NACM Credit Index Shows Good Business Conditions

The nation’s service and manufacturing sectors reversed roles from the previous month according to a major credit index produced by the National Association of Credit Management. However, commentary and analysis by global accounts receivable management provider Euler Hermes ACI shows that overall business conditions have improved despite the weakening economy.

The seasonally adjusted Credit Manager’s Index (CMI) crept up 0.1% in May as a decline in the manufacturing sector of 0.7% was offset by a gain in the services sector of 0.9%. The report showed mostly small changes in the 10 components, with the number of increases and decreases evenly split.
However, the 0.1% increase for the combined index was hardly robust since it would have actually fallen 0.3% without the sharp increase in the amount of credit extended in the manufacturing sector.

"Except for hints of improved cash flow in the services sector, the data suggest that conditions were only slightly improved from last month," said Euler Hermes ACI Chief Economist Daniel C. North. "However, the small improvement came off of a good base, pushing all of the components above the 50 level indicating economic expansion. Overall, credit managers are currently reporting good business conditions."

Sector by sector analysis of the CMI follows:

Manufacturing Sector
The manufacturing sector fell 0.7%, showing widespread but shallow weakness as seven of the 10 components fell. The only offset to this weakness was a jump of 7.7% in the amount of credit extended; without the gain in this single component, the entire manufacturing index would have fallen 1.7%.
Comments from respondents were mixed, although several of them still pointed to continuing troubles in the housing market.

Service Sector
The service sector gained 0.9% as six of 10 components rose. There were significant improvements in the dollar amount beyond terms, which was up 5.3%, and the dollar amount of customer deductions, which gained 4.0%. Both components moved back above the 50% level indicating economic expansion. The data suggest that buyers have experienced improved cash flow during the month and are taking the opportunity to clear out old payables. Like the manufacturing sector, comments from respondents in the services sector were mixed with several of them still reporting continued troubles in the housing market.

May 2007 vs. May 2006
On a year-over-year basis, the services sector has risen 0.4%, but a strong increase in the manufacturing sector of 3.4% pulled the combined index up 1.9%. Overall the data suggests that the economy continues to expand at a modest pace despite the drag of tightened monetary policy, high energy prices, and a devastated housing market.

A complete view of the CMI analysis, including charts and methodology, can be viewed online at www.nacm.org.