December 1, 2022
November CMI Falls to New Low as Downward Trend Continues
Kendall Payton, editorial associate
The November NACM Credit Managers’ Index fell once again, this time by 1.2 points to a reading of 52.0, its lowest since May 2020 and the lowest non-recession, non-pandemic value recorded. Overlooking the slight rise of 0.6 in September, the CMI has trended downward for the last eight months as respondents cite ongoing supply constraints and slow payments from customers, said NACM Economist Amy Crews Cutts, Ph.D., CBE.
“Technically the index is still on the expansionary side, so there is some room for optimism, citing the bump in October retail sales,” Cutts said. “But the rapid decline of the housing and financial markets, headwinds from the end of federal pandemic aid programs and now large tech industry layoffs suggest growing recession risk as we head into 2023. … credit managers are the first in line to see trends in manufacturing and services, and they have been indicating for several months now that conditions are weakening.”
The combined index of favorable factors deteriorated by 0.8 to 56.1, a level that is 8.2 points lower than a year ago. The index for new credit applications leads the declining factors with a 2.0-point drop to 57.0. The index for the amount of credit extended fell 1.5 points to 57.2 and the sales index lost 0.7 landing at 54.5. The index for dollar collections rose 1.0 point to 55.7.
With a 1.4-point drop, the combined index of unfavorable factors is now in contraction territory with a reading of 49.3. All categories within the index deteriorated. Disputes led the decline with a 2.1-point drop (48.3). The index for the dollar amount of customer deductions lost 1.9 points (49.4); filings for bankruptcies, 1.4 points (52.4); dollar amount beyond terms, 1.4 points (47.6); accounts placed for collections, 0.7 (46.9); and rejections of credit applications, 1.0 point (51.2).
“Credit is still available to businesses, but it is getting tougher to come by and it comes with higher costs,” Cutts said. “Bankruptcies are still low relative to pre-pandemic times, but they have started picking up according to the U.S. Courts statistics through the third quarter of this year. NACM member respondents are indicating credit deterioration with more accounts going beyond terms or being referred to collections. I believe the CMI is indicative of recession starting soon, if it hasn’t already, from a business point of view.”
What CMI respondents are saying:
- “Supply chain shortages are a continuing problem and dramatically affect our sales sourced from Asia.”
- “We’re still having supply chain issues that limit our production, while new orders have increased.”
- “Sales are constrained by continuing supply chain disruptions and pricing.”
Sign up to receive monthly CMI survey participation alerts. For a complete breakdown of manufacturing and service sector data and graphics, view the November 2022 report. CMI archives also may be viewed on NACM’s website.
Holiday Shopping Strong Despite High Prices
Jamilex Gotay, editorial associate
The holiday shopping season is in full swing. Despite high prices and fear of a looming recession, consumers are forecasted to have spent 2.3% more this Black Friday than last year, according to data from Adobe Analytics. And a record 196.7 million Americans shopped in stores and online during the holiday shopping period from Thanksgiving Day through Cyber Monday, per a survey from the National Retail Federation (NRF). The total number of shoppers grew by nearly 17 million from 2021 and is the highest figure since the NRF first started tracking this data in 2017.
But that may have more to do with shoppers taking advantage of bargains rather than actually having disposable income to spend. That also does not factor in inflation, so consumers could have done less shopping but spent more.
“Consumer sentiment is low but that is not always a great indicator for the outlook of retail sales, that is to say it’s hard to translate it into actions,” said NACM Economist Amy Crews Cutts, Ph.D., CBE, during an NACM webinar, Retail Industry Economic Outlook for Holiday Season. “Households have lost huge amounts of wealth and have increased debt since the beginning of 2022. Consumers react to stock market wealth even if it isn’t their own by cutting back on spending and acting more conservatively.”
Even though consumer spending is stronger than expected this holiday season, Cutts is still nearly certain a recession will occur sometime in the next year. “Now more than ever, customers are having financial difficulty and taking longer to pay, thus giving [the creditor] more work to get your money back,” she said.
Consumers also are spending differently than past years, with “buy now, pay later” orders up 68% during the week of Black Friday, and up 13% year over year, according to Adobe. “We now have much higher interest rates, and they’re going to start to hit any credit card balances. With buy now, pay later, it tells you the consumer is challenged ... in the long term, it’s a warning sign,” Rod Sides, global leader at Deloitte Insights, told Retail Dive.
Brick-and-mortar stores made a bit of a comeback this year, as the NRF said 3% more shoppers plan to go to the stores on Black Friday. And RetailNext reported that store traffic rose 7% over the weekend. “Consumers who feared leaving their homes and embraced e-commerce during the pandemic are heading back to physical stores in greater numbers this year as normalcy returns,” reads an article from AP News.
But why are people still spending at all if the economy is overshadowed by high inflation? Many consumers have seen a salary increase, the unemployment rate remains near a multi-decade low and households may still have leftover stimulus money to bolster additional spending. Axios reports that consumers still have 75% of pandemic excess savings. Still, consumers are more intentional about their spending this year. “We’re seeing that inflation is starting to really hit the wallet and that consumers are starting to amass more debt at this point,” Guru Hariharan, founder and CEO of retail e-commerce management firm CommerceIQ, told AP News.
If we have learned anything from these past few years, it is that economic patterns can quickly change. “I think consumers can’t continue to afford expensive items, even though they’re spending right now,” said Jack Kleinhenz, CBE, chief economist for the NRF. “You can see since back in January 2020, spending has had an on-and-off cycle.”
Disputes: Is the Customer Always Right?
Jamilex Gotay, editorial associate
More often than not, disputes end in the customer’s favor. A recent eNews poll revealed that disputes end in the customer’s favor more than 75% of the time for one-fourth of credit professionals. 28% of respondents claimed that 50-75% of disputes end in the customer’s favor, and another 28% said it happens 25-50% of the time. But, why?
While disputes can arise for a variety of reasons, an issue with the product or service is among the most common. For Darrell Horton, ICCE, director of revenue and credit at AGS, LLC (Las Vegas, NV), customer disputes are mainly due to gaming equipment issues. “For example, a slot machine could be down for a few days and we won’t realize it until after-the-fact,” Horton explained. He said 60-75% of disputes at his company end in the customer’s favor.
A misunderstanding of contracts also can cause a dispute to end in the customer’s favor. That is why Horton said it is important to do as much research as possible in order to avoid those mistakes. “We could get price changes coming through on backdated contracts and a lot of times, we produce an invoice unaware that we signed a contract for a price decrease,” Horton said. “It is a legitimate excuse because the price is wrong but we don’t know about it up front.”
More recently, disputes are caused by ongoing supply chain and logistics challenges. “It’s all the billing and shipping issues that are causing the deductions or causing people to not pay right now,” said Scott Woitas, CCE, CCRA, credit manager at Crawford Electric Supply Company, Inc. (Spring, TX). “If you can fix the front-end process, you don’t end up with a mess in the back-end.” His credit team found that 80% of disputes ended in the customer’s favor simply by not updating prices in time or processing issues with returns.
Credit card disputes in the B2B space also are becoming more common and are difficult to prove wrong. “I work for a ready-mix concrete company that deals specifically with credit card disputes,” one NACM member said. “A homeowner would use their credit card to purchase our product and if they find the finish to be less than desirable, they dispute it as a quality issue and not a workmanship issue. Whenever we receive a disputed credit card transaction, we recognize the odds are against us.”
Liens are one way to protect against fraudulent credit card disputes, but it has to be done on the correct timeline. For example, a NACM member in Utah said they are allowed to file a preliminary lien notification within 20 days from the date of delivery. To protect themselves further, they make sure that they do not take any credit card that is not issued to the card holder in the state of Utah.
For the few respondents who said less than 25% of disputes end in the customer’s favor, due diligence is key. Sham Von Pawlak, CBA, ICCE, director of credit and collections at Westlake Royal Building Products (Wixom, MI) said only 5-10% of disputes end in the customer’s favor, but that has not always been the case. “A few years ago, it was 60-70% that ended in the customer’s favor,” Von Pawlak explained. “Since the pandemic, we saw that we were losing money and hired analysts to manage our disputes, even before they take a deduction.”
Pawlak found that customers expected easy write-offs, so she implemented a dispute process that benefited both parties. “We basically built a partnership with the customer and made them aware it’s not a one-sided ordeal, but a benefit to both parties. Soon after, customers began to review disputes on their end,” she said.
Anne Scarcella, CCE, CCRA, credit manager at Crawford Electric Supply, Inc. (Spring, TX) says that 60% of customer disputes end in the customer’s favor simply because it’s not worth losing a large customer over an argument. “It doesn’t make sense to fight them and there’s no hard and fast rule for it,” Scarcella said. But sometimes the customer is not right. “In those cases, it’s up to the credit department to identify invoices timely, ask questions, negotiate and follow up with the customers.”
How Mergers and Acquisitions Impact Credit Risk
Kendall Payton, editorial associate
Companies may merge with or acquire another company for several reasons—whether to expand, diversify or increase profits. A U.S. mergers and acquisitions (M&A) monthly review showed M&A activity decreased 15.9% from August to September. The technology industry in particular had the highest rates of M&A compared to all others between January and September of this year, per a report from Statista.
With each new acquisition or merger comes some risk because it often changes the legal makeup of a company. When your customer’s business undergoes these changes, it is crucial to pay attention to the fine print. “If a customer merges with a company that they haven’t done business with in the past, you are now essentially absorbing a credit risk related to this entity,” said Thomas Fawkes, Esq., of Tucker Ellis LLP (Chicago, IL).
You have to look at the newly formed entity with fresh eyes, he added. “Depending on the nature of the transaction, if the new entity is acquiring your customer, you have to make sure the new entity is creditworthy. You’ll have to go through the same underwriting process you would go through with a new customer, which entails asking for a credit application from the new entity, running references, looking at financials and outside credit reporting.”
Larger companies are not immune from the risks that come with M&A activity. For example, Ticketmaster recently faced huge blowback from customers when Taylor Swift fans encountered issues buying tickets for her Eras tour. Many blamed their decision to merge with Live Nation to be the cause of the issue and called for the conglomerate to break apart. “Ticketmaster holds a monopoly in the ticket sales market. The merger with Live Nation would lead to less choice and higher prices,” said David Balto, former policy director of the Federal Trade Commission. Balto raised concerns about Ticketmaster’s merge with Live Nation and testified against it in 2009, according to Business Insider.
But sometimes M&As can strengthen a customer. A company may decide to merge and acquire as a strategic move to increase sales. If a business based in an eastern region wants to broaden their presence to the west, they could merge with a larger company in the desired area for more exposure. Economically, if a customer is in any financial distress, an acquisition would be the appropriate step to take. “It could be as simple as ‘I want to acquire an entity because I’m trying to beef up my profits and put more money in my shareholder’s pockets.’ So, taking on an existing business that has healthy profits allows me to increase my equity distributions without having to grow that out organically,” said Fawkes.
With ongoing talks of a recession headed into 2023, what should companies expect to see from their customers in terms of M&A activity? The Federal Reserve’s continual increase in interest rates this year—expected to raise again in mid-December—means the value of money has become much more expensive. “We’ve actually been seeing less activity in the M&A market and that’s probably a product of what we expect to see in terms of a recession,” Fawkes explained. “Borrowing money to acquire companies is costing a lot more than it did, which is a disincentive for companies to want to go on an acquisition spree.”
As a creditor, it is helpful to ask as many questions as possible and stay skeptical about the reason behind your customer’s merger. “I think the toughest piece is trying to figure out where the risk lies,” said Amy Cook, CCE, credit manager at McNaughton-McKay Electric Company (Madison Heights, MI). “Every company has their own formulas so you have to take a step back to see historically how good their profits are and how well you think they may perform as a new entity.”
Cook and Fawkes both attested to the potential hardships and challenges for credit professionals as we head into the next couple of years. “I’ve found that because we sell to so many different industries, there are a lot of changing terms on a regular basis. You have to look at what terms are in play, how to communicate that to the customer and mitigate the risk of losing a sale,” Cook said.
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