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Small Business Digest


Credit Index Hits Lowest Level Since 2003

As 2006 drew to a close, the nation's manufacturing and service sectors continued to suffer from a weakening economy according to a major credit index and economic study produced by the National Association of Credit Management (NACM). The seasonally adjusted Credit Manager's Index (CMI) fell for the fifth consecutive month in December, and now stands at its lowest level since April 2003.

According to Euler Hermes ACI Chief Economist Dan North, the Index fell 0.5% as seven of the 10 components declined. Four of the components are now under the 50 level (of a possible 100) signaling contraction, the most since March of 2002. "The CMI data strongly suggests a slowing economy, and remains consistent with data from the rest of the macro-economy indicating a slowdown weak GDP growth for two consecutive quarters, durable goods orders (ex-transportation) falling for two consecutive months, modest holiday sales, and signs of weakness in the labor markets," North commented.

As the economy continues to weaken in the new year, North said he expects a cut in short-term interest rates in 2007. "'The Bernanke Fed' (Chairman of The Federal Reserve) will continue to talk tough on inflation well into 2007, probably even after it starts to cut rates," he said. "While inflation is not dead, expectations are that the weakening of the economy will significantly ease inflationary pressures. As such, I expect the Fed to start cutting short-term rates in 2007, while the inverted yield curve suggests that longer-term interest rates are likely to fall as well."

Analysis of the December CMI showed that:

  • the manufacturing sector has shown an increase in the past two months, primarily on sales, boding well for the future months. But comments from survey participants and a closer look at the data still show signs of weakness. Five of the ten components fell, but they were offset by relatively large increases in just three components; sales, new credit applications, and filings for bankruptcies. Without these three, the Manufacturing index would have fallen 0.3%. Indeed, one participant describes an increase in "customers who 'can not pay'" while another labels the residential housing sector as "almost at a standstill."
  • the service sector fell for the third consecutive month, dropping 2.5% as eight of the ten components fell. It is worthwhile noting that five of the ten components are now below the 50 level, indicating a contraction in activity. There have not been this many components below 50 since March of 2002, and the total Services index has not been this low since March of 2003.

December 2006 vs. December 2005 comparisons showed that:

  • on a year-over-year basis, the total CMI Index has fallen 3.6 from 58.3 to 54.7 as nine of the ten components fell.

  • the fall was driven mostly by deterioration in the Services sector which fell 7.5, again as nine of ten components fell.

  • in the Manufacturing sector, five components fell but the Index did manage to eek out a 0.4% gain.

  • overall, the year-over-year data continues to suggest an economy slowly weakening under the strain of tightened monetary policy and a decimated housing market.

A complete view of the CMI can be viewed online at

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