CMI Flashes Red

"We now know that the readings of last month were not a fluke or some temporary aberration that could be marked off as something related to the weather.  There is quite obviously some serious financial stress manifesting in the data and this does not bode well for the growth of the economy going forward." - National Association of Credit Management report for March 2015

The Credit Managers' Index (CMI) is an index put together by the people paid to spot trouble early.  Credit managers are the people that approve or reject applications for credit.  Furthermore they are the same group that try to collect on the debt once it is issued.  So this group has a very keen understanding of the health of the economy which is why I like to follow the index closely.

To give you a better understanding of the index it is based on a scale of 50.  Anything that is higher than 50 means that the indicator is showing signs of health; a reading therefore less than 50 shows signs of strain.  Back in 2008 the reading plunged from roughly 55 to 50 in a couple of months before then falling to 40 in the midst of the recession.  Once again this reading has fallen from 55.1 to 51.2 in two months, a sever contraction not recorded since right before the previous recession.  Prior to February the index had hovered around 55 for the past 5 years with moderate fluctuations but nothing serious.  So in February when the index tested its lower boundary it was a concern but now that it has bust the bubble it could mean trouble is coming at a very rapid clip.

Digging into the numbers shows that while the number of applications for credit is rising, the number being rejected is growing faster.  This means that the companies requesting the credit are struggling and are not strong enough financially to handle the additional credit so they are being turned away.  Companies that could be given credit lines are not taking on more debt so the number is falling.  This is creating a financial squeeze similar to that which occurred right before the previous contraction.  With this type of financial squeeze going on it is only a matter of time before a number of bankruptcies are announced but for now this is one number that has yet to fall into the negative category.

The ripple effect of these bankruptcies will be felt throughout industry as these debts that were previously recorded as either performing loans or accounts receivable will have to be written off creating an overall contraction of credit and a strain on company and bank cash flows.  The problem this time around is that the Federal Reserve has already spent $4 trillion getting us nowhere so announcing another round of quantitative easing while more likely than not, will not help alleviate the stresses caused by a weak business environment.  What it could do is once again ignite the currency warfare and drive not only Europe but the rest of the world into a recession.

Keep your eyes on this indicator as it does not normally flash red unless there is a real danger ahead.