The combined December Credit Managers’ Index (CMI), published by the National Association of Credit Management (NACM) fell dramatically from 57.1 to 55.6, erasing most of the gains made in the last few months and taking the CMI back to levels not seen since the middle of summer. Though the manufacturing index fell by a full point from 56.7 to 55.7, it was the service sector’s two-point fall from 57.5 to 55.5 reflecting a slow response to Christmas and a slowdown in the housing sector that delivered the hardest blow.

The CMI’s four favorable factors registered the biggest declines, as the gains made in the second half of the year seemed to evaporate. Overall, the favorable factor index fell from 61.3 to 59.3, driven by a sharp reduction in sales, which stumbled from 63.4 in November to 58.7 in December, marking the fifth lowest sales reading in the last 12 months. New credit applications dropped by two points from 59.2 to 57.2, a reading not seen since April, and dollar collections slipped a full point from 59.7 to 58.7. The smallest drop occurred in amount of credit extended, from 63.2 to 62.6, which could be the only silver lining in the favorable factor index. “This suggests there might be an opportunity to recover in the coming months,” said NACM Economist Chris Kuehl, PhD. “It gives some faint hope that many companies are still interested in making credit available to the customers they trust.”

December also saw a slowdown in the unfavorable factors, which contributed further to the overall decline in the combined index. The unfavorable factor index fell from 54.3 to 53.1, staying in the same range of numbers recorded in the last six months. Dollar amount beyond terms took a big dive in December, falling from 54.7 to 49.7 and into contraction territory. Accounts placed for collection slipped from 55 to 53.4 and disputes fell from 51.9 to 50.7. Dollar amount of customer deductions managed to stay in the same ballpark as November, falling from 52.4 to 51.5, and filings for bankruptcies remained at 59. The only factor that improved was rejections of credit applications, from 53.3 to 54.5, which supports the notion that credit is still available for companies in good standing, but decreases in accounts placed for collection and disputes both suggest that more and more companies are experiencing financial distress.

“The sense is that most of the financial issues are of relatively recent origin and that would suggest that things could turn in either direction,” Kuehl said. “The situation could get more serious and some of the longer-term issues could emerge or this might be more of a curve in the road and just a delay in the response of the overall credit world and the economy.”

What’s most alarming about the December CMI, however, has more to do with the CMI in general than it has to do with any one particular factor. “The most concerning part of this month’s data is that the CMI is very often a predictor of what is to come in the near future given its ability to track the availability of credit,” Kuehl said. “This month’s reading could signal that the economy is due to slow down substantially in the first quarter of the year.”

For a full breakdown of the manufacturing and service sectors, in addition to tables and graphs, view the complete CMI report for December 2013 by clicking here.