NACM: Economy Takes Hit From Manufacturing Sector

Wed January 25, 2006 - National Edition
Construction Equipment Guide

December’s Credit Manager’s Index fell 2.5 percent to 54.9, a level still associated with economic expansion. But the manufacturing sector took a sharp plunge of 4.8 percent, while the services sector slipped only .2. The only positive component in the manufacturing report was the improvement in bankruptcy activity.

Dan North, chief economist of EulerHermes ACI, noted that otherwise, manufacturing was weak all around, particularly in the Index of favorable factors where all four components fell at least 7.6 percent, amounts that were not entirely attributable to seasonality.

The total Manufacturing Index is down 2.1 percent from last year, three of the manufacturing components are now below the 50 percent level, which indicates a slowdown, and the sales component for the manufacturing sector is down 21.1 percent since September. By contrast, five of the 10 components in the Service Index rose, pushing it up .2 percent from last month and up 2 percent from last year, while only one component is below 50 percent.

“However,” North said, “in both sectors, dollar collections and dollar amount beyond terms fell the most, easily wiping out [November’s] gain, suggesting that customers might be short on cash flow. Higher energy costs, interest rates, and labor rates are likely culprits. November’s drop in fuel price may help ease the situation next month.”

With the onset of the holiday season, the manufacturing sector dropped to 53 percent, a 480 points drop over November; credit managers reported decreases in nine of ten factors. All four of the favorable factors had substantial decreases, with the largest decline coming from Dollar Collections, which dropped 1,020 points.

Unfavorable factors also showed decline, with erosion in five of the six factors: the largest of which were in Dollars Beyond Terms and Disputes, down 820 and 710 points, respectively. One positive note was the decline credit managers reported in the number of bankruptcies.

The service sector fared slightly better than the manufacturing sector, reporting only a 20-point drop in the overall CMI. Despite minor improvement in three of the four factors, a 590-point drop in Dollar Collections caused an overall decline.

Looking at unfavorable factors, a pattern is similar to the one seen in the manufacturing sector: erosion in both Dollars Beyond Terms and Disputes, with a much lower level of bankruptcy filings.

NACM’s December 2005 CMI remained fairly consistent with the level credit managers reported just one year ago. The CMI ended 2005 at 54.9 percent compared to 55 percent at year-end 2004. Of the 10 factors, eight were at or above the 50 percent neutral mark, indicating economic expansion. The two remaining factors — Dollars Beyond Terms and Disputes-were just slightly below the 50 percent mark, at 49.3 and 48.3 percent, respectively.

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.

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