Current Economic Strength Boosts Major Credit Index

The U.S. economy continues to be strong, providing needed support for important industry sectors according to analysis released by the National Association of Credit Management (NACM) and provided by Euler Hermes ACI Chief Economist Dan North.

Following gains seen last month, the Credit Manager’s Index (CMI) posted even stronger indicators for March. “While seasonal factors played a role in this increase,” said North, “the underlying strength of the economy demonstrated in the first quarter continues to provide solid support for the CMI and its components.” The strength was widespread as the 4.9% monthly increase for the entire CMI tied a record increase set three years ago. Record gains were also seen in four of the 10 service sector components. “As in February, the bulk of the gains was in the four favorable factors: sales, new credit applications, dollar collections and credit extended ? all factors which suggest a likelihood of continued growth,” North said. “Similarly, all of the components for the service sector and for the total CMI are now above the 50% level, which indicates economic growth.”

The manufacturing sector continues to lag a bit, as six of its 10 components are still lower than they were a year ago, while none are lower in the service sector. North added, ?The strong overall tone of the CMI ? and of the economy in general ? could be a mixed blessing, as the Federal Reserve raised its benchmark interest rate to 4.75% and suggested that it may continue to raise short-term interest rates even more this year.?

“March saw significant growth among all four favorable manufacturing factors,” observed North. The largest growth is seen in sales, with 70.7% of credit managers reporting higher levels of new sales. Also reported was growth in dollars collected (+960 points); amount of credit extended (+880 points); and new credit applications (+690 points). The overall manufacturing CMI rose 420 points, finishing at 58.4%.

Favorable factors in the service sector also showed significant growth. Both sales and dollar collections posted growth over 1,000 basis points ? 1,380 and 1,170, respectively; and significant growth in the amount of credit extended is indicated. “For the first time since November 2005, all 10 factors surpassed the 50% mark, which indicates economic expansion in this sector,” said North.

New sales recorded higher levels in both the manufacturing and service sector, compared to one year ago. Within the manufacturing sector, credit managers indicated fewer rejected credit applications and saw slightly lower levels of bankruptcy filings. This trend was repeated in the service sector; which also showed lower levels of disputes. “Lower levels of disputes likely indicates solid cash flow and companies rendering prompt payment of invoices,” said North.

Despite the positive news from the March CMI, North cautioned that the Federal Reserve’s continued raising of interest rates could produce some “significant economic headwinds” going forward.

“The long-term outlook is more questionable since the tightening monetary policy will certainly influence the economy for several more quarters to come,” North said. “Furthermore, the Fed is expected to continue raising rates through perhaps even May, so the economy could be facing this headwind until well into 2007.” He added that the rising short-term rates have inverted the U.S. Treasury yield curve, a strong predictor of a future slowdown.

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. A complete view of the index can be viewed online at www.nacm.org.