Once again the economy shows strong growth in May, with an overall reading of 60.2%. This reading has fallen from its record high registered last month, as have those for both the manufacturing and service sectors. The readings indicate that although growth continues to be strong in each sector, the rate of change in May relative to April slowed with greater deceleration in the service sector. However, the charts and graphs below show both sectors have current readings higher than months preceding March 2004. The economy continues to do well!

MANUFACTURING SECTOR RESULTS

Again this month, the numbers suggest little problem exists with the manufacturing sector. Although growth in sales and new credit applications are not as strong as last month, they are still very strong. The number of disputes with customers declined; offsetting this favorable factor is the slightly increased aging of accounts. However, the “dollar amount beyond terms” doesn’t appear to be a problem. It needs to be watched for further deterioration in future months since it would indicate increasing customer cash flow problems.

SERVICE SECTOR RESULTS

Although the service sector continues to grow, the amount of slowing in May’s growth rate is somewhat surprising. There were significant decreases in each of the “favorable factors” with the sub-index falling 940 basis points. The one positive to take away from this performance is that the index still exceeds readings posted prior to March 2004. Overall, the sub-index of “unfavorable factors” held its ground, with one significant negative change: erosion in “dollar amount beyond terms”. This increased aging of accounts may simply be a return to more normal levels from the extremely favorable April reading of 65.7%.

COMBINED SECTORS

The overall equally-weighted combined index gave up 240 basis points in May. The largest contributors to the decline are slower growth in the favorable factors—sales, new credit applications, dollar collections and amount of credit extended. In total, these items fell 590 basis points, largely caused by declines in the service sector. The results do not appear to be reason for alarm. The readings are still quite strong, indicating a vibrant economy.

METHODOLOGY APPENDIX

The CMI data has been collected and tabulated monthly since February 2002. The index, published since January 2003, is based on a survey of about 500 trade credit managers during the last 10 days of the month, with about equal representation between manufacturing and service sectors. The survey asks respondents to comment on whether they are seeing improvement, deterioration, or no change for various favorable or unfavorable factors. There is representation from all States, except some of the less populated ones, such as Vermont and Idaho.

Factors Making Up the Diffusion Index

As shown in the table above, 10 equally weighted items determine the index. These items are classified into two categories: favorable factors and unfavorable factors. A diffusion index is calculated for each item with the overall CMI being a simple average of the 10 items. Survey responses for each item capture the change—higher, lower, or the same—in the current month compared to the previous month. For positive items, the calculation is:

Number of “higher” responses + ½ x number of “same” responses
Total number of responses

For the negative factors, the calculation is:

Number of “lower” responses + ½ x number of “same” responses
Total number of responses

Thus, greater “lower than a month ago” responses for negative factors signify improvement. Stated differently, a higher index score for an unfavorable factor represents an improvement.

A CMI reading in excess of 50 indicates the economy is expanding; a reading below 50 indicates a declining economy. The index is not seasonally adjusted because of lack of an historical record.

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The National Association of Credit Management (NACM), headquartered in Columbia, Maryland supports more than 25,000 business credit and financial professionals worldwide with premier industry services, tools and information. NACM and its network of Affiliated Associations are the leading resource for credit and financial management information and education, delivering products and services, which improve the management of business credit and accounts receivable. NACM's collective voice has influenced legislative results concerning commercial business and trade credit to our nation's policy makers for more than 100 years, and continues to play an active part in legislative issues pertaining to business credit and corporate bankruptcy. George W. Gallinger, Ph.D., of the W. P. Carey School of Business, Arizona State University, Tempe, AZ prepared the index results and analysis. More information is available at www.nacm.org or by contacting Norma Heim at 410-423-1842.

Media Contact: Norma Heim, 410-740-5560