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Declining CMI Numbers Suggest Change in Economy

Wed June 28, 2006 - National Edition
Construction Equipment Guide

The Combined Credit Manager’s Index (CMI) fell 2.6 percent for the month of May on a seasonally adjusted basis. While seven of the 10 components remain above the 50 percent mark, indicating economic expansion, the decline was relatively large and quite widespread.

“Only twice in over four years has the combined index fallen more, and all 10 of the components in the combined index fell. The size and breadth of the decline suggests a definitive, structural change that outstrips change,” remarked Dan North, chief economist of credit insurer Euler Hermes ACI.

“Despite strength in recent government releases, it is likely that the combination of rising oil prices and interest rates continues to quietly erode the strength of the economy in the background,” North continued.

As predicted, the Fed raised the Fed Funds rate to 5 percent in May, and it now seems likely that the Fed will ratchet it up another 25 basis points at the end of June to continue slowing the economy.

“In the meantime,” he said, “crude oil continues to hover at near record prices, which also puts a significant drag on the economy.”

The manufacturing sector index fell 2.8 percent in May on a seasonally adjusted basis. While nine of the 10 components fell, six still remain above the 50 percent mark indicating expansion. North noted “the other four components, rejection of credit applications, disputes, amount beyond terms and customer deductions suggest cash flow problems among customers.”

The service sector index fell 2.4 percent in April on a seasonally adjusted basis as all 10 components fell. However, only three of the 10 components are below 50 percent, including two in common with the manufacturing sector; amounts beyond terms and customer deductions.

“Combined with the deterioration in collections, a pattern of cash flow problems emerges in the service sector as well, but overall growth remains positive,” observed North.

The seasonally adjusted Combined Index fell 0.8 percent on a year-to-year basis. The decrease was widespread as seven of the 10 factors are at lower levels than the previous year in the combined index.

Manufacturing fared worse than service as eight components fell for the former versus four for the latter. North noted “a decline in bankruptcy activity was the only bright spot in both sectors, most likely a result of bankruptcies falling off dramatically after a surge in activity caused by the change in bankruptcy law last October.”

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 asked credit managers to rate favorable and unfavorable factors in their monthly business cycle. Favorable factors included sales, new credit applications, dollar collections and amount of credit extended.

Unfavorable factors included rejections of credit applications, accounts placed for collections, dollar amounts of receivables beyond terms and filings for bankruptcies.

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