By Michael Rudnick
NEW YORK-The sharp increase in retailer bankruptcy activity was just one contributor to manufacturers' credit weakness in November.
The bankruptcy filings category within the manufacturing sector of the Credit Manager's Index plunged 7.9 percent to 54.2 percent in November, the second-largest drop on record. Credit Manager's Index readings below 50 percent indicate a contracting economy.
Dan North, chief economist with credit insurer Euler Hermes ACI, said that the bankruptcy spike is "indicative of the retail situation." He added that nationwide business bankruptcies have increased for the past six consecutive quarters and are up 42 percent over the year-ago period for the first three quarters of 2007.
Manufacturers of housing-related products and building products are particularly impacted by the rise in bankruptcies because these "products are in more dire straits," North told HFN.
The overall manufacturing sector Credit Manager's Index sunk to its lowest level in at least a year at 52.7 percent. Five of the 10 components fell, including rejection of credit applications, accounts placed for collection, disputes, dollar amount of customer deductions and filings for bankruptcies.
"As has been the case for months now, comments from survey participants were mostly about the terrible conditions in the housing market, but this month there are some unhappy comments from other industries as well, indicating more widespread weakness," North said in a statement.
Other conditions impacting buying from manufacturers include continued high gasoline prices, the dollar decline, the credit squeeze, increase in home foreclosures and a decaying employment situation, North stated. He said that sales during the crucial holiday season have been "mixed at best," adding that the National Retail Federation's modest projection of a 4 percent increase may not even be met.
All of these consumer pressures could lead the economy into a recession in the first half of 2008, North said. However, a new round of Federal Reserve interest rate cuts could pull the United States out of this possible recession by 2009, he added.
The Credit Manager's Index is based on a survey of about 500 credit managers during the last 10 days of the month, asking respondents to comment on whether they are seeing improvement, deterioration or no change for various favorable factors, such as new credit applications and sales, or unfavorable factors, such as filing for bankruptcies and accounts placed for collections.