If you were following headlines earlier this year, you may have seen reports about a major crash in one of the “most critical and completely underreported indicators for the US economy” (Zerohedge).
The Credit Managers Index (CMI), as it is known, measures the flow of credit through thousands of its company members in the US and was showing a major deterioration the likes of which hadn’t been seen since 2008—in fact, worse than 2008—in one of the ten components it tracks.
Given that we weren’t seeing the same level of deterioration in other credit measures (nor in the other components of the CMI), we invited the National Association of Credit Management’s lead economist, Chris Kuehl, to speak with our audience in April and explain whether he felt this was a meaningful warning sign of a major credit collapse (a la Zero Hedge) or more of an anomaly.
Chris explained that the overall index was still in growth territory, but there was a large deterioration in the "Rejection of credit applications" category not because of a large decline in credit worthiness on the part of borrowers, which would be a troubling sign, but because credit lenders had become apprehensive about future risks to the economy. Thus, since the fundamentals (credit worthiness) hadn’t changed significantly, if fears from earlier this year failed to materialize and the economy didn’t implode, then lending should pick back up and all the sensational headlines would've been, as usual, just a lot of noise.
So what happened?
In a recent interview with Financial Sense (see here), Dr. Kuehl said the CMI is now showing signs of a turnaround as credit lending in the US improves (see chart).
Source: Bloomberg
Given the above, Dr. Kuehl notes that near-term risks of a US-led credit collapse and recession have declined. It’s not all rosy, he said, but things have definitely improved. For some reason, I doubt Zero Hedge will be reporting on this.
