Credit Managers Index Slips in July

The continued deterioration of the nation’s housing market is causing credit conditions to worsen across both the manufacturing and service sectors according to a monthly credit index produced by the National Association of Credit Management.

The seasonally adjusted Credit Manager’s Index (CMI) fell 1.2% in July, the first decline in four months. "While the drop-off was not dramatic, it was widespread as eight of the 10 components fell," said Daniel C. North, Chief Economist for leading accounts receivable insurer Euler Hermes ACI, who provides regular commentary and analysis for the CMI. North said the housing market was once again a major drag on the respondents’ businesses, "and there appears to be little relief in sight as home-builders continue to report bleak conditions. Housing starts, permits, and unit sales are all down dramatically from last year, while the supply of unsold homes is growing. And large home- building firms are reporting losses and forecasting continued weakness." North noted that commercial construction activity remains strong.

"Even though the report shows signs of erosion this month, note that 29 of the 30 total components are still above the 50 level, indicating economic expansion," he concluded.

Sector by sector analysis of the CMI follows:

Manufacturing Sector

The manufacturing sector dropped 1.7% on a seasonally adjusted basis as seven of the 10 components of the index fell. Sharp declines in the accounts placed for collections and dollar amounts beyond terms components accounted for much of the drop, suggesting cash flow difficulties. Indeed, one respondent reported that "…customers are disputing more and slowing payments." while another noted that ".everyone is . taking longer terms without approval."

Service Sector

The service sector fell 0.7% on a seasonally adjusted basis as six of the 10 components fell. Once again, survey respondents pointed to the housing sector as the major cause of their woes. One respondent’s comments were typical, saying "The housing market continues to suffer from lack of building permits…" and the ".market is still flooded with existing homes."

However there were several comments about the continuing strength of commercial construction, a factor which is helping to maintain employment in the building industry. Interestingly, one respondent echoed the recent concern over inflationary pressures saying "Raw material cost(s) continue to rise." Inflationary pressures are under careful scrutiny at the moment, because if rising material and labor costs result in accelerating consumer inflation, the Fed might be forced to start raising interest rates again.

And higher interest rates would put the health of the economy at significant risk.

July 2007 vs. July 2006

On a year-over-year basis, the combined index fell 1.6% to 56.0. Over the past twelve months, the manufacturing sector has outperformed the services sector. The manufacturing sector fell 0.9% as five of the 10 components fell, but the services sector fell 2.4% as eight of its 10 components fell.

The housing market has consistently been cited as the major drag on building materials suppliers in the services sector.

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