–Gasoline Sales Subtract from Other Sectors

WASHINGTON (MNI) – The following are excerpts from the text of the
National Association of Credit Manager’s summary of its April report on
credit extensions, published Friday:

Flat CMI Reflects Inflationary Burdens on Manufacturing Sector

Columbia, Maryland: In March the manufacturing sector held its own
and provided the sole piece of good news for the Credit Managers’ Index
(CMI) as a whole, but in April the sector stumbled and exchanged
positions with the service sector. In March the news for the service
side was not so good, but in April it staged a bit of a recovery and
much of this appears to be related to the hike in inflation as well as
the reactions from the business community most affected by price shifts.

The changes from month to month have been subtle and the CMI itself
barely moved from the position it marked in March, up just 0.1% from
55.7 to 55.8.

“The devil is in the details,” said Chris Kuehl, PhD, managing
director of Armada Corporate Intelligence and economic advisor for the
National Association of Credit Management.

“Overall sales stayed at almost the same rate from month to month
but that obscures the fact that there was a real reversal of fortune
with the two sectors.” Sales fell in the manufacturing sector while they
rose in the service sector — the exact opposite of what happened in
March.

Some of this can be accounted for by the fact that inflated pricing
in some parts of the economy causes a rise in sales that benefits one
group, but punishes another, Kuehl said. Sales from gas station outlets
were up so much that the nations overall retail numbers rose 0.8%, but
when gasoline and food costs are stripped out of that number, the growth
falls to 0.3%, a solid indication of how much inflation has had an
effect.

Looking at some of the other favorable factors for both sectors
there was more evidence of divergence. The number of new credit
applications in manufacturing fell to levels not seen since the start of
the year, but in the service indicators the fall was even more
dramatic — numbers not seen since October of last year.

The evidence is pretty strong that business has returned to a more
cautious position than they had started to adopt earlier in the year.
There is now much more concern about the future of the economy through
2011 and that has caused many businesses to pull back on credit. Given
that it was the expansion of credit that had been fueling enthusiasm at
the start of this year, one can expect further slowdowns in expansion
for the next few months.

Yet another sign of divergence is the rate of dollar collections
between the two sectors. Overall, the number improved from 60 to 61.3
but that obscures a shift. Dollar collections were actually down in the
manufacturing sector while recovering nicely in the service sector.
Commodity inflation is taking a much bigger bite in manufacturing and is
affecting cash flow.

The bulk of the impact of inflation is being felt in the basic
industries at the moment, although the consumer is seeing more of that
rise every day. Manufacturers are paying those high fuel costs along
with everybody else, but they are also paying record prices for
everything from steel to copper to resins and chemicals. It is not just
gasoline that goes up when the price of oil rises. The price of
feedstock for the fertilizer industry rises and so do the prices of
petrochemicals. Transportation costs have risen as well and that affects
the manufacturer first as they are paying for the transportation of the
raw materials they need.

“The overall news from the CMI is that conditions have stabilized,
but the fact is that there is considerable volatility just under the
surface,” Kuehl noted. The expectation is that inflation issues will
affect the service sector in short order and the advantage held by that
category will diminish in future index readings.
—

April 2011 is the month the U.S. economy started to confront dual
threats and the credit community almost instantly reflected the
transition. For the past two years the focus of the business community
has been almost solely oriented toward recovery and finding strategies
that would propel them toward that recovery. The threat of inflation was
not a concern beyond the sense that at some point all the efforts to dig
out of the downturn would come back to haunt the economy. That was
before the price of oil started to accelerate at a rate not seen since
the 2008 debacle. Now the inflation threat has become a clear and
present danger and one that is affecting the business and credit
community.

—
The online CMI report for April 2011 contains the full commentary,
complete with tables and graphs. CMI archives may also be viewed online.

** Market News International Washington Bureau: 202-371-2121 **

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