The bottom seemed to drop out of the economic recovery in May. The first signs of trouble started to manifest in the April, but by the end of May these threats had become very real and the economy took some steps backwards. The Credit Managers’ Index (CMI) data in April had hinted at the problems with declining numbers in areas like sales, credit extension and dollars beyond terms, but by May these areas and others showed definite strain.
The biggest drop in May was in sales. The 59.4 reading is the lowest since September 2010, and this decline was felt in both the manufacturing and service sectors. There is widespread concern that the consumer was retreating from spending again as retail numbers in general have been tepid. The only reason for an increase in retail activity is due to the hike in gas and food prices. These have forced more spending on the part of the consumer, but this spending has come at the expense of almost every category of retail.
There are other trouble areas showing up in the data this month. Dollar collections dropped to a level last seen in August 2010 as many companies found themselves in trouble as they were forced to start contending with inflation even as their business opportunities remain limited. This started to show up in April and has since accelerated. As companies start to exit the recession, they often face some severe competitive pressure, as there is nearly always a market leader ready to put pressure on a given industry. As the market leader starts to become aggressive and goes after market share, other competitors in that sector have to keep pace — even if they are not ready. They start to spend more despite limited resources as they fear losing their market position. Add in an inflation surge and there will be some real consequences. Within a very short period of time there will be cash flow challenges unless the expected demand manifests — and as has been pretty obvious that demand has yet to manifest. The inflation that is complicating the financial situation for companies is also hitting the consumer and having a negative impact.
The index of favorable factors had been as high as 64.1 just three months ago in February. Now that index has fallen to levels not seen since October of last year. The index shows that there is still some growth in terms of credit applications and that bodes well for the future assuming that conditions improve and the rate of approvals starts to grow again. Right now there is still a sense that conditions will improve as the threat of inflation fades, but if the threat continues to advance there is likely to be another wave of negative responses.
Learn more about the Credit Managers’ Index.