Credit managers are relatively optimistic about the state of the economy these days.
But one critical sector in particular is behaving like it’s in a recession – and it’s going to have ripple effects on creditors and supply chain partners.
The manufacturing sector’s Credit Managers’ Index (CMI) from the National Association of Credit Management (NACM) dropped 2.5 points down to 51.5 in August. That’s the worst number for manufacturing since May 2020 as coronavirus restrictions started taking a heavy toll on businesses.
The CMI is centered on a value of 50, with values greater indicating expansion and values lower indicating
contraction. While manufacturing as a whole treaded water, the sector flashed at least four warning signs that product makers will struggle to deliver goods and pay back creditors:
- dollar collections are on a downswing
- the dollar amount beyond terms index is at 43.2
- bankruptcy filings are increasing, and
- the index for credit application rejections dropped to 48.2.
What happens when prices are inevitably slashed?
Despite the dark clouds hovering over manufacturing, the overall picture isn’t nearly as gloomy.
The combined CMI for August was 55 (as it was in July) and the service sector index is still above 58. Not great but not too bad considering the wide range of supply chain shortages and rampant inflation every company’s been forced to navigate through the past year and half!
Just don’t assume we’re through the worst yet. Reason: Sales in terms of dollars are growing primarily due to price increases.
“Price increases are leading the day,” says NACM economist Amy Crews Cutts. [Credit managers] indicate that sales in terms of dollars continue to grow, but units of sales are stagnant or down.” As a result, “companies with too much inventory [will be] pausing purchases.”
Cutts also notes what we’ve reported: “Slowing payment speeds and lower collections amounts are also
appearing in CMI responses, consistent with some payors having difficulties now, perhaps an early indicator of the coming broader economic stress.”