report for January 2012 contains the full commentary, complete with tables and graphs and will be available Tuesday. CMI archives may also be viewed online).

Brian Shappell, NACM staff writer

The Credit Managers' Index, to be unveiled Wednesday afternoon, is set to show the overall index was largely unchanged over the last month. But, given that September had been seen as a major success, that’s not necessarily such a bad thing. What is a bad thing, even if it’s likely to be short-lived, is the noticeable drop in sales levels.

Perhaps the quickest, most accurate way to describe the to-be-unveiled CMI is to use just two words: mixed bag.

“If one is of a more pessimistic bent, there is the continued high rate of unemployment, the struggles in the housing sector and the sense that nobody in the political realm has a clue what to do about any of this,” said Chris Kuehl, PhD, economist for the National Association of Credit Management (NACM). “There is the mess in Europe, the gyrations in stocks and consumer polls that suggest that vast numbers of people are in bed with the covers pulled over their heads. If you tend toward optimistic, there is something for you as well, especially recently.”

Perhaps the reason for those optimistic lies in the stability in recent months for the manufacturing sector, which is said to continue in November and reflect strength found in May, before a disconcerting summer dip. Additionally, market-watchers may be licking their chops on the news that Black Friday and Cyber Monday sales figures were up significantly. However, those numbers won’t actually show up in the CMI statistics until next month Without the holiday sale/marketing-inspired shopping numbers, sales will be off quite a bit in November and are said to track at the lowest level of the year.

Most economic indicators were pretty stable, aside from the dwindling number of bankruptcy filings. Kuehl, who prepares the CMI, notes the feeling is most companies that were going to file or fold have already done so. Granted, U.S. businesses haven’t purged all financial issues, “but, going forward, many companies will see opportunities to gain market share from those competitors that have left the scene and that strengthens their ability to gain momentum in the coming year,” the economist said.

(Editor’s Note: The November CMI will be release through various sources this afternoon. Check back at www.nacm.org in the home page’s news scroll to get all of the November CMI statistics and analysis).

Brian Shappell, NACM staff writer

(EDITOR'S NOTE: Solyndra LLC officially filed for Chapter 11 in U.S. Bankruptcy Court in Delaware early Tuesday. Story originally posted on 9/1/11)  As predicted in NACM’s eNews more than a month ago, “green” business has become far from gold, especially where solar is concerned. Just last Monday, NACM covered the SpectraWatt Inc. Chapter 11 bankruptcy filing. One day later, yet another company announced it was with certainty heading down the same path.

Solyndra LLC, a solar energy products firm which gained notoriety during well-publicized visit there by President Barack Obama in 2010, announced plans to file for bankruptcy protection as early as next week. It marks the third solar in a month to official file for or announce Chapter 11 in the last month, with more potential struggling firms in the pipeline. Like SpectraWatt shortly before them, the company’s high-tech solar product offerings had become “noncompetitive” as Asian manufacturers, especially those based in China, continue to deeply undercut the firm and its competitors on pricing and overhead. Even significant financial assistance in the form of federal programs could not help enough. The problems are fueling speculation about widespread, near unrecoverable problems emerging in the solar business niche. More than 1,000 Solyndra employees are expected to be out of work almost immediately as a result of the company’s proverbial white flag.

As previously noted, it’s a prediction Credit Management Association's Mike Joncich make in an interview for stories in NACM's eNews and. the new issue of Business Credit Magazine. He noted the industry's problems go deeper than just an economic downturn/slow recovery and include serious over-saturation:

"There was over-investment in those industries [during the boom], and a number of companies are going to fall out that didn't have the right ideas or right business models to survive,” said Joncich. “Credit managers have to be aware of such phenomena."

Earlier this month, Massachusetts-based Evergreen Solar filed for Chapter 11 bankruptcy protection and, months before that,  Maryland-based BP solar operation halted its activity in favor of relocation abroad to save costs.

Brian Shappell, NACM staff writer

The Credit Managers’ Index (CMI) for August hasn’t been this low in more than a year—falling from July’s 53.9 to 52.7—and is now tracking at levels last seen in 2008–2009. “The news this month is not good and comes as no shock to anyone who has been tracking the data coming from all directions,” said Chris Kuehl, PhD, economist for the National Association of Credit Management (NACM). If there is any good news, it is that the combined number has not yet fallen below 50, the threshold separating contraction from expansion. But the index of unfavorable factors fell to contractionary levels. The last time the unfavorable index was this low was in the 2009 period when the recession had just started to show signs of easing. The fact that the data was not worse this month than it was is probably worth noting as most of the other indices released in the last few weeks suggested there might have been an even steeper decline.

Kuehl said the best news in this month’s data is found in the favorable index. Here the data barely changed, going from 58.9 to 58.1. This is still much lower than most of the last year, but the precipitous collapse that took place in the companion part of the overall index did not take place here. There was even some improvement in the amount of dollar collections, while declines in the sales category were slight, from 60 to 59.2. “The most interesting aspect of the data is that extension of credit actually improved in the middle of all this gloom and doom. The fact that favorable factors have improved slightly or remained stable provides some hope that conditions will improve in the coming months,” said Kuehl. “There is still demand and business progress, but the crisis in the overall economy has been putting pressure on the finances of many companies.”

Upon examining the unfavorable factors, it is striking that the problem is primarily one of sudden business stress and failure. The biggest declines were in accounts placed for collection and dollar amounts beyond terms. These are signs of real distress among customers, but it is equally significant that filings for bankruptcies did not increase dramatically and there was not an acceleration in the rejection of credit applications. The divergence in these factors is particularly interesting and informative. While speculative, one could look at this data and conclude that companies got in trouble in the last month or so because of a sudden drop in business after anticipating better times. Evidence from earlier in the year showed that companies across the board were anticipating better days in the second half of the year and many were trying to prepare for this with expansion plans. This anticipated economic growth did not come to pass and these companies swiftly got into trouble.

If there is a small silver lining to all this, it is that the level of bankruptcies has not risen at the same pace. That means one of two things. If the economy gets back in gear in the next couple of months, companies struggling now will have some time to gain control of their budgets and be able to avoid sliding further toward collapse and ultimately bankruptcy. If the economy doesn’t catch fire to some extent in the near future, the bankruptcy rate will start to climb and the index will reflect it. The other mildly encouraging piece is that the rate of rejection for credit applications was not markedly different from last month. There is still credit available to customers that are bucking the trend. This is not like the situation at the end of 2008 when the entire credit system came screeching to a halt and even the best of companies were denied access.

The data this month is mixed but with a decidedly downward slope. The CMI remains in expansion territory, but is holding on to that status by a thread. There may be another month of essentially flat growth in store, but after that the economy will begin to tilt in one direction or another. If there is no real improvement in some of the fundamentals, the index will reflect continued deterioration. There is some resilience evident in the index numbers as the favorable categories are holding their own. The sectors that will drag the whole index further under include those that are most dependent on the decisions that companies made when they were expecting some solid economic growth by now. The credit requested made sense at the time, but now there is some serious concern as far as what happens next if the growth rate remains mired in the predicted 1% to 1.5% region.

The online CMI report for August 2011 contains the full commentary, complete with tables and graphs. CMI archives may also be viewed online.

The realities of a tough market for sustainability based products and services, which were all the rage during the late boom years last decade, continue to dampen the once rose-colored view on green  business. Yet another blow to the so-called green products and services niche segment came last week as New York-based SpectraWatt Inc., a spin-off of Intel Corp. that had been based in Oregon until 2009, filed for Chapter 11 bankruptcy protection.

SpectraWatt officials said the company’s products, primarily high-tech solar cells, had become “noncompetitive” as Asian manufacturers continue to deeply undercut the firm and its competitors on pricing and overhead. Hurting matters for the company earlier this year was its unknowing receipt of defective components that were used in the production of its own products, which caused their value to plummet.

In the filing, SpectraWatt foreshadowed a slew of solar business failures by pushing for an auction to be held quickly, in less than one month, on its prediction that the market will be flooded with such solar product sales very soon. It's a prediction Credit Management Association's Mike Joncich make in an interview for stories in NACM's eNews ann the new issue of Business Credit Magazine. He noted the industry's problems go deeper than just a downturn/slow recovery:

"A lot of companies started up to participate in that sector—there was a substantial investment in green companies that are making the best of products that are energy- or resource-saving," said Joncich. "But there was over-investment in those industries, and a number of companies are going to fall out that didn't have the right ideas or right business models to survive. Credit managers have to be aware of such phenomena."

Also this month, Massachusetts-based Evergreen Solar filed for Chapter 11 bankruptcy protection. Despite receiving millions in federal and state grant dollars and tax incentives, the solar business has struggled mightily in the last two to three years. Earlier this year, it shut down a U.S. plant that employed more than 800 people and, like a Maryland-based BP solar operation before it, relocated abroad to save costs.

Brian Shappell, NACM staff writer

The best that can be said about this month’s Credit Managers’ Index (CMI) is that things did not get appreciably worse. The latest data suggest a third month of slump, and it appears the economy is languishing in a state that is not quite in crisis but which isn’t showing energy either. For the third month in a row, the overall index was slightly over 54. The fact that it went up by .4 is nothing much to cheer, as the overall index had been over 55 for the six months prior to May’s slip. “If there is anything to be somewhat encouraged by it is that manufacturing improved over the really down month last July, but at the same time there was weakness in the service sector that didn’t appear the previous month,” said Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and economic advisor to the National Association of Credit Management (NACM).

Very little changed as far as favorable factors were concerned. Sales were essentially flat at 60—slightly down from 60.8—but that is a pretty solid sign given the declines noted in other areas. “It appears sales numbers have started to stabilize and are not that far from the highs reached a few months ago when they crested at 66.3,” said Kuehl. The biggest decline was in dollar collections—from 58.1 to 56.2. There have been other signs that collection activity has been slowing, which is consistent with the overall assessments of the economy of late.

“In comparing the CMI readings to other indices, it is apparent the economy has still not committed to either continued growth or a real decline,” said Kuehl. “There have been some positive signs from the latest set of leading economic indicators released from the Conference Board, but there have also been renewed signs of distress as far as consumer confidence is concerned. Not surprisingly there is a sense that much has stalled in the economy as uncertainty has been the rule of the day.”

Unfavorable factors don’t show signs of increased stress and there isn’t a lot to suggest much panic—at least not yet. There was a pretty solid improvement—from 50 to 55.6—in the dollar amount of customer deductions. This was accompanied by modest improvements in the number of rejected credit applications, which improved from 50.9 to 51. There was also improvement in the number of disputes, from 49.3 to 50. “These are not major shifts by any stretch of the imagination, but at least they are not trending downward any further,” said Kuehl.

The overall index barely changed and the manufacturing and service sectors have simply swapped positions again as far as stress is concerned. The CMI numbers for the last three months show a general slowdown in business activity. There has been a slump in sales, a reduction in the number of new credit applications and a slowdown in the collection process. The economy is essentially stalled and the question is whether this is a reaction to something short term or a reflection of some greater underlying trend. The CMI data hint that the situation is temporary and related to uncertain factors gripping the economy. Much of this information is more anecdotal than anything that can be pinned onto hard data. The majority of the information from the banking sector suggests there is money to borrow. There is available trade credit according to most sources. Businesses are sitting on more cash than they have in a long time and most companies are not having issues paying their bills. The problem is that almost everybody is worried about contingency plans and are sitting back as they wait for something to change.

The demand needed is not there yet and nobody is quite sure why. The jobless situation is certainly a worry, but the fact is that 91% of the workforce is employed. They are nervous about spending and as long as they stay on the sidelines, the manufacturing community does as well. “There are few in the mood to leverage themselves until they have a better sense of what to expect from the government and from the economy as a whole. Everything is more or less in place for expansion, but there has been no trigger thus far and there is plenty to make people more nervous about the future,” said Kuehl.

The online CMI report for July 2011 contains the full commentary, complete with tables and graphs. CMI archives may also be viewed online.

(Updated) A U.S. Bankruptcy Court judge has approved a plan for Borders to liquidate its assets following failed attempts to find a buyer.

Stung as a deal fell through at the last minute, struggling book-retailer Borders announced early this week that a potential bankruptcy auction would not go forward earlier and that the end of former giant through liquidation essentially was unavoidable.

Borders, whose Chapter 11 bankruptcy filings were made in February, had submitted to bankruptcy court a previously-announced proposal from Hilco and Gordon Brothers to purchase the store assets of the business and administer the liquidation process. Borders presently operates 399 stores, which employ more than 10,000 people. As many as three dozen stores and 1,500 Borders jobs could be saved as negotiations still are ongoing for retailer Books-A-Million to those locations over, which was predicted by Wanda Borges, Esq., of Borges & Associates LLC, in an interview with NACM earlier this week. 

"A notice has been filed that says 'the debtors received a bid from a non-insider to purchase the inventory, furniture, fixtures, equipment and leases for approximately 30 stores for which the debtors reserve the right...to seek approval in connection with the sale hearing...to be held on or about July 21, 2011...if the bid becomes a qualified bid.' This week could still prove interesting in the Borders case -- we may yet see a continued business operation," Borges told NACM.

Products such as the Kindle and other growingly popular electronic book-reader products hit significantly at Borders’ business model, and both they and top competitor Barnes & Noble have been trying to break into the more techno-friendly niche. However, both have been playing from behind, so to speak.

"The big box retailers have suffered from internet sales -- books are now becoming really an alternative to electronic media," said Credit Management Association's Mike Joncich about the shifting industry paradign. "Borders took a wrong turn while people like Amazon and Barns & Noble took a right turn to embrace the electronic delivery method." Joncich added that he believes "the age of the big box retailers may be coming to an end." 

Foreshadowing of Borders' demise into bankruptcy gained steam through late 2010 and, increasingly, throughout January. The big-box book retailer intimated twice in as many months that it would have to delay payments to creditors and/or vendors in an attempt to bolster its capital position. In additions, it was widely reported that Borders was trying desperately to renegotiate terms with financiers at Bank of America and General Electric, among others. These developments all helped tank a stock that was already trading below $0.50. A late 2010 poll conducted by The Street found that more than two-thirds of respondents believed a Borders Chapter 11 filing was likely. At least one major publishing company reportedly stopped all shipment of books to Borders for a time, fearing this week's announcement was an inevitability that would arrive sooner than later.

Brian Shappell, NACM staff writer

As noted an eNews story last week (link at bottom of story), a small business trade association took issue with the U.S. Small Business Administration’s declaration that nearly 23% of government contracting dollars went to small businesses, calling the statistics “misleading.” In a subsequent interview with National Association of Credit Management, which occurred after this week’s eNews deadline, the SBA is firing back saying its statistics are legit.

The new federal “Scorecard” on small business contracts for FY2010 included statistical findings that nearly $100 billion, 22.7% of all federal contracting dollars, went to small businesses. However, the American Small Business League (ASBL) alleged that 61 of the top 100 recipients of the so-called small business federal contracts in 2010 were, in reality, large firms. The association calls the Obama Administration’s assertions “dramatically inflated” and alleges some of the “small business” recipients in FY2010 included Lockheed Martin, AT&T and Hewlett-Packard.

Michele Chang, SBA’s senior advisor for government contracting and business development, told NACM that agencies have gone through painstaking processes to ensure the data is “clean” and free of data anomalies such as “miscoding.” She said SBA stands by the 22.7% number originally released and said an allegation from ASBL that only 5% of those receiving federal contracts were, in reality, small businesses simply was “not true.”
“We have a comprehensive data-quality process that ensures accuracy,” said Change. “We’re confident this is the cleanest data we’ve had and the cleanest it can be.”

However, when asked if Lockheed Martin, AT&T and Hewlett-Packard received money classified under small business allotments, Chang said she “can’t comment on them specifically.” Change noted that, sometimes, a smaller firm awarded an ongoing contract sometimes expands and becomes a mid-sized or large business or gets bought out/taken over by a larger firm; but she placed the onus on the businesses to report the happenings to SBA within 30 days for classification. When pushed, Chang admitted none of the aforementioned businesses would have been considered small business for a number of years and again declined to comment on whether any were classified among small businesses for the purpose of this year’s scorecard.

The original eNews story posted Thursday is available here.

Brian Shappell, NACM staff writer

The overall economic narrative in the country for the last month has been a question as to whether the latest run of bad economic news is a temporary phenomenon or is the harbinger of much worse to come. As many analysts have asserted that this is all attributable to the earthquake and “Arab Spring” as those who assert a double-dip recession is setting up for as early as the third quarter. Most of the economic community is somewhere in between, but much of the interpretation lies within the latest run of data, and the National Association of Credit Management Credit Managers’ Index (CMI) for June suggests the temporary impact position has some validity.

The dramatic collapse reflected in the May CMI eased up a little in June. The index numbers bounced around, but these variations were obscured somewhat by the fact that the index as a whole was flat. Considering this month, it is very apparent that the devil is in the details. The overall index number was exactly the same as it was in May—54.2—but there were significant changes in the combined sub-indices for favorable and unfavorable factors.

“The most distressing news comes from the number of credit applications received and the amount of credit extended,” said Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and NACM economic advisor. Many businesses seemed more cautious in the last month or so. Part of this is still related to the issues in Japan and the fear of higher commodity prices, but there is also some growing unease regarding political games. “Few really believe that the United States would put $100 billion at risk in its securities market by not raising the debt limit, but there is intense fear that Congress will take the game too far and provoke a reaction in the markets before it reaches an agreement,” Kuehl said. “It appears this trepidation is affecting the willingness of businesses to expand and seek additional credit. The good news is that sales have risen during this period; in the past, expanded sales usually beget more credit requests and more credit extended.”

The bad news in favorable factors has been balanced out by good news in some of the unfavorable factors. Many signs of distress weakened a little. There were fewer disputes and fewer dollars beyond terms. While there were also fewer bankruptcies, there were still concerns about the number of credit applications rejected and the number of accounts placed for collection. “The overall impression is that there is some separation taking place between those companies that have weathered the last few years and those that had been counting on an economic breakthrough to help salvage their financial position. This is a development we’ve referenced before and the pattern is still evident,” said Kuehl.

As the recession gives way to a slow recovery there is a series of expected moves from the different players in a given industry sector. The market leaders start to anticipate the end of the downturn, and they are ready to ramp up and make an attempt to grab market share from rivals. The best-prepared companies make the first moves forcing competitors to try to keep pace. Some do, but others begin to falter as the business they expected to cover their investment fails to materialize. Right below the market leader category is the market challenger and they are looking for the weak link among the market leaders. They push with their own expansion schemes in an attempt to supplant them. If they calculate correctly they make the jump; if they do not they fall back and start to struggle with cash flow. Right behind the leaders and the challengers are the market followers and they are waiting to see how the bigger battles play out before they choose which approach to emulate.

“Right now the economic recovery is waiting for the market followers to make their move. This is the biggest category of business—and the most cautious,” said Kuehl. The CMI data suggest that this sector is starting to have more active sales activity, which generally provokes more credit demand. The majority of credit requests have been coming from either the most important customers with the best credit or from those struggling on the bottom tier. “When the middle levels start to get earnestly engaged is when there is potential for more general overall economic growth.”

The online CMI report for June 2011 contains the full commentary, complete with tables and graphs. CMI archives may also be viewed online.

The Expo hours at the 2011 Credit Congress found large crowds mulling about and among the most common questions fielded at the National Association of Credit Management booth was “Where can I find out more about that new national credit report thing?”

NACM proudly unveiled the National Trade Credit Report, featuring credit scores and “days beyond terms” statistics among tools designed to provide specific trade payment data drawn from a database of more than seven million trade lines, during Credit Congress’ packed Super Session. Though already available, it was the first major public announcement of the evolved product. What followed was a steady stream of credit professionals looking for a demonstration and to ask questions about it. 

Said Bill Meeker, president of NACM Tampa: "We’re bringing this report out emphasizing the trade. When you get to talk about trade groups, you’re talking about pure industry trade, how they’re paying in their own industry. While it’s important to see other trades, the first need is ‘I want to see how they’re paying in my industry.’

(Note: To find an affiliate in your area that provides industry credit reports, visit http://web.nacm.org/asp_aps/Affiliates/location/mmbr_map.asp. More information about the creation of the NACM National Trade Credit Report and the importance of reliable credit rating information is available in the new, June Business Credit story “Industry Credit Reports Continue to Demonstrate Credibility; Take a Big Step” on page 30).

Brian Shappell, NACM staff writer

The bottom seemed to drop out of the economic recovery in May. The first signs of trouble started to manifest in the April, but by the end of May these threats had become very real and the economy took some steps backwards. The Credit Managers’ Index (CMI) data in April had hinted at the problems with declining numbers in areas like sales, credit extension and dollars beyond terms, but by May these areas and others showed definite strain. “The momentum of the economic rebound has been reversed for the time being and for reasons that should not come as a shock to many,” said Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and National Association of Credit Management economic advisor.

The biggest drop in May was in sales. The 59.4 reading is the lowest since September 2010, and this decline was felt in both the manufacturing and service sectors. There is widespread concern that the consumer was retreating from spending again as retail numbers in general have been tepid. The only reason for an increase in retail activity is due to the hike in gas and food prices. These have forced more spending on the part of the consumer, but this spending has come at the expense of almost every category of retail.

“The CMI data reflects the decline in demand at the manufacturing and wholesale level, and it is very likely that consumer retail numbers will dip correspondingly in June,” said Kuehl. “The CMI data generally presages activity in the consumer sector as it reflects the activity in the commercial sector.”

There are other trouble areas showing up in the data this month. Dollar collections dropped to a level last seen in August 2010 as many companies found themselves in trouble as they were forced to start contending with inflation even as their business opportunities remain limited. This started to show up in April and has since accelerated. As companies start to exit the recession, they often face some severe competitive pressure, as there is nearly always a market leader ready to put pressure on a given industry. As the market leader starts to become aggressive and goes after market share, other competitors in that sector have to keep pace—even if they are not ready. They start to spend more despite limited resources as they fear losing their market position. Add in an inflation surge and there will be some real consequences. Within a very short period of time there will be cash flow challenges unless the expected demand manifests—and as has been pretty obvious that demand has yet to manifest. The inflation that is complicating the financial situation for companies is also hitting the consumer and having a negative impact.

The index of favorable factors had been as high as 64.1 just three months ago in February. Now that index has fallen to levels not seen since October of last year. The index shows that there is still some growth in terms of credit applications and that bodes well for the future assuming that conditions improve and the rate of approvals starts to grow again. Right now there is still a sense that conditions will improve as the threat of inflation fades, but if the threat continues to advance there is likely to be another wave of negative responses.

“The most dramatic changes in the overall index represent an early warning of some bad times ahead if conditions do not improve on the inflation and growth fronts,” said Kuehl. As recently as January all index categories were above 50 and that suggests expansion. Today, there are three important categories that have slipped into the 40s and that creates concern. The biggest drop was in dollars beyond terms—a slide from 50.7 to 46.5. Overall, the combined index fell 1.6%, from 55.8 to 54.2. Many companies are having problems staying current as the costs of inputs rise while their markets remain moribund. Kuehl said that, thus far, there has been little increase in areas like disputes, accounts out for collection and bankruptcies, but if the past is any pattern these areas will reflect the strain in the months to come as business customers continue to grapple with cash flow.

The inflation hike is not solely responsible for the problems manifesting in May, but it is playing a significant role for sure. The plain fact is that most businesses have not seen a return of previous demand as yet and that leaves them very vulnerable to higher costs. The big hike in gas pricing has worked its way through the economy and will be having an impact for the next few months and beyond if its march upward resumes.

The online CMI report for May 2011 contains the full commentary, complete with tables and graphs. CMI archives may also be viewed online.

April 2011 is the month the U.S. economy started to confront dual threats and the credit community almost instantly reflected the transition. For the past two years the focus of the business community has been almost solely oriented toward recovery and finding strategies that would propel them toward that recovery. The threat of inflation was not a concern beyond the sense that at some point all the efforts to dig out of the downturn would come back to haunt the economy. That was before the price of oil started to accelerate at a rate not seen since the 2008 debacle. Now the inflation threat has become a clear and present danger and one that is affecting the business and credit community.

In March the manufacturing sector held its own and provided the sole piece of good news for the Credit Managers’ Index (CMI Report) as a whole, but in April the sector stumbled and exchanged positions with the service sector. In March the news for the service side was not so good, but in April it staged a bit of a recovery and much of this appears to be related to the hike in inflation as well as the reactions from the business community most affected by price shifts. The changes from month to month have been subtle and the CMI itself barely moved from the position it marked in March, up just 0.1% from 55.7 to 55.8. “The devil is in the details,” said Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and economic advisor for the National Association of Credit Management. “Overall sales stayed at almost the same rate from month to month but that obscures the fact that there was a real reversal of fortune with the two sectors.” Sales fell in the manufacturing sector while they rose in the service sector—the exact opposite of what happened in March. Some of this can be accounted for by the fact that inflated pricing in some parts of the economy causes a rise in sales that benefits one group, but punishes another, Kuehl said. Sales from gas station outlets were up so much that the nation’s overall retail numbers rose 0.8%, but when gasoline and food costs are stripped out of that number, the growth falls to 0.3%, a solid indication of how much inflation has had an effect.

Looking at some of the other favorable factors for both sectors there was more evidence of divergence. The number of new credit applications in manufacturing fell to levels not seen since the start of the year, but in the service indicators the fall was even more dramatic—numbers not seen since October of last year. The evidence is pretty strong that business has returned to a more cautious position than they had started to adopt earlier in the year. There is now much more concern about the future of the economy through 2011 and that has caused many businesses to pull back on credit. Given that it was the expansion of credit that had been fueling enthusiasm at the start of this year, one can expect further slowdowns in expansion for the next few months.

Yet another sign of divergence is the rate of dollar collections between the two sectors. Overall, the number improved from 60 to 61.3 but that obscures a shift. Dollar collections were actually down in the manufacturing sector while recovering nicely in the service sector. Commodity inflation is taking a much bigger bite in manufacturing and is affecting cash flow. The bulk of the impact of inflation is being felt in the basic industries at the moment, although the consumer is seeing more of that rise every day. Manufacturers are paying those high fuel costs along with everybody else, but they are also paying record prices for everything from steel to copper to resins and chemicals. It is not just gasoline that goes up when the price of oil rises. The price of feedstock for the fertilizer industry rises and so do the prices of petrochemicals. Transportation costs have risen as well and that affects the manufacturer first as they are paying for the transportation of the raw materials they need.

“The overall news from the CMI is that conditions have stabilized, but the fact is that there is considerable volatility just under the surface,” Kuehl noted. The expectation is that inflation issues will affect the service sector in short order and the advantage held by that category will diminish in future index readings.

The online CMI report for April 2011 contains the full commentary, complete with tables and graphs. CMI archives may also be viewed online.

This could just be me, and my uninitiated self, but in my experience with credit, credit managers, financial management professionals, financial management, and what have you, it always seemed like these things, and these people, were separate from banking, or bankers.

The word “silo” comes to mind.

This was a word that, before I began working here at NACM, I associated only with farming. All of the sudden I heard it used to describe the divisions of responsibility in a corporate entity, or the separation of who does what within a department or a sales organization or anything similar. 

The term itself connotes a sense of isolation, or almost loneliness, and while I didn’t realize it at first, was more often than not being used negatively. The idea that credit professionals should stay focused on their credit “silo,” wasn’t sustainable anymore, and probably hadn’t been for quite a while. Understanding the needs of sales, marketing, treasury, and everyone else was, and still is, a necessity.

To tie this back to the CICP course, and to that opening paragraph up there, I always looked at business and banks as two separate silos. Larger ones than those of credit, or sales, or marketing, or collections, or any others you care to name, but still their own unique, unattached worlds. The CICP course has changed that for me.

It could be different in domestic credit, but in international transactions, banks and their corporate customers seem to be very closely twined together. The course tips its hat to this fact by giving students a rundown of the process of international credit and risk management at a seller, as well as the process of international credit and risk management at a bank. You’re getting both sides here, rather than just the knowledge that you’d need to equip you to manage risk on only one of the two sides; banking or business.

It took me a couple modules to really catch it, but I think much of the course involves recognizing that credit management at a bank is different than credit management at a seller, then keeping your eyes peeled for the more subtle, important ways where these two things overlap. While I have no professional experience with this, I’d bet money that being aware of these items, the similarities and the differences, would help a banker better understand their corporate customer and a corporate customer better understand their banker. And that sounds pretty win-win for everyone there.

In any case, I was not expecting that from the course, at the onset, although maybe I should have. A one-sided look at the international risk management function probably wouldn’t yield results nearly as interesting as the ones I’ve found here.

Till next time,

~Jake

This month's news is not so positive as recent world events are rippling through the U.S. economy. For the past several months there had been a consistent feeling of optimism—despite some struggling in the manufacturing sector based on solid sales—and the seeming willingness to increase trade credit. That optimism took a hit this month. There were sharp declines in sales, new credit applications, dollar collections and the amount of credit extended—all the positive factors. The overall index dropped from 64.1 to 62.2. "This is not exactly catastrophic as the index remains in the 60s," said Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and economic advisor for the National Association of Credit Management, "but the pace has dramatically slowed and that is hardly what had been anticipated or hoped for."

There were continued signs of distress in the unfavorable factors, but the decline slowed and that is somewhat better news. The overall sense of the March data is that the U.S. economy is struggling to keep pace with the events in the world that have drastically altered everything from commodity price expectations to sourcing decisions and credit allocation. "It is important to note that the ripple effects of the events in the Middle East and Japan have only started to manifest and will be factors for months to come," said Kuehl. "The Japanese catastrophe has affected supply chains all over the U.S. and Europe and that has added considerable expense to manufacturers being forced to find new suppliers or wait for weeks to get what they need from the affected region." The price per barrel of oil has jumped by almost $15 since December and that is now filtering into all sectors of the economy.

The most dramatic change in the CMI data is in the category of dollar collections. The combined index slipped back to levels not seen since November of last year, falling -0.7 from 56.4 to 55.7. Kuehl noted that the real damage here is not that the index numbers are drastically reduced—they are still holding fast in the 60s and upper 50s. The real problem is that expectations had been high and it was anticipated that these numbers would be well into the mid-60 level by now. There had been some expectation that gains would be placing these index numbers into the 70s by mid-summer, but that is no longer the most likely scenario. The gains seem to have stalled for the moment, and it is not likely they will start up again as long as the global situation remains fundamentally unpredictable.

When one looks at the unfavorable factors there is still cause to worry and there will be more concerns as prices start to escalate. The rise in oil prices has been sharp, but this is not the only sector seeing increases. The radical price hikes of all industrial metals and food inflation are as bad as they have been since the debacle in 2008 and are now moving through the economy: high oil prices have prompted higher airfares and freight rates. As businesses face these hikes, they are forced to spend more than anticipated and that puts a strain on their ability to keep pace with the other debts they owe. Many of the companies reporting on their creditors suggest that a key reason for the slowdown in payment has been the spike in operating costs.

If there is any good news in the data for this month it is that the index of unfavorable factors has not changed much as compared to the favorable factors. The negative news is the same as last month, suggesting that some concerns about credit collapse have been reduced. There were fewer bankruptcies in this period and that is good news. The other factors worsened a little, but not dramatically. "The anecdotal evidence suggests that most creditors are reacting to some short-term shocks but expect to be back to normal in the months to come—providing that the situation in the Middle East does not worsen appreciably," said Kuehl.

(Note: A link to the full report, complete with tables and graphs, along with CMI archives, is available at the eNews version of this story. It can be found at this website, nacm.org

This month's Credit Managers' Index (CMI) from the National Association of Credit Management (NACM) reveals a tale of two economies and two strategies. There is continued good news in the index with sales and credit availability, but there is some very bad news as far as the toll this economy has had on business thus far. An impressive growth in sales pushed the number well into the 60s with a reading of 66.3-the highest since the recession started in 2008. Credit applications experienced the same growth, rising to 60.3 after having slipped to 58.6 in January. This number is also the highest since 2008, suggesting that companies still expect growth and are taking steps to get ready. The good news continued with dollars collected, which improved from 60.9 to 63.4. And, finally, there was good progress in the level of credit extended-an increase from 64.8 to 66.5.

The sum total of all this positive trending is an improvement from 62 to 64.1 in the favorable factor index. "What then is the problem?" asked Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and NACM economic advisor. "Why is overall growth in the CMI non-existent? The 56.4 reading this month is the same as last month despite the good numbers."

This is the vexing part of a transition economy, said Kuehl. This is the time that companies move aggressively to capture market share due to the sense that the consumer is starting to engage-an assumption reinforced by overall economic numbers. The retail sector finished 2010 stronger than expected and the last set of data from the Purchasing Managers Index (PMI) show substantial gains in both the manufacturing and service sectors. Consumer confidence is up as well. These are the signs everyone has been waiting for, but they are not the signs of a fully recovered economy.

This situation creates the same pattern every time. The strongest competitor in a given market, the market leader, starts responding to anticipated demand with more capital investment, some hiring and additional marketing. That provokes the market challengers in that sector to respond in kind to maintain their edge. Right behind them are the market followers that also have to react to the moves of those in the dominant position. It is a chain reaction driven by the need to hang on to market share-a race that some companies are better positioned to enter. They are the ones that can wait for the recovery. Those that are not sitting on enough cash have no choice but to make investments and hope that the timing is right.

One of two things will happen to these companies. If the timing is right, the investment will pay off. The anticipated demand will manifest itself, and the cash flow will be there to handle the investment and credit requests. If the timing is off or if the company is forced to respond to the competition sooner than preferred, the debt soon becomes brutal and business failures ramp up. This is the signal sent by this month's index. The two negative factors showing the biggest increase were bankruptcies (falling from 59.1 to 56) and accounts placed for collection (moving from 52.5 to 49.9). Other indicators deteriorated as well. In the end, the declines in the unfavorable factors dragged down the combined index and left the CMI flat for the month.

This part of the transition out of a recession can be the most brutal. Companies barely hanging on could survive if there is little additional pressure. Now with the competition starting to heat up, these struggling companies are left with poor options. They either just accept the loss of their market or they gamble on their ability to hang on. If they guess wrong, they get into trouble soon. It is now a matter of how patient creditors can be and the point where credit managers must really show their skill at reading businesses. If they restrict an account to reduce exposure, they strain the relationship and may lose that customer should it rebound. If they give too much and the company goes under anyway, they have lost a lot of money and could put their own company in some peril.

"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

Coverage of FCIB's New York International Round Table is available Thursday in NACM's eNews and an extended feature will be included in the soon to be released March issue of Business Credit Magazine. As always, the Round Table featured interested insights and strong opinions on economic and credit conditions in the United States and abroad.

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Here are some interesting quotes captured during the Wednesday's event:

"Creditors lose with inflation; debtors, like the U.S. government, win with inflation," said Dan North, chief economist at Euler Hermes ACI. "Some countries now are discouraging investment from foreigners with hot U.S. dollars."

"There's eight times the amount of people among the Indians and Chinese. Protectionism will no longer be an option," said North on projections of the shrinking dominance in relation to world GDP in deference to India and China. "It's doesn't mean we're not going to be important or prosperous...but it puts us at more risk to growing creditors and losing the U.S. dollar as a global reserve currency."

"Access to credit information is getting more and more restrictive [in China], said Joachim Bartels, managing director of the Business Information Industry Association. "They find loopholes on financial information, targeted at Dow Jones, Bloomberg, etc. If we can't deliver commercial credit information, it will be damaging to our market; and it will be damaging to their market.

"Banks are starting to lend again, business is getting done," said Garlow.

"They've become credible inflation fighters," said North on Brazil.

"I don't think there really is a currency war," said Josh Green, CEO of Panjiva. "Currency is a bit of a side show when you think about trade. The future is going to be more about market access. Can we get access to the various Chinese markets, Indian markets?"

"In my world, the big question is where is the next China," said Green. "Realistically, there is no next China. People talk about Africa. But, realistically, what kinds of investments are being made. People go there for stuff, resources, not the people or their skills at anything."

"Quantitative easing (by the Fed) = printing money = inflation pressures," said North. "The Fed soon will be chasing inflation for a long time."

"We must touch third rails of society: Social society and Medicare," said North. It's an ugly job, but if we don't, never going to fix budget."

"Customers are not complying with terms," said David Garlow, VP/country risk manager, of AIG Global Trade. "Conditions are improving, banks are starting to lend again; business is getting done."