Recession to Start Later than Expected, CMI shows

NACM's Credit Managers' Index (CMI) improved for the first time since October with a 1.1-point jump from 51.3 to 52.4. While this is a sign that a recession will likely happen later than originally forecasted, many credit professionals remain cautious, said NACM Economist Amy Crews Cutts, Ph.D., CBE.

She now expects the U.S. to enter a recession between Q2 and Q3. "Like many other economic indicators for this past month, the February Credit Managers' Index is showing a bit of a rebound," Cutts said. "It's nice to finally see a positive reading in the CMI but I am cautious about reading too much into the headline number because several factors in the index continued to deteriorate. However, we cannot ignore that the Credit Managers' Index is indicating that the likelihood of recession starting in the near term has diminished greatly."

The main driver for the increase was a large jump in the sales factor, which improved 6.7 points to 56.5. "Reversing one of the worrying trends from last month, rising sales are now driving applications for credit and the amount of credit extended," Cutts said. "In January, we saw a 5.0-point drop in sales and now we have a 6.6-point gain. Importantly, the sales index is down nearly 20% since last March, a stunning change in activity."

The combined index of favorable factors improved by 2.9 points to 58.0, a level that is 8.8 points lower than a year ago. The index of unfavorable factors lost 0.1 in February to a reading of 48.6, a level that is 3.1 points lower than one year ago and the lowest value recorded since May 2020.

All favorable factors improved in February. The index for dollar collections gained 2.5 points (59.8); new credit applications, 1.6 points (57.9) and amount of credit extended, 1.1 points (57.9).

Four of six unfavorable factor indexes deteriorated, with the largest decline recorded for dollar amount of customer deductions, which fell 1.7 points to 48.5. Disputes and filings for bankruptcies both lost 0.7 points to 48.1 and 49.8, respectively. Rejections of credit applications fell 0.1 to 50.4.

"The CMI has been tracking closely with other indicators of economic activity, either coincidentally or leading by a month or two," Cutts said. "While the numbers are important, it's the comments from NACM member respondents that outline the true economic story."

What CMI respondents are saying:

• "We have definitely seen a slowdown in business the last four weeks. It's not huge, but significant enough that it's noticeable."
• "Continuous supply chain disruptions have limited sales and collections are getting incrementally harder each successive month for several of our A/R portfolios."
• "Though January sales are higher than December, it is only incremental and reflects a cyclical slowdown for our industry in December. Many customers are paying slower and have their working capital tied up in built up inventories."
• "We have an excessively large number of backorders. We are still playing catchup due to supply chain shortages and transportation issues."
• "The trucking industry continues to be squeezed due to diesel fuel prices, which are going up again, and higher interest rates. Weaker players are really struggling."
• "Accounts are paying slower than usual for this time of year."
• "2023 is going to be the year of Chapter 11's and mergers of one sick company with another sick company. Tread lightly!"

Sign up to receive monthly CMI survey participation alerts. For a complete breakdown of manufacturing and service sector data and graphics, view the February 2023 report. CMI archives also may be viewed on NACM's website.

You can hear Cutts present a live economic update at Credit Congress from June 11-14 in Grapevine, TX.

-Kendall Payton, editorial associate