Hope Glimmers for Consumers, But Not for Business

The housing market and consumer spending hint at an economic stabilization, but Fed Chairman Ben Bernanke says businesses continue to see declines in new orders and clamp down on capital spending.

In testimony today before Congress, Federal Reserve Chairman Ben Bernanke sounded a positive note on the economy, saying that “the pace of contraction may be slowing.” But, he was quick to add, “the available indicators of business investment remain extremely weak.”

Bernanke cited several encouraging signs in the consumer market, including a first-quarter increase in consumer spending and a possible bottoming of the housing market, but his outlook for business remained grim.

The Fed Chairman noted that spending for equipment and software fell at an annual rate of about 30% in both the fourth and first quarters and the level of new orders remains below the level of shipments, which he said suggests “further near-term softness” in business equipment spending.

“Recent business surveys have been a bit more positive,” Bernanke conceded, “but surveyed firms are still reporting net declines in new orders and restrained capital spending plans.”

There are, however, some indications that the business climate, if not improving, is at least not getting drastically worse. For example, The National Association of Credit Managers reported Friday that its Credit Managers’ Index, a measure of trade credit trends and receivables’ performance, rose 1.3% in April, after rising by 2.5% in February and 0.5% in March. Those three months of increases follow six months of contraction.

The Credit Manager’s Index is the result of a survey of 800 trade credit managers, split evenly between the manufacturing and service sectors, during the last 10 days of the month. The index comprises 10 components: sales, new credit applications, dollar collections, amount of credit extended, rejections of credit applications, accounts placed for collection, disputes, dollar amount beyond terms, dollar amount of customer deductions, and bankruptcy filings.

The latest increase brings the index to 44.8, the “highest reading since November 2008,” said NACM Economist Chris Kuehl. However, any reading below 50 indicates the economy is still contracting. This latest data “supports the notion that conditions have started to stabilize,” NACM commented in a press release, but the association added that there “will not be a cause for real celebration until the CMI climbs back above 50.”

Indeed, Bernanke also noted that the Fed’s latest quarterly survey of bank loan officers, conducted in April, indicates that demand for commercial and industrial loans continues to weaken. That’s too bad, as fewer U.S. banks (40%) reported clamping down on commercial and industrial lending standards than in the previous quarter, when 65% said they did so.

Tighter lending standards mean that businesses must meet tougher thresholds of income, cash flow, or indebtedness levels in order to secure loans. “The survey also showed that the net fraction of banks that tightened their business lending policies stayed elevated, although it has come down in the past two surveys,” said Bernanke.

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