Is the economy due for a downturn?
Investors seemed to consider the possibility on February 27, when most major market indexes fell nearly 4 percent. The plummeting Shanghai stock market may have kicked things off, but investors also would have taken notice when Alan Greenspan, the former chairman of the Federal Reserve, observed that a contraction was possible simply because the current economic expansion had lasted so long.
One indicator of a possible slowdown is the monthly Credit Manager’s Index, which fell 0.6 percent in February, its sixth decline in seven months.
Five of the index’s 10 components fell, according to the National Association of Credit Management, which has conducted a survey from the standpoint of commercial credit and collections since January 2003. For its survey, the association asks about 500 trade 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 bankruptcy filings.
February’s decline was driven by sharp decreases in new credit applications, observed the NACM; disregarding that component, the index would have risen by 0.3 percent.
“The data suggest that businesses are curtailing their spending in anticipation of an economic slowdown,” said Dan North, chief economist for credit insurer Euler Hermes ACI, in an NACM statement. North observed that business orders for durable goods — those meant to last more than one year — dropped sharply in January, the most recent month for which a report is available.
Year on year, the overall index fell 0.7 percent, according to the NACM survey. Although the manufacturing component of the index actually rose by 1.3 percent, it was easily outweighed by a 2.6 percent drop in the services component.
For the month of February, the manufacturing sector fell 0.6 percent, largely driven by a 7.2 percent drop in new credit applications. According to North’s statement, survey respondents reported that large customers are demanding longer payment terms for their contracts.
The services sector, too, fell 0.6 percent last month; new credit applications fell 9.6 percent. The services sector has fallen in four of the past five months and has underperformed the manufacturing sector during that period, according to the survey.
North, citing a soft housing market, also noted that survey participants in the home-building and furnishing-supply industries seem to have been hit the hardest.