Credit Index Shows Widespread Carnage in Manufacturing

The nation’s economic woes continue to plague the business community as credit managers reported deteriorating conditions in December, sending a major credit index to another record low at the end of 2008.

According to commentary and analysis from leading accounts receivable insurer Euler Hermes ACI, the National Association of Credit Management (NACM) Credit Manager’s Index recorded its fourth consecutive record low in December, hitting a level of 40.1. "All 10 components of the index are below the 50 level, representing economic contraction, and six of the components are at record lows," said Euler Hermes ACI Chief Economist Dan North, who claimed that the "carnage was widespread." Both the services and manufacturing indexes fell to record lows to finish out 2008, and all 20 of the collective components fell below 50 as indicated by the index.

"The nation’s credit managers delineated in nauseating detail the business conditions of an economy which has lost almost 2 million jobs in the last year, and one whose prospects are dismal," North said. "Deteriorating sales and payment patterns are the credit managers’ main complaints, and those complaints are likely to strain cash flow and put businesses at risk."

North said that the grim news to end the year comes as no surprise. "Retailers had abysmal holiday sales, which are likely to contribute to a wave of bankruptcies in 2009," he explained. "Continuing difficulties in both the auto industry and the financial markets are putting a severe drag on the economy, and the housing market is still in decline."

However, 2009 may offer signs of hope for the business landscape, as "it is possible that a change in administrations, super loose monetary policy, and a new stimulus package will help us out of the recession," North concluded. "But according to the credit managers, it’s going to be a rough ride until then."

Analysis of the manufacturing and service sectors:

Manufacturing Sector
The seasonally adjusted manufacturing index fell 1.4 to 41.0, its fourth consecutive record low. Sales fell a dramatic 11.7 to a record low 26.8, while dollar amount beyond terms fell a record 8.2 to a record low 31.8. Comments from the participants confirm the data:

"Customers are claiming they can’t get work and don’t have money to pay. Some are inviting us to `go ahead and shut them off’ since they aren’t working anyway. Also, many customers traditionally ‘excellent pay’ are now paying a month slow."
"In previous years I sent out about 3 lien/bond notices a year. Currently I am having to send about 3 lien/bond notices a month."
"…mfg demand down 30%+ orders down 18%."
"Times are tough. We are waiting for them to get harder."

Service Sector
The seasonally adjusted service sector index fell 2.8 to a record low 39.2 For the first time since its inception in February of 2002, all 10 components of the index are below the 50 level indicating economic contraction Like in the manufacturing index, sales and dollar amount beyond terms are the worst components. Similarly, comments from the service sector participants focus on bad payment conditions.

"…customers tell us flat out- we do not have the money to pay more often;"
"…signs of the times…sales and collections are slowing even from solid, long term customers;" "Many customers who have paid very well in the past are dropping in the 60 to 90 day column." "Receivable(s) over 90 days past due continue to increase."
And finally, one pithy comment sums it all up: "Dismal."

December 2008 vs. December 2007
On a seasonally adjusted basis over the past 12 months, the Credit Manager’s Index has fallen a record 12.3 as both the manufacturing and service sectors have fallen record amounts of 12.5 and 12.0 respectively. All 20 components in both indexes fell over the 12 month period. For both indexes, the sales component dropped the most; 23.3 for services, and a huge, record 35.1 for manufacturing.  Certainly if sales have deteriorated that much while payment problems are on the rise, cash flow will be severely strained, a very dangerous condition which threatens businesses’ survival.

The full Credit Manager’s Index report and archives may be viewed at http://web.nacm.org/cmi/cmi.asp.

Euler Hermes ACI is North America’s oldest and largest provider of trade credit insurance and accounts receivable management solutions and is the US subsidiary of the Euler Hermes Group. Headquartered in Owings Mills, MD, the company protects and insures more than $150 billion in US trade transactions annually. Additionally, Euler Hermes ACI provides a suite of receivables management services that includes commercial third party collections, receivables management outsourcing, and international collections. For more information, visit www.eulerhermes.us.