Euler Hermes, the world’s largest provider of trade credit insurance, mines its database of receivables each quarter to project performance of the broader economy. “Our clients are telling us who is paying slowly, for how much, and how far they are behind,” says Dan North, chief economist at Euler Hermes. “Past-due receivables indicate that a company doesn’t have enough cash to pay all its bills that are due today. Revenue may not match expectations, or the company may not be able to get financing because its creditors are seeing some degree of financial stress. So we look at trends in past-dues as a sign of financial stress by industry and across the economy overall.”
The Euler Hermes Receivables at Risk Index tracks closely with gross domestic product (GDP). “The correlation between the two is 0.7, which is fairly high for an economic time series,” North says. “It turns out the Receivables at Risk Index is a pretty good indicator of what the final GDP is going to show.”
For the fourth quarter of 2014, the index suggests annualized GDP growth will be significantly lower than the third quarter’s 5.0 percent but might be higher than the advance estimate from the Bureau of Economic Analysis, released last month, which pegged Q4/2014 GDP at 2.6 percent. The index suggests receivables deteriorated in Q4/2014 in terms of both the frequency with which accounts were past due and the severity, the proportion of the receivable that was past due.
“The Receivables at Risk Index took a slight turn down, but I don’t see anything alarming,” North says. “One thing to note is that in the third quarter [of 2014], there was a 16 percent increase in defense spending. That was a one-time item, so the government contribution to the economy was negative in Q4.”
Industries in which the fourth quarter was most damaging were chemicals, auto, and retail; in each of these, past-dues’ severity in Q4/2014 was at least 20 percent higher than a historical average. In contrast, in the energy and commodities sectors, both severity and frequency of past-dues fell in Q4. “If you comb through the data, you can see that the high severity in the chemical industry is due to some decay in the cosmetics industry, in the perfume industry in particular,” North says. “The same is true with autos. When we went through the auto data, we saw the problem is really limited to the tire sub-industry, which is suffering 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 net exports,” he says. “I expect to see that net export figure continue to erode away total GDP, with the stronger dollar. Our exports are going to be less competitive, and imports are going to be cheaper.” Still, he adds, “we’re expecting to see overall GDP growth of about 3.1 percent this year.”