Credit professionals reported fewer filings for bankruptcy and a higher score for rejections of credit applications in the July 2018 economic report from the National Association of Credit Management, but these spikes are coupled with plummeting sales and unsustainable changes for the future.
After a large spike in May and a dip in June, July continued the trend of falling figures; this time by almost a point in NACM’s Credit Managers’ Index (CMI). Ratings in the combined score have not fallen this low since January, yet they still remained somewhat healthy with a score in the mid-50s, sitting now at 55.5.
While the American economy appears to be forecasting a positive future, with Q2 growth of 4.1percent and an unemployment rate of 3.8 percent to 4 percent, this month’s combined 0.8-point drop and the combined drop in sales of 5.7 indicates a slip for the future. NACM Economist Chris Kuehl, Ph.D., said many of the positives come in the form of concentrated, deliberate preparation.
“It seems that credit managers are seeing some of these warning signs and are not as impressed with these good news reports,” Kuehl said. “In fact, some of the issues can be read in those same reports. Much of what drove the fast growth in Q2 came from higher export levels, which took place as buyers of soybeans and other agriculture products rushed to get their orders filled before tariffs took effect. Sales will now start to fall like a rock.”
Kuehl noted, however, that sales still remain in the 60s, dropping from an unusually high 69.6 to 63.9. The novelty and impact of tax cuts in the new tax reform are now beginning to fade after a few months of hype. Just as sales remained high even with the drop, so did dollar collections and amount of credit extended, both still in the 60s.
On the more positive side for the combined CMI, rejections of credit applications jumped 1.3 points, which is curious given that requests, in general, have fallen in July. The category of filings for bankruptcies saw a small boost as well. Kuehl said this means more companies are pushing through challenges rather than giving up on business entirely.
The manufacturing sector of the CMI fell by half a point to 55.4. This small drop likely comes from small- and medium-sized businesses finally purchasing the machines needed for years following the recession. While this keeps the score stable for now, this rapid buy-back is not sustainable and will likely not continue into the following months. Kuehl said this group will continue to hop through the obstacles of trade wars and tariffs.
Manufacturing sales fell sharply this month from 69.1 to 62.4, along with the new credit applications and dollar collections categories. While dollar collections has been “volatile” all year, Kuehl said the drop indicates manufacturers are having less cash flow issues, but the future for manufacturing still remains uncertain.
“What is worrisome is that there are lots of sagging readings in the nonfavorable sectors,” Kuehl said. “If companies are still struggling to get out of a rut this long into a robust recovery, what will they look like when there are issues later with a slowing economy?”
The service sector saw a steeper decline this month than manufacturing. It fell from 56.8 to 55.6, seeing a change of about one point between both favorable and unfavorable factors.
While sales did drop 4.8 points, the score is still at 65.3—a solid reading. The new credit applications category climbed about two points, reflecting retail stores building up inventory for the upcoming shopping season.
The rejection of credit applications dropped by 0.3, which Kuehl said is good news given the number of new applications increased by 2.1. Bankruptcies also went up, seeing a 0.7 increase.
While some readings in July’s CMI appear to boast a positive outlook, Kuehl said credit managers should remain cautious in the future as much of the growth is not sustainable.
“The fear now is some of the factors that had been keeping the economy functioning reasonably well are starting to fade. Inflation threats are becoming very real with the recent rise of wages to accompany the rise in commodity prices,” Kuehl said. “If there are further hikes due to the tariff and trade wars, the inflation threat becomes imminent and serious, and very difficult to walk back from.”
For a complete breakdown of the manufacturing and service sector data and graphics, view the July 2018 report.