COLUMBIA, MD-The most striking aspect of this month’s Credit Managers’ Index (CMI), issued by the National Association of Credit Management (NACM), is that sales in both the manufacturing and service sectors jumped-and at a pace not seen in over a year. This reinforces the news from consumer demand studies showing that spending was up last month. The increase in sales was nearly five points, faster than any increase since early 2008. This burst in sales occurred despite the fact that new credit applications were flat. There was a slight extension in the amount of credit extended, but the majority of that increase seems to have originated from companies working with the suppliers and contacts they have had for years as opposed to new additions to the business fold.
“The pace of growth in the overall economy has been uneven thus far, but is about what was expected from most analysts,” says Chris Kuehl, Ph.D., NACM economic analyst. “All along, the assumption has been that this would be a recovery marked by slow and methodical reactions to demand that was expected to be spotty and very much affected by the pace of consumer attitude recovery. The fact that consumers added 0.3% to their activity despite some of the worst weather this winter appears to indicate some significant pent-up demand.” CMI data bolsters this assessment.
Kuehl noted the only really major change from last month’s data was in the sales factor. For the most part, the negative factors remained stable with only slight improvements in items like accounts placed for collection and dollars beyond terms. For all practical purposes, there was no change in the data, but the sales numbers allowed for a gain in the combined index, which improved from 55.2 to 55.7.
“It is early in the process, but if one couples this data with reports from other sectors, there is reason to assume there will be some pretty decent progress ahead in the coming months,” he said. “The consumer is getting a little more confident despite the fact that there has been no change in personal income and the business confidence level has also expanded according to data from both the Institute of Supply Management and the Conference Board.”
“There are still plenty of worries about the future, but for now these are somewhat unfocused. There are signs that inflation could be an issue before the end of the year and there are continued concerns about the ability of the banking sector to recover fast enough to provide the credit that expanding demand will require,” said Kuehl. “The fact that financial reform is now the topic for Congress will make banks more cautious than usual until this situation is resolved and that could take all summer,” he added.
As with the combined sector, the biggest change in the manufacturing arena was in the level of sales-jumping from a 62.5 reading in February to 66.9 in March. This suggests that the momentum created during the inventory build-up has continued to some extent, but at a slower pace than seen in the last quarter of 2009. “The manufacturing sector saw more action in terms of dollar collections and amount of credit extended. This is not very surprising given the ongoing attempts to build inventory back to levels deemed acceptable for meeting demand-or at least the demand that many have been anticipating,” says Kuehl.
“There were a number of anecdotal stories indicating that manufacturers in some sectors-mainly those supplying the health care industry and those with connections to energy production-are seeing the beginnings of consistent demand,” Kuehl says, noting there was solid growth in the business machine category as well, which could be a result of electronic equipment needed in the service sector or the machines needed in the manufacture of products. Export-centered companies have also seen growth for the past few months due to the weakness of the dollar and the fact that some of the U.S. export targets have been seeing economic growth including Brazil, Colombia and Chile.
There was little change in the negative factors except the dollars beyond terms and the number of bankruptcies. In both, the issue is that some companies in the manufacturing sector are very weak coming out of the recession and that will make them highly vulnerable to competition when demand returns. This is a pattern observed many times in the past and is the reason that coming out of a recession is often much more dangerous for a weaker company than being in the middle of one, Kuehl says.
Both service and manufacturing sector indicators are now hovering around 55. While, this is not stunning in terms of growth prospects, it is a far cry from where the numbers stood a year ago. Kuehl said that going forward, there will be less and less distance between the readings of 2009 and 2010 as this is the point that the first, very faint signs of recovery began to appear. “The gap will narrow steadily until there is some renewed growth spurts to propel the survey higher,” he says.
The first three months of 2010 were essentially flat after a pretty impressive jump in the last part of 2009. The fear was that the gains made in the fourth quarter of 2009 would be eroded in 2010, but thus far the gains have held with slight improvements to note.
The National Association of Credit Management (NACM) supports approximately 19,000 business credit and financial professionals worldwide with premier industry services, tools and information. NACM and its network of Affiliated Associations are the leading resource for credit and financial management information and education, delivering products and services, which improve the management of business credit and accounts receivable. NACM’s collective voice has influenced legislative results concerning commercial business and trade credit to our nation’s policy makers for more than 100 years, and continues to play an active part in legislative issues pertaining to business credit and corporate bankruptcy.