NACM Credit Manager's Index Improves Slightly in April

The seasonally adjusted combined Credit Manager’s Index rose slightly to 50.1 in April, barely above the critical 50 level indicating economic expansion. The increase of 0.2% was a result of the manufacturing sector falling 0.8% while the service sector rose 1.2%. Five of the 10 components in the combined index fell, but six are below 50. Eight components fell in the manufacturing sector, leaving six below 50, the most ever.

“However, the service sector showed a rebound in April, breaking a six-month streak of decreases, which made it only the second month in the past 11 to show improvement,” commented Daniel North, chief economist with credit insurer Euler Hermes ACI. “Finally, note the respective levels of the combined, manufacturing and service indexes—50.1, 50.2 and 50.0—all perilously close to showing economic contraction,” he continued.

North said that comments from participants this month include the usual litany of slow paying customers and overall economic weakness, especially in businesses exposed to the housing industry. “However, there was a significant increase in comments about the negative effects of higher input costs, especially fuel,” he said. “No doubt the Federal Reserve will cite these inflationary pressures as a concern when it signals to the financial markets that the cycle of monetary easing is about to end.”

Manufacturing Sector
The seasonally adjusted manufacturing sector index fell for the second consecutive month as eight of its 10 components slid. Comments North provided from participants noted weak economic conditions: “laid off about quarter of our staff,” “sales very low,” “accounts finding more and more reasons not to pay within their times and are requesting extensions,” and “too much inventory.”

In addition to comments about the weak economy, however, this month saw a distinct increase in participants’ notes about rising prices, North said. A manufacturer of plumbing fixtures said they “just increased prices” while a food processor stated, “We had a price increase.” An operator of a steel works gave a more thorough assessment highlighting the dangers of inflation: “We continue to increase prices as our raw materials prices have drastically increased…Many (of our customers) cannot pass along price increases…if current economic conditions persist for the rest of 2008, then 2009 will be a much worse year as customers cannot hang on.”

Service Sector
The seasonally adjusted service sector index rose 1.2%, the first increase in seven months, as seven of the 10 components rose. Comments from participants were mixed this month as some reported strength, others reported weakness and still others reported inflationary pressures, North noted. “Photographic and farm equipment, metals services and sporting goods industries all reported good business conditions,” he said. “Lumber, home furnishing and transportation industries reported increases in NSF checks, slow pay, weak sales and cancellations.”

North pointed out that, as with the manufacturing sector, inflationary pressures came to the forefront. Trucking and transportation equipment suppliers reported that higher fuel prices are causing “significant trouble.” Other complaints reported were “cost of products sold has increased,” “raw material cost(s) are up 30% from last year” and, finally, an angry “It’s the fuel prices that (are) doing this!!”

April 2008 vs. April 2007
“On a seasonally adjusted basis over the past 12 months, a weakening trend is very clear,” said North. Nine of 10 components in both the manufacturing and service sectors fell (all 10 fell for the combined index). Manufacturing fell 5.3% while services declined 5.4%. “The data show without doubt a weakening economy over the past year, and the trends toward the critical 50 level bode poorly for the future,” he concluded.

The CMI data has been collected and tabulated monthly since February 2002. The Index, published since January 2003, is based on a survey of about 500 trade credit managers during the last 10 days of the month, with about equal representation between manufacturing and service sectors. The survey asks respondents to comment on whether they are seeing improvement, deterioration or no change for various favorable or unfavorable factors. There is representation from all states, except some of the less populated such as Vermont and Idaho.

To view the entire Credit Manager’s Index report for April, please visit http://web.nacm.org/cmi/pdf/CMI_April2008.pdf.