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Recovery Grinding to Halt, Credit Index Suggests

Customers display cash-flow problems, triggering a dip in a key credit indicator for the first time in over a year.
David M. Katz, | US
June 2, 2010

Worsening credit conditions and tightened cash flow among customers stalled the nation's economic recovery in May, the findings of the most recent Credit Managers' Index suggest. While the CMI dipped less than a point last month, from 56.5 to 55.9, it was the first time the index recorded a decrease since January 2009.

Similarly, after six months of rising, the score for the amount of credit extended, a favorable factor, flattened out in April at 61.3 and then dropped to 60.2 in May. And for the first time since August 2009, the credit managers recorded a decreased score (62.1 to 59.7) for the dollars they collected from creditors between April and May.

To be sure, the scores were merely small drop-offs from several months of nascent recovery. "I don't think we're in a real crisis situation," says Chris Kuehl, economic adviser to the National Association of Credit Management, the organization that prepares the index each month. "It's really a sense of that we were growing pretty aggressively, and now we've flattened out." The numbers reinforce "the notion of a slow recovery," he adds.

The big takeaway for finance chiefs? "Resist entreating the sales and marketing departments to spend money," says Kuehl. "It's still a good time to be a conservative, count-your-pennies CFO."

Particularly indicative of the need for parsimony was the drop from 55.7 to 51.8 in the CMI score for the dollar amount of customer deductions from their billings. While that decrease between April and May did not reverse a long-term trend — the scores in January, February, and March bounced from 52.5 to 51.2 to 51.7, respectively — it did indicate some cash-flow problems among customers, says Kuehl.

The drop in customer deductions suggests that customers need to hold on to cash rather than pay off all their debt. That, in turn, is leading creditors to hold back on aiding other debtors with better terms or deductions. "Many of the companies, whether they are expanding are not, are saying, 'Now we need the consumer to come in and consume some of the inventory we've built,'" says Kuehl.

Based on a survey of about 1,000 trade-credit managers near the end of each month, the CMI is a compilation of scores based on whether respondents are seeing improvement, deterioration, or no change in the factors discussed above, as well as in sales, new credit applications, accounts placed for collection, and other factors.

Credit index monthly change