Global Output Trends Provide Insight for Managing Credit Risk
Right now, the economy is a mixed bag. As the following chart indicates, the service sector is still expanding, while manufacturing has begun contracting. Moving to the next section of the chart, most of the economic growth is being provided by the consumer services sector, while Financial Services, Technology, Healthcare, and Consumer Goods have turned anemic. Basic Materials are contracting, which may be indicative of future contraction in the Industrial Sector, which is already showing signs of slower growth.
A credit executive looking at this chart can get a good sense of the direction their industry is going:
- You can see the March to April trend for each industry. Are your industries growing/contracting faster or slower?
- You can also look up the supply chain – the output in Industrial Goods, Construction Materials, Basic Material Resources, and Metals and Mining are all rapidly contracting, which does not bode well for the future growth of the upstream industries.
With this knowledge, you should be reviewing the industry segments in your AR portfolio and re-evaluating the risk parameters you are currently using. Some industry sectors are holding their own or even showing accelerated growth. These are areas where you may be able to assume a bit more risk. Others, as already indicated, appear headed for hard times, and with those industry segments you should be tightening credit and working down any balances outstanding.
When economic volatility increases, credit executives need to be more forward-looking or risk being caught unaware. Fortunately, in this day and age, we have an abundance of economic indicators that provide valuable insights. Make sure you take time to understand and use them.
