NACM Survey Sees Weakening of Credit Conditions

A survey of credit professionals showed a "worrisome" downward trend in sentiment in January, according to the National Association of Credit Management.

While the index continues to suggest that the economy is reasonably strong, Dan North, chief economist with credit insurer Euler Hermes ACI, noted that NACM's January index number of 53.7, while positive, is down sharply from November's 57.4. Numbers above 50 suggest that respondents see economic growth. And he worries that if consumer finance sources such as home-equity credit dry up, that could create further deterioration.

But NACM noted that three of the index's 10 components are now below 50. The manufacturing sector has fallen for seven of the last nine months - six out of nine for services - and in January, seven of 10 components fell in both the manufacturing and services sectors.

These data reflect trends in some of the most recent macroeconomic data: weak fourth-quarter GDP of 1.1%, a faltering housing market, and below expectations reports for both December job growth and from the Institute of Supply Management Index, the NACM said.

"Once again, high energy costs, rising interest rates, a flat yield curve and a weakening housing market are the major drags on the economy," Mr. North said in a NACM news release. "The consumer has been the offsetting factor, which has kept the economy growing and the CMI above 50, but consumers could hit a rough patch if their two sources of funding dry up - financing from home equity and credit cards, and incomes, which are falling below consumption. The overall picture suggests that business conditions could weaken in the spring, given the possibility of a consumer slowdown and the trends in the CMI."

The first month of the new year saw little change to the manufacturing sector. The CMI ended January 2006 just slightly below the December 2005 level, down 60 basis points, to end at 52.4%.

A look at the favorable factors shows all levels above 50, reflecting some economic growth. Although there was negative growth in three of the four factors, positive growth was seen in new credit applications, which increased 680 basis points. The index of unfavorable factors fell 60 basis points to 52.4%, down from 53%. Four of the six factors finished above 50, while disputes and amount of customer deductions finished somewhat below this mark.

The service sector ended January 200 points below year-end 2005. Much of the decline can be seen in the favorable factors - where there were lower levels of sales and amount of credit extended - down 780 and 650 points, respectively. At 54.9%, favorable factors recorded its lowest level in 10 months. Overall, unfavorable factors dropped 80 points, to end at 51.7%. Lower levels of accounts placed for collections were offset by dollar amount beyond terms. Five of the six factors showed some economic growth, posting levels higher than the 50% mark.

The CMI, a monthly survey of the business economy from the standpoint of commercial credit and collections, was launched in January 2003 to provide financial analysts with another strong economic indicator.

The CMI survey asks credit managers to rate favorable and unfavorable factors in their monthly business cycle. Favorable factors include sales, new credit applications, dollar collections and amount of credit extended. Unfavorable factors include rejections of credit applications, accounts placed for collections, dollar amounts of receivables beyond terms and filings for bankruptcies. A complete index including results from the manufacturing and service sectors, along with the methodology, is attached.

SNAPSHOT: Credit Confidence Slipping?

Nov. '05 57.4

Dec. '05 54.9

Jan. '06 53.7

Source: NACM's credit managers index.

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