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More Businesses Settle Their Debts in September

NationalMortgageProfessional.com
Sep 30, 2013

September's growth in the Credit Managers’ Index (CMI) from the National Association of Credit Management (NACM) was driven primarily by increases in the index's unfavorable factors, all of which registered improvements and some by substantial margins. The overall unfavorable reading leapt from 53 to 53.8, driven by big improvements in accounts placed for collection, from 52.5 to 54.3, dollar amount beyond terms, from 51.1 to 52.2, and filings for bankruptcy, from 58.7 to 59.8. NACM Economist Chris Kuehl, PhD noted that this reflected a shift in debtor behavior toward friendlier payment behavior with regard to their trade creditors. Essentially, businesses are settling their debts rather than trying to test the waters of late payment. "When times are tough, debtors begin to take advantage of what leverage they have and start to test those that have given them credit. There are more slow pays and many of the negative indicators get progressively worse as companies try to hang on to their cash and test the patience of the credit manager," Kuehl said. "There comes a point when these companies want access to credit again, prompting them to try to catch up and get back in the good graces of those from whom they seek credit. This could explain why the data within the unfavorable categories has improved." Elsewhere in the index, all but one of the favorable factors fell in the overall index, although each of them remain well above 50, the line that indicates each of these categories is still in expansion. Much of this decline in the favorable factors can be attributed to a slide in sales, which slipped from 63.1 in August to 62.7 in September. Improvements were also seen in the manufacturing and services sectors, again by improvements in the unfavorable factors, which further suggest that businesses are taking the time settle their existing debts before taking on new ones. The CMI has often functioned as a leading indicator, and other economic indicators have begun to mirror its growth readings, according to Kuehl. "The CMI started to show these solid gains at the start of the summer and, in the months that followed, the Purchasing Managers Index (PMI) followed suit and was sitting at its highest point this year in August," he said. "Thus far, the expectation is the PMI will continue to trend in the same direction as the CMI. This is a logical relationship that has been manifesting for some time. The thinking behind using the actions of purchasing managers to gauge the economy is that nothing happens in a business until a purchasing decision is made. By that same logic, no purchasing of significance is going to happen without a credit decision."
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