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COLUMBIA, USA — The latest data is starting to turn in a decidedly
positive direction; GDP numbers are the best in over a year and a half,
suggesting that the recession is in clear retreat. After a mild
recovery in the third quarter, numbers jumped 5.8% in the fourth. The
bulk of this growth is attributed to manufacturers starting to
replenish inventories, mostly since the beginning of December.
This shift in strategy is reflected in the Credit Managers’ Index (CMI)
numbers as well. “The jump in manufacturing was stark and unexpected
and, since the decline registered in the last iteration of the index,
there has been a major leap in some critical areas,” says Chris Kuehl,
Ph.D., economist for the National Association of Credit Management
(NACM). “The combined CMI saw a jump from 52.9 to 55.1, which is
impressive enough, but the real movement came from the manufacturing
side,” he says. Reinforcing the message coming from the economy as a
whole, the manufacturing sector jumped from 52.1 to 55.1, reversing the
trend from the December index when the sector stagnated and slipped in
terms of positive factors.
There was an improved atmosphere in
both manufacturing and service sectors resulting with the most activity
in the combined index’s favorable factors, specifically sales and new
credit applications. Sales in the combined index jumped from 56.7 to
60.7, marking the first time this figure has been above 60 in 18
months. There was also progress in new credit applications—a jump from
54.2 to 57—signaling movement in the credit sector despite ongoing
issues in the financial community. One of the biggest leaps came from
dollar collections, which sported readings in the 40s just nine months
ago and is now at 61.3. The same pattern can be seen in amount of
credit extended, now standing at 58.8 after sitting in the 40s just
five months ago.
“The past pattern in the index suggests that
this is developing into a classic recession exit,” says Kuehl. “The
deterioration of inventory and the dramatic reduction in capacity
utilization meant that any spark of demand would propel business out of
this predicament and, as in past recessions, the months following the
end of these strategies would show substantial growth. The
trillion-dollar question is whether this growth surge can be maintained
throughout the rest of the year.”
Thus far, these are the
highest numbers seen in the index since February 2009 when the initial
impetus of the recession was broken. Since then, growth has been even,
but not dramatic. That trend of slow growth is likely to return, but
the suggestion from this month’s data is that there will be pretty
substantial gains for the bulk of the first quarter.
A pattern
appears each time there is a recession and, in this downturn, that
pattern has been as visible as it was during the recessions of the
early 1970s and 1980s. The strategy employed by most companies in the
face of financial strain is to reduce costs to the barest of minimums,
which involves slashing the workforce, postponing or eliminating
capital expenditures and reducing inventory to the lowest possible
level. The CMI’s figures on capacity utilization reflect this strategy
as they have fallen to levels not seen since the depths of the 1980s
double-dip recession. The strategy for retailers was as extreme as it
has ever been—betting that the consumer would grab whatever they could
find during the holiday season—and the effort seemed to work, as the
retailers managed to pull off a decent December in spite of the limited
offerings. On the manufacturing side, this inventory reduction was
extreme and extended such that by the end of the year supply was
dangerously low, especially if one wanted to hang onto market share
when recovery arrived.
“For two months, the CMI told a story.
The number of disputes fell, dollars out for collection declined and so
did almost all the factors that indicated debt was going unpaid,” says
Kuehl. He further commented that the process of catching up on that
debt was the first step toward returning inventory levels, and
companies that needed to buy raw materials for production had to get
current with their creditors, a process that began in earnest in
November and in some cases as early as October. By December, the
purchasing had officially started. The evidence of this recovery was
noticeable in other sectors as well. The first transportation sector
that would see gains when factories started back up was rail and, sure
enough, freight volumes started to climb in the rail sector in November
and have been climbing steadily ever since.
It is far too
early to assert that manufacturing has finally escaped the ravages of
this recession, but the first stage is underway. The boost provided by
the need to replenish inventory has already helped to stabilize some of
the metals prices and has resulted in renewed activity in everything
from transportation to warehousing. The next step in the recovery will
be for consumer demand to draw down this newly-established inventory
and necessitate its replacement. This has yet to develop, but there are
some hopeful signs. For the moment, the good news lies in the future,
reflected in the manufacturing index by jumps in sales as well as
amount of credit extended.
There was less dramatic movement in
the service sector, but progress was registered nonetheless. The
increase in sales was notable, although not as significant as in
manufacturing this month. What is good to see is the index has crested
above 60 in both new credit applications and dollar collections. Kuehl
noted that it was only four or five months ago that both of these
factors had readings in the 40s and, a year ago, new credit
applications was in the 30s. The credit squeeze has certainly not
ended, but there is more available now than there has been for almost
18 months. The system has not returned to the profligate ways of the
last decade, but that is likely a good thing. The old-school thinking
that used to dominate the banks and financial institutions seems to
have made a bit of a comeback, which is now freeing up credit for those
that are traditionally creditworthy.
The contrast between
January 2009 and January 2010 is stark and the distance between the two
is likely as broad as it will be for some time. It was a year ago that
the recession reached its deepest point and the index showed numbers
buried in the 40s. Now the index has climbed into solid expansion
territory and is well into the mid 50s. It is not likely that this
trajectory will be maintained indefinitely as there are still questions
about how fast consumers will start to draw down new inventory, but
there is also not much that would suggest a major decline at this
point. The National Association of Credit Management (NACM) supports
approximately 19,000 business credit and financial professionals
worldwide with premier industry services, tools and information. NACM
and its network of Affiliated Associations are the leading resource for
credit and financial management information and education, delivering
products and services, which improve the management of business credit
and accounts receivable. This report, complete with tables and graphs,
and the CMI archives may be viewed here. |
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