CMI Indicates a Weakening Economy

The seasonally adjusted Credit Manager’s Index fell for the fourth consecutive month in November.

The CMI, a monthly survey of the business economy from the standpoint of commercial credit and collections, was launched in January 2003 to provide financial analysts with another strong economic indicator.

“While the decline was small at 0.1 percent, the CMI continues to indicate an economy slowly weakening under the weight of monetary tightening by the Fed and a decimated housing market,” said Dan North, chief economist with credit Insurer Euler Hermes ACI.

He noted that other recent economic data confirm the CMI’s message: uneven holiday sales, plunging durable goods orders, falling consumer confidence, and below-trend GDP growth.

In addition, he said the median sales price for existing homes has fallen on a year-over-year basis for an unprecedented three straight months, the latest of which was the largest decline ever.
“In contrast, Fed Chairman Bernanke and the Fed Governors have been predictably banging the drum about the risks of inflation and how the deteriorating housing market will not hurt the economy,” North said. “It is difficult to read much into this ‘jawboning’ because, no matter what the economic circumstances might be, the Fed must continue to build credibility and present a clear, uniform message: ‘We are inflation fighters’,”

However, North added if the slowing economy does fail to quell inflation, the Fed will continue to raise rates to reduce the risk of inflation, and by so doing, increase the risk of seriously hampering the economy.

“Given the deteriorating trends in the CMI, that scenario could be a most ‘unwelcome’ one,” he said.

The manufacturing sector showed a surprising 1.4 percent upturn, breaking a three-month string of losses.

“While the results are unarguably positive, it is important to note that the improvement was due to large increases in just two components, sales and dollar collections. Without those two components, the manufacturing sector index would have fallen 0.1 percent,” North said.

Respondents focused on the housing industry as the main source of weakness, citing an increase in payment terms and a slowing payment trend.

The service sector suffered its largest decline since May of this year, as nine out of the 10 components fell.

“The index has not been lower than the current 55.4 in three and one-half years.” North said. “Once again, the deteriorating housing market has affected many respondents such as building materials suppliers and contractors. … Indeed the 5.1 percent drop in dollar amount beyond terms was the single largest decline in the index.

“Over the past 12 months, all three indexes have fallen,” North added. “While all of the indexes remain above the 50 level indicating expansion, there has also been a steady erosion similar to that of the macroeconomy as a whole. The manufacturing sector has dropped 2.7 percent, the services sector 2.1 percent, and the combined index 2.4 percent.”