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Key Credit Index Says Weak Economy Heading in Right Direction

January 05, 2010

Although its key index remains above the expansion level, the National Association of Credit Management (NACM) said its December Credit Managers’ Index matched the mood of the economy as a whole – essentially flat.

The NACM’s index did show a slight gain as it moved from 52.3 to 52.9. More importantly, the index remained above 50 for the third straight month, which is the line that separates growth from contraction.

“This is hardly the kind of advance that provokes celebration, but given the gloomy assessments made about the 2009 holiday season, the gain is certainly preferable to what had been anticipated,” said Chris Kuehl, economist for the NACM.

The indicators that showed the least movement included sales and new credit applications, which Kuehl said was consistent with December readings of past years. While still preliminary, he said retail numbers thus far showed a gain of around 4.5 percent over the last year.

“This is a period in which most manufacturers are in semi-hibernation unless the retail community is frantically trying to bolster inventory,” he said. “That was not the strategy employed by retail this year.”

What did show up as more positive was an increase in dollar collection and an expansion of credit extended. The data points bode well for the coming year, especially given the fact that the rebound of the credit markets will be key for the economy’s healthy recovery.

Other elements showing promise include a modest improvement in unfavorable factors, as items such as disputes and rejection of credit applications all showed declines. The one unfavorable factor – filings for bankruptcies – continues to deteriorate significantly, particularly in hard-hit sectors like automotive and construction.

“There have been more bankruptcies and that poses some longer-term problems,” Kuehl said. “The growth of bankruptcy activity is not unexpected at this point in a recession, but until these are worked through, there will be hesitation in the market to extend credit to any one but the healthiest companies.”

Kuehl concluded that while the economy remains weak, it is headed in the right direction. He added that the slow thaw in the credit markets is still taking place and there are signs of expansion in both the manufacturing and service sectors.

“There’s been no sign of explosive growth thus far, but that is consistent with most of the other assessments of the economy,” noted Kuehl. “The improvement in 2010 looks more feasible, but there are still no fireworks in the immediate future.”

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