PR - Credit Index Shows Economic Contraction

 
Amid fears that the nation’s economy is headed for recession, a major credit index showed economic contraction in the manufacturing and service sectors for the first time in five years. According to analysis from leading trade credit insurer Euler Hermes ACI, a potent combination of negative economic factors could lead the Federal Reserve to once again lower interest rates in an attempt to revive the sharply slowing economy.

In his monthly commentary regarding a national survey of credit managers in the manufacturing and service sectors, Euler Hermes ACI Chief Economist Daniel C. North said the survey data showed a decline for the third straight month in the manufacturing and service sectors. "Although the drop was relatively small, six of the 10 index components fell, leaving five components below the 50 level – this indicates economic contraction,” said North. "This is the first time that there have ever been more than four components indicating contraction since the inception of the index in 2002, and it could well be a harbinger of things to come.”

To explain the reason for the continually deteriorating business conditions, North continued to point to a number of negative headwinds facing the U.S. economy. "Gasoline prices are high, housing prices are low, the dollar is crumbling, consumer confidence is plummeting, holiday sales have been mixed at best, credit is drying up, bankruptcies and foreclosures are on the rise, the employment situation is decaying, and conditions in the housing industry are getting worse,” he said. "It is a potent combination which could lead the economy into a recession in the first half of next year.” However, he conceded that both the economy and the nation’s business environment have remained resilient so far, but "cracks are starting to show, and the Fed will almost certainly cut the Fed Funds rate again at its December 11th meeting in an effort to forestall a recession.” And, in all likelihood, North believes the Fed will have to continue to cut the Fed Funds rate well into 2008, perhaps as low as 3.5%.

North said the manufacturing sector fell slightly in November, with bankruptcies plummeting 7.9% – the second largest drop on record. "The bright spot of the manufacturing report was that the sales component erased all of last months 5.2% fall,” he said. As has been the case for months now, comments from the survey participants were mostly about the terrible conditions in the housing market, but this month North commented that "there are some unhappy comments from other industries as well, indicating more widespread weakness.”  For example, one manufacturer of nuts, bolts, screws, etc. said manufacturing "is cutting back to a four-day week.” A petroleum refiner said, "We are seeing stress across industries due to rising energy and raw material costs.”  And a manufacturer of cookies and crackers noted how the housing crisis is now directly affecting even the food industry: "We’re affected by the trauma of home builders, mortgage banks and title companies.”

Meanwhile, North said the service sector decline was widespread as seven of the 10 components fell. As with the manufacturing sector, bankruptcies led the way down, falling 6.0%. Also similar to the manufacturing sector, most survey comments were negative regarding the housing industry, but downbeat comments from other industries are now ringing in. One participant from the photocopying industry said, "Even our best customers are paying beyond 100 days past due.” Another from the plastics industry, referring to the impact of higher oil prices, said, "Prices are increasing … We have had several customers close their doors as a result of the higher price.”  Finally, another from the tire industry described the state of the economy perfectly: "There appears to be no question that the economy is turning negative. With the housing industry in a slump and the price of gas more than $3.00 a gallon, individuals simply do not have the money they once had to make retail purchases.”