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May Credit Managers’ Index Rises, Signals Continued Recovery

June 02, 2014, 07:11 AM
Filed Under: Economic Commentary

The Credit Managers' Index (CMI), issued by the National Association of Credit Management (NACM), improved from 56 to 56.8 in May. This marks the second consecutive month of improvement for the index, further signaling the end of the first quarter's economic turmoil that appears to have been primarily caused by bad weather. Elsewhere in the May CMI report, the favorable factors index rose from 60.7 to 62.7, buoyed by a strong increase in sales, and the unfavorable factors index remained unchanged at 52.8, held back by a perplexing increase in disputes.
Earlier in the 2014 the CMI predicted poor economic performance in the first quarter with a short series of declines that was eventually reflected in the US Commerce Department's recent revision of the US gross domestic product (GDP) figures, which indicated that the economy had endured negative growth at a rate of 1% for the first three months of the year. Recent CMI readings, however, have supported the hypothesis that analysts can expect the second quarter data to be much more positive.

The best news in the May report came in the favorable factors, which reached its highest reading in the last year thanks to a leap in sales. "The biggest jump took place in the sales category as the reading is now heading towards the 70 mark," said NACM Economist Chris Kuehl, PhD. "The index sits at 65.6 and that is by far the highest reading notched in well over three years." Indeed only one of the favorable factors now sits below 60 as of May's readings: new credit applications. The figure fell this month from 59.3 to 58.9, but the data suggest that while new applications for credit have slowed, fewer applications are also being rejected, which means that those applying for credit are in better financial shape. Furthermore, while new applications fell, amount of credit extended jumped considerably to 65, just shy of where it was at the start of the year. "There may be fewer applications, but there are more companies seeking larger amounts of credit," Kuehl said.
The unfavorable factors index remained flat at 52.8, which remains a respectable figure. Rejections of credit applications improved from 52.3 to 52.7 and accounts placed for collection improved as well from 51.7 to 53.8, suggesting that fewer business debtors overall are facing credit crises. An unexpectedly sharp deterioration in disputes, however, from 54.7 to 50.2, is most likely what held the index down. The decrease in disputes was somewhat baffling, and could have been driven by any of a number of different possibilities. "It may indicate that there is a stronger desire to adjust credit arrangements as companies anticipate a period of better growth," Kuehl noted. "It may also reflect the impact of the first quarter slump and the temporary nature of that economic dip."
Nonetheless, the combined index, coupled with improvements in both the manufacturing and service sectors, suggests that better days are ahead now that the winter doldrums are firmly in the past, barring any unforeseen surprises. "The impact of the bad first quarter is still being felt and it may be another month or two before the rebound noted in the favorable categories starts to make a real dent in the unfavorable categories," Kuehl said. "The news is good in the right places and there are fewer warning signs or cautionary notes this month. If that trend can be sustained for a few more months one can talk of real recovery by the middle of the year, but thus far it seems that one good month is often followed by a more challenging one."
For a full breakdown of the manufacturing and service sector data and graphics, view the complete May 2014 report by clicking here.

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