The economy's effect on the credit markets has spread to the trade credit markets, causing difficulties ranging from financing troubles to increased business bankruptcy risk, according to commentary and analysis from Euler Hermes ACI.

The seasonally adjusted National Association of Credit Management Credit Manager's Index (CMI) crept up 0.1% in August, although six of the 10 components fell. The manufacturing sector rose 0.4% but the service sector slipped 0.1%. Euler Hermes ACI Chief Economist Daniel C. North, who provides regular commentary and analysis for the survey, said, "While there is little data in the survey to provide a compelling picture of current business conditions, the comments from the survey respondents are revealing. Trade credit managers seem to be experiencing the same difficulties currently seen in virtually all credit markets."

In his analysis, North explained that the rapid rise in delinquencies and defaults in the sub-prime mortgage market have sent a contagion of fear into other mortgage-backed securities, corporate bonds, leveraged buy-out financings, and now even the safest of commercial paper markets. "If the highest quality credits are having difficulty securing financing, then smaller businesses will be even more strapped to find financing of any kind, including financing of trade credit as suggested by the respondents to this survey," he commented. "Conditions in the credit markets are likely to force the Fed's hand at the September meeting when a new cycle of monetary easing is likely to begin." North has forecast an interest rate cut for each of the next three meetings of the Federal Reserve.

Sector by sector analysis of the CMI follows:

Manufacturing Sector

The manufacturing sector rose 0.4% in August, but a declining housing market combined with poor weather in parts of the country weighed heavily on the construction industry. Bankruptcies in other industries, such as the automotive sector, continue to take their toll. As one respondent reported, customers are "just walking away from failed business ... Closing the door and letting the bank or secured creditor take it all."

Service Sector

The service sector index fell 0.1% on a seasonally adjusted basis as seven of the ten components fell. Not surprisingly, the housing market continues to be the greatest source of pain. As one respondent said, "Housing market and mortgage market woes are killing ... residential subcontractors." Survey participants from other industries make similar doleful observations, saying:

- "Credit demand appears to be weakening ..."
- "... money is still tight and hard to get"
- "Increase in number of clients with cash flow problem(s)"
- "Small customers are having problems with their bank loans."

Finally, lending conditions appear to be tightening in the trade credit market as much as in other credit markets, as evidenced by the comment, "Credit review process is tighter ... Lower credit limits are being established."

August 2007 vs. August 2006

The Credit Manager's index has crept lower over the past 12 months, falling from 57.3 to 55.1. The services sector fell from 58.2 to 55.3 as eight of its 10 components declined. The manufacturing sector also fell, but not as much, dropping from 56.3 to 55.0. All three indexes still remain above the 50 level, indicating economic expansion.