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.
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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.
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."