Slowdown in Commercial Credit Applications Signals Weakened Economy

American businesses are curbing their spending habits in the midst of a forthcoming economic slowdown, causing another decline in a major credit index produced by the National Association of Credit Management.

The seasonally adjusted Credit Manager’s Index (CMI) crept 0.6% lower in February – the sixth decline in seven months. According to commentary and analysis by Euler Hermes ACI Chief Economist Dan North, five of the index’s 10 components fell, and much of the fall was driven by sharp decreases in the new credit applications component of all three indexes. "Indeed, without the slide in new credit applications, the combined index would have risen 0.3%," said North.

"The data suggests that businesses are curtailing their spending in anticipation of an economic slowdown – a notion confirmed by January’s durable goods orders report, which showed that business’ orders for items meant to last more than a year dropped sharply last month," he continued.

"The combined CMI index reflects conditions found throughout the economy – continued economic momentum accompanied by stubborn signs of deterioration; the Institute of Supply Management’s (ISM) manufacturing index fell below 50 for the second time in three months; median housing prices have fallen for six consecutive months (an unprecedented event); and the U.S. Treasury yield curve has become increasingly negative, a strong indicator of a future slowdown."

The news of the CMI decline comes on the heels of a forecasted increase in business bankruptcies in 2007. The nation’s continued economic slowdown – coupled with increased costs of doing business – will cause the number of American business bankruptcies to rise this year by approximately 12%, according to analysis from global trade credit insurer and accounts receivable management service provider Euler Hermes ACI.

Sector by sector analysis of the CMI follows:

Manufacturing Sector

The manufacturing sector fell 0.6% but was driven in part by a 7.2% drop in new credit applications.  Without that component, the index would have risen slightly by 0.1%.  Survey respondents say they are "Definitely seeing a slow down in manufacturing and sales,"  and that their "large customers are demanding longer payments terms be built into their contracts."

Service Sector

The service sector fell 0.6% in February, again led by the number of new credit applications, which fell a sharp 9.6%.  The index without that component would have risen 0.4%   The service sector has fallen in four of the past five months and has underperformed the manufacturing sector over that period.  Survey participants in the home building and furnishing supply business sectors seem to have been hit the hardest.

February 2007 vs. February 2006

On a year-over-year basis, the overall CMI fell 0.7%, as the drop in the services component of 2.6% more than outweighed the manufacturing component’s rise of 1.3%.  While all of the indexes remain above the 50 level, indicating expansion, the survey continues to suggest that ingrained weakness caused by the decimated housing market and tightening monetary policy continues to chip away at the economy’s considerable momentum.