Euler Hermes, the world's largest provider of trade creditinsurance, mines its database of receivables each quarter toproject performance of the broader economy. “Our clients aretelling us who is paying slowly, for how much, and how far they arebehind,” says Dan North, chief economist at Euler Hermes. “Past-duereceivables indicate that a company doesn't have enough cash to payall its bills that are due today. Revenue may not matchexpectations, or the company may not be able to get financingbecause its creditors are seeing some degree of financial stress.So we look at trends in past-dues as a sign of financial stress byindustry and across the economy overall.”

The Euler Hermes Receivables at Risk Index tracks closely withgross domestic product (GDP). “The correlation between the two is0.7, which is fairly high for an economic time series,” North says.“It turns out the Receivables at Risk Index is a pretty goodindicator of what the final GDP is going to show.”

For the fourth quarter of 2014, the index suggests annualizedGDP growth will be significantly lower than the third quarter's 5.0percent but might be higher than the advance estimate from theBureau of Economic Analysis, released last month, which peggedQ4/2014 GDP at 2.6 percent. The index suggests receivablesdeteriorated in Q4/2014 in terms of both the frequency with whichaccounts were past due and the severity, the proportion of thereceivable that was past due.

“The Receivables at Risk Index took a slight turn down, but Idon't see anything alarming,” North says. “One thing to note isthat in the third quarter [of 2014], there was a 16 percentincrease in defense spending. That was a one-time item, so thegovernment contribution to the economy was negative in Q4.”

Industries in which the fourth quarter was most damaging werechemicals, auto, and retail; in each of these, past-dues' severityin Q4/2014 was at least 20 percent higher than a historicalaverage. In contrast, in the energy and commodities sectors, bothseverity and frequency of past-dues fell in Q4. “If you combthrough the data, you can see that the high severity in thechemical industry is due to some decay in the cosmetics industry,in the perfume industry in particular,” North says. “The same istrue with autos. When we went through the auto data, we saw theproblem is really limited to the tire sub-industry, which issuffering severe margin compression due to Chinese imports.”

For 2015, North expects slightly better growth than the U.S.economy saw in 2014. “The one thing that is a bit unsettling is netexports,” he says. “I expect to see that net export figure continueto erode away total GDP, with the stronger dollar. Our exports aregoing to be less competitive, and imports are going to be cheaper.”Still, he adds, “we're expecting to see overall GDP growth of about3.1 percent this year.”

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