NACM’s Credit Manager’s Index for February ’06 Makes a Strong Comeback

Thu April 06, 2006 - National Edition
Construction Equipment Guide

The Credit Manager’s Index (CMI) continues to mirror developments in the overall U.S. economy, rapid changes from month to month, said Dan North, chief economist of credit insurer Euler Hermes ACI.

The February CMI showed a strong snap back from January’s weakness, led by sharp gains in sales, new credit applications, and amount of credit extended — all favorable items oriented towards the top line.

Gains were solid in both the service and manufacturing sectors, with the latter benefiting the most.

It was the first increase in the manufacturing sales component in five months, and only the second in eight months.

“The recent volatility of the CMI is confirmed by the GDP data, which was much weaker than expected in 4Q05, but looks to be very strong in 1Q06, partially because the consumer held off purchases until the new year,” said North.

“Other data also indicates that while the economy is strong now, it is likely to weaken after the first quarter as the Fed’s tightening takes hold. It takes about a year for Fed actions to work through the economy, so the effects of the tightening, which are reflected in the inverted yield curve, are only beginning to be felt. Similarly, a recent survey indicates widespread optimism for 2006 among CEOs, but at the same time earnings growth for the S&P 500 companies is likely to fall in 2006 to an estimated 6 percent to 7 percent from 14 percent in 2005.”

The manufacturing sector saw modest growth in February 2006. Sparked by an increase in three of the four favorable factors, the overall CMI increased 180 basis points from 52.4 to 54.2 percent. Amount of credit extended displayed the highest level of growth-increasing 650 basis points; followed by new sales, which jumped from 52.9 to 58.8 — a 590-point increase.

The service sector displayed growth in the same three favorable factors as the manufacturing sector: new credit applications, which jumped 530 points; new sales, which posted a 290 point gain; and credit extended, up 250-points.

The February 2006 CMI is down 30 points from one year ago; a drop reflected in the overall favorable and unfavorable factors. From a sector standpoint, more variation is displayed among the favorable factors: for example, the favorable factors for the February 2006 service sector showed increases in 75 percent of the factors — while a decrease in 75 percent of the favorable factors was true for the manufacturing sector.

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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