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Sharp Improvement Seen in Credit Managers' Index

Data collected by the National Association for Credit Management in its Credit Managers' Index has proven to be very prescient. There are a couple of reasons for this. Generally speaking, credit managers are future thinkers. The surveyed nation's credit managers are more interested in the state of those accessing credit when they are due to pay

If they have granted 90- or 120-day terms, they want to know what these companies look like in October or November. Credit managers are often at the very start of a business cycle because they will determine whether companies can buy the machine or inventory they need. The fact that this month's survey is encouraging is quite welcome. What follows is the executive summary; for the whole report, you can go to www.nacm.org.

Last month, it was suggested that we should all refrain from dancing in the streets based on just one month of promising data. Now I think some of that terpsichorean activity might be warranted. There has been a second month of progress, and the categories that were in the most trouble have staged a dramatic turnaround

The lock-down has started to end for a wide variety of business sectors, and the credit data is reflecting that. However, service sectors still have a long way to go, and that shows up in some of the index readings. Regardless, even in this arena, there has been substantial progress. The gains have been more obvious in several of the manufacturing sectors even though others are still waiting for consumer demand to kick in. The majority of the predictions asserted this would be a V-shaped recession. These numbers continue to support that conclusion.

The combined score for the Credit Managers' Index this month left the contraction zone as it jumped from 44.1 to 51.0. This is the best score since March and is certainly a major improvement over the 40.6 notched in April. In February, the reading was 56.2 and not all that far from where it is today. The combined score for the favorable factors made a major gain as it also jumped back into expansion territory with a reading of 55.3. Consider that in April it was languishing at 32.0 and in May it was still in the 30s with a reading of 39.5. Granted, the reading in February was 62.2, but 55.3 is solidly in expansion territory. The combined score for the unfavorable factors also saw a slight gain from 47.2 to 48.1. This suggests that there has now been enough time for companies to have entered credit difficulty. The good news is that recovery in the favorable category may have come in time to keep the unfavorable section from dragging the entire index down.

The really good news comes from the four break-out categories in the favorable section. The sales data made a simply stunning rebound from 20.0 in April to 28.6 in May, and now it sits at 54.1. New credit applications made a dramatic leap as well from 43.3 to 57.9 not too far behind the 62.2 that was noted in February. The dollar collections data shifted from 43.2 to 53.9, and the amount of credit extended moved from 42.8 to 55.2. It is hard to overestimate the importance of these gains. The favorable factor collapse pushed the whole index into territory it had not seen since the 2008 recession.

Data from the unfavorable category show a little weakness this month, but there was no collapse. The sudden nature of the lock-down recession caught the business and credit community by surprise. Prior to the recession of 2008, there was the usual warning that something threatening was starting to build and most credit managers started to behave more cautiously. They were only offering generous terms to their best clients, and they carefully scrutinized new applications. This time there was abundant confidence at the start of the year, and there was no time to exercise much caution.

Rejections of credit applications took a little hit this month as it moved from 51.9 to 49.8. There is a little more concern regarding the ability of companies to stay current while the economy finds its footing. The accounts placed for collection also slipped considerably from 49.1 to 46.7. There had not been time for companies to get into trouble prior to this month; but it has now been three months since the lock-down started, and there are companies getting far behind in their ability to pay on their credit.

Dollar amount beyond terms had been a problem for the last few months because companies have been watching their cash flow closely. The numbers reflect that this continues to be a concern. It has gone from 49.1 to 46.7 and is likely to fall further in the coming month as some companies struggle to get back to previous levels. The disputes category also slipped a bit and fell into contraction territory with a reading of 49.6 as opposed to last month's 51.5. The dollar amount of customer deductions stayed about where it had been with a reading of 50.6 as compared to 50.9 in May. The filings for bankruptcies also remained fairly stable at 47.7 as compared to 47.3. There is hope that bankruptcy activity will slow as business are allowed to start making a comeback.

—Chris Kuehl, Ph.D., NACM Economist

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Sunday, 17 January 2021