Accurate CMI Readings Show Worth of Credit Department

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Columbia, Maryland: January 26, 2011-News outlets heavily covered the National Bureau of Economic Research's (NBER's) announcements of when the recession began and when it mercifully ended. December 2007 was the official start date, giving a green light to negative GDP growth, increased investor anxiety and swift political action. Three months prior to the recession's official start, a sizeable contingent of credit professionals sat down at their computers and participated in one of a series of surveys conducted by the National Association of Credit Management (NACM).

The survey was used to calculate the Credit Managers' Index (CMI), NACM's own economic indicator that first starting taking the market's pulse in January 2003. In the CMI, any reading above 50 suggests economic growth, while anything below 50 indicates a contracting economy. The CMI's first reading showed a modestly growing economy. Years later, when the September 2007 CMI was released, the forecast was a bit more negative.

This was three months before the official start of the recession. Following a significant 1.3% drop in July 2007 and another -0.2% in August, September's reading edged up 0.3% to 54.3, but an uneasiness had set in. Comments received by credit professionals in the manufacturing sector noted they "had more companies just closing their doors and walking way [with] no assets to recover" and that "orders are being canceled or modified after the initial order," illustrating the jittery, changing nature of their customers. Comments from the service sector by and large focused on the housing market mid-collapse.

October's reading of 54.1 showed yet another decline. NACM members in the abrasives industry reported "seeing some domestic slow down" and one from the newspaper industry said that "certain local industries continue to experience severe financial crisis, citing cash flow problems, reduced sales and inability to get financing." November continued the downward trend, falling 0.2%.

In December 2007, the recession began, although savvy observers armed with the CMI already knew it was going to happen.

Bad times aren't the only thing that the CMI can predict. As early as February 2009, the CMI indicated that the market was slowly stabilizing. While the index didn't break the 50-point threshold until later that year in October, its slow trickle upward signaled that the recession would hit bottom soon, and that very tentative, much awaited growth was on its way, and it was.

Chris Kuehl, PhD, managing editor of Armada Corporate Intelligence and NACM economic advisor, analyzes the data and prepares the monthly CMI report. He noted that other indices try to measure what's expected to happen by asking respondents what they intend to do in the next several months. The problem, however, is that intentions don't always pan out, and often change for many of these participants, which affects how easy it is to generalize from the index in question. "There are other indices that talk about intent and plans, but as soon as you start getting into that kind of conjecture you kind of weaken the data," he noted.

Part of what allows the CMI to predict economic developments is that it surveys credit professionals, whose responsibilities really deal with what's going to happen next. "I think it's the nature of credit management," said Kuehl, when asked why the CMI is proving to be so accurate. "Credit managers are as concerned about the condition of their clients 15, 30, 60 and 90 days from now as they are today. The tendency is to think ahead."

A look at the questions asked of CMI participants all suggest something that hasn't happened yet, but will in the coming weeks and months. "You're getting responses that have to do with credit applications and the status of accounts, and most of that stuff is oriented to the future," Kuehl added. "As you collect data, you're almost forcing people to be predictive and the information that you get, particularly the things like number of credit applications received and credit applications denied, are things designed to indicate a future occurrence." If someone applies for new credit, Kuehl noted, "they're planning to do something," which most likely involves spending, which in turn helps the economy in general. On the other hand, if someone has their application rejected, "that's a future plan that has to be altered," meaning the cancellation of originally planned spending or some other negative change. Altogether, these items take advantage of the forward-looking nature of credit management to accurately and intuitively suggest what the economy will see in the months to come.

The full version of this story is available online. To learn more about the Credit Managers' Index (CMI), or to become a participant, visit the NACM website at www.nacm.org.

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About the National Association of Credit Management
NACM, headquartered in Columbia, Maryland, supports more than 16,000 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. NACM's collective voice has influenced legislative results concerning commercial business and trade credit to our nation's policy makers for more than 100 years, and continues to play an active part in legislative issues pertaining to business credit and corporate bankruptcy. Its annual Credit Congress is the largest gathering of credit professionals in the world.

NACM has a wealth of member experts in the fields of business-to-business credit and law. Consider using NACM as a resource in the development of your next business story.

Source: National Association of Credit Management

Contact: Caroline Zimmerman, 410-740-5560, carolinez@nacm.org

Website: www.nacm.org

 

 

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