Did A Tap On The Shoulder "Prevent" The US Economy From Sliding Into Recession?

The US Ministry of Truth has been hard at work the last month and nowhere is that more evident than in the blatant "tap on the shoulder" that The National Association of Credit Managers must have got this week... to revise their catastrophic indicators back to 'stable'...


Two weeks ago we highlighted what was a stunningly clear indication of the looming recessionary environment (that The Atlanta Fed is now also seemingly suggesting and is consistent with the worst collapse in macro data since 2008). The largest spike in 'credit application rejections' indicated a credit crunch and "serious financial stress manifesting in the data and this does not bode well for the growth of the economy going forward."

According to the CMI, the Rejections of Credit Applications index just crashed the most ever, surpassing even the credit crunch at the peak of the Lehman crisis.


This can be seen on the chart below.




And without any new credit entering the economy, a recession is all but assured.

More details on what may be the most critical and completely underreported indicator for the US economy. The report continues, with such a dire narrative that one wonders how it passed through the US Ministry of Truth's propaganda meter:

By far the most disturbing is the rejection of credit applications as this has fallen from an already weak 48.1 to 42.9. This is credit crunch territory—unseen since the very start of the recession. Suddenly companies are having a very hard time getting credit. The accounts placed for collection reading slipped below 50 with a fall from 50.8 to 49.8 and that suggests that many companies are beyond slow pay and are faltering badly. The disputes category improved very slightly from 48.8 to 49, but is still below 50. This indicates that more companies are in such distress they are not bothering to dispute; they are just trying to survive. The dollar amount beyond terms slipped even deeper into contraction with a reading of 45.5 after a previous reading of 48.4. The dollar amount of customer deductions slipped out of the 50s as it went from 51.8 to 48.7. The only semi-bright spot was that filings for bankruptcies stayed almost the same—going from 55.0 to 55.1. This is the one and only category in the unfavorable list that did not fall into contraction territory and that suggests that there are big, big problems as far as the financial security of these companies are concerned.

Which NACM summed up thus:

The rejections of credit applications is as miserable as it has been since the depths of the recession—going from 45.9 to 42.0.These are very bad readings and it will take a good long while to climb out of this mess.

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Soon after we exposed this shocking hole in the US economic growth meme, the sell-side banks exploded into a fit of narrative recomposition and excuse-finding...

Goldman Sachs "narrative"...


Credit standards tightened sharply during the Great Recession and have gradually eased over the past few years. However, a recent sharp deterioration in the NACM Credit Managers’ Index—a series which has typically not generated much market interest—has prompted questions about whether credit standards are tightening anew.


The NACM index captures terms of trade credit extended to businesses by suppliers. As such, it does not reflect directly on credit standards imposed by commercial banks on C&I, CRE, mortgage, or consumer loans. The recent downturn in the index appears to be partly related to more cautious credit extension from suppliers to smaller energy sector firms. Even so, the extent of the recent weakness is surprising.


Despite a reasonable narrative for credit tightness in the energy sector, the fact that the NACM index is a diffusion index should naturally down-weight extreme changes among a limited subset of respondents. As a result, the extent of recent weakness appears surprising. According to our equity analysts, large producers of industrial machinery have generally not indicated significantly tighter terms of trade credit, and auto dealers do not seem to be facing difficulty obtaining floor plan financing (i.e. financing inventories). In addition, C&I loans—the closest analog to the coverage of the NACM index with regard to bank lending—has continued to grow at a healthy rate according to the Fed’s weekly H.8 release, although changes in credit conditions are likely to show up in loan growth only with a lag. Finally, credit-related questions in the NFIB's small business survey revealed a slight tightening in March, but not nearly as much as suggested by the NACM index.


Overall, absent deterioration in the SLOOS data—which is more comprehensive and in our opinion probably more reliable—we would be reluctant to read too much into the recent volatility in the NACM index with regard to broader credit conditions.


UBS "narrative" before...


Credit is the lifeblood of the world economy, and we believe the retrenchment of lenders from extending new credit is a highly reliable leading indicator of future problems for borrowers and the economy at large.


...recent monthly surveys from the National Association of Credit Management’s Credit Managers Index (CMI) paint a picture in stark contrast. Simply put, measures of trade credit (the financing of receivables and inventories) have deteriorated sharply from January to March and are at their worst level since the financial crisis. We believe this data point should not be dismissed, and is an indication of the negative credit ramifications from dollar strength and falling EM demand.


It may indicate that stressed borrowers are reaching for a lifeline and getting rejected. This was seen during the financial crisis when demand for trade financing increased even as banks cut supply.


And UBS "narrative" after...


The severe drop in the NACM credit market index has been revised away. In a recent economic comment titled "Credit Controversy", we had called attention to the National Association of Credit Management Credit Market Index, which plummeted in March. That weakness has now been partly revised away, and April data suggest stabilization. The credit market index has certainly softened, but its decline more closely resembles earlier soft spots during the current expansion. Before this revision, it had more closely resembled the runup to the credit crisis.


And BofAML "narrative" destroying NACM data...


Periodically an obscure economic indicator or survey pops up on the radar screen, suggesting something big is happening in the economy. The latest example is the Credit Manager’s Index.


Before we hit the panic button, consider four facts. First, it only deals with trade credit – credit a firm extends to its customers (typically other firms) to facilitate sales. It is not a measure of bank credit or credit more broadly in the economy. To the extent that a lack of trade credit would ultimately hurt sales, the recent decline may be self-limiting. Second, it appears to be a relatively ad hoc survey, so it is possible that the addition or exclusion of a few key respondents could significantly move the index – although the group that puts it together suggests that is not the case.


Third, it fell largely because of a collapse in just two of the ten components in this index: “amount of credit extended” and “rejection of credit applications” (where a drop in the former means less credit extended while a drop in the latter means a larger number of rejected applications). So there is apparently some sort of minicrunch in trade credit according to this sample. Finally, despite its alleged great prediction record it didn’t drop below 50 in 2008 until after the recession had started. The “rejection of credit applications” component, that is signaling disaster today, didn’t drop below 50 until the middle of the recession.


In sum, like many such indicators this survey probably is useful for members of the narrow industry it covers. However, there is a good reason why macroeconomists like us had never heard of the survey.

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And so - after all that - we get April's data from NACM. If ever there was a more clear indication of a firm getting a major tap on the shoulder to 'fix' the data or face 'consequences' this was it. Against a background of detrimental commentary from Goldman Sachs, BofAML, and UBS, NACM revised (massively) the last two months data, in their words, "to be "more consistent with the numbers that had been seen throughout the past year," instantly removing any looming recessionary indicator (along with any credibility they had). NACM explains their "revisions":

The big declines in amount of credit extended in February and March have been revised from 52.1 and 46.1 respectively to 60.5 and 60.6 - more consistent with the numbers that had been seen throughout the past year.


The numbers for rejections of credit applications went from 48.1 in February to 51.4 and March went from 42.9 to 2.6.


The remainder of the categories were unchanged...

NOTE: How exactly does one revise survey respondents answers from the last two months? Ask then again now how they felt in Feb? Did they lie at the time about the credit application rejections? The CMI polls 1,000 trade credit managers across the US and asks respondents to qualitatively assess changes in lending conditions from prior months. The index constructed is a diffusion index, similar to PMI indices (any readings greater than 50 indicate an economy in expansion, any readings less than 50 indicate an economy in contraction).

This leaves us with this chart as the plainest indication yet of the smoke and mirrors bullshit being pulled on every gullible non-skeptical American about the state of their nation:


And, for those who shrug this off as "well, it's just seasonal adjustments" or "well,  it's just Zero Hedge conspiracy stuff again," here is none other than the NACM last month destroying their own future credibility by removing any doubt that the collapse in the data was an aberration...

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. These readings are as low as they have been since the recession started and to see everything start to get back on track would take a substantial reversal at this stage.


The data from the CMI is not the only place where this distress is showing up, but thus far, it may be the most profound.

You decide - does this look like a normal 'revision' (that remember only took place in the two sub-indices that showed dramatic weakness and none of the others) - or is this a giant "tap on the shoulder" from someone to 'fix it or you're f##ked!"?