My Favorite Graph From the All-South Credit Conference

Last week I (publisher Rob Lawson) was privileged to moderate a roundtable discussion on the economy at the NACM All-South Credit Conference in Tampa at which five distinguished experts from the trade credit field offered up their views on what's going on out there in the "real world" economy.

One of the presenters at the conference was Lee Lovvorn, Equifax's Senior Vice President of North American Commercial Solutions. He asked the data technicians and analysts at Equifax to go into their database and mine it for current and relevant data on what's going on out there.

Now keep in mind that Equifax has extensive credit data on both consumers and businesses. And on the business side, they have some proprietary data from banks on small businesses including such critical information as loans and payment history on loans.

This is stuff you won't see in the newspapers or even in most of the many "leading indicators" out there.

Lee presented many charts and graphs but the one I'm highlighting below is the one that really struck home with me.

This chart measures the percentage of businesses that fall into Equifax's highest risk category ("5"). As you can see, there's been an astonishing spike from the 1st quarter to the 2nd quarter of 2009 - just as the stock market has risen.

This chart generated some skeptisism from an audience member.

After all, we're talking about a tripling of customers in the highest risk category - in just ONE quarter! That's a staggering and sobering piece of data - particularly when it coincides with the recent rise in the stock market.

Lee used this graph as summation of many points he'd made and showed it just before we took a break in the session.

During the break, an experienced and savvy energy industry credit pro came up to me and said he was skeptical of that chart: "Did Lee post that just to see if we were all awake?! How can there have been such a sharp rise in that category? I'm not sure I believe it!"

While I can certainly understand the skepitiscm, I can also understand clearly how this rise in risk may have happened and how it might not be as sudden as it appears.

First, the chart only shows those businesses falling into their highest risk category.

It doesn't show the other four categories.

It's highly possible that in the quarters leading up to spike many businesses were getting progressively weaker (drawing their capital down as business faltered) and then collectively were pushed into the worst category as their capital and resources depleted. After all, there are still some very serious stresses in the economy right now. Business activity is up marginally since the early part of this year, but it's still way down from a year ago.

Keep in mind also that bankruptcies (and insolvencies that don't formally become bankruptcies) are often a lagging indicator of the economy, whereas the stock market is a leading indicator.

Nonetheless, a chart showing this rapid a decline in the health of so many businesses may signal that perhaps the stock market is sending us a false signal here.

In general, the stock market is wrong half the time on the way down. But on the way up, it's always right. Or at least, in modern memory it's always been right. But if you go back to the 1930s, there were many times that the stock market rallied significantly (sometimes 50%, as it has lately), but ultimately the economy stayed dead-in-the-water for more than a decade.

Could that be what's happening here? I don't know, but it's certainly worth factoring into your thinking.

The benign view (though still not a good view) of this chart is that we're still in for a very serious spell of credit problems going forward. Watch for continued slowing payments and dramatically rising bankruptcies. But perhaps the general economy might continue to improve.

The more serious interpretation is that the stock market is wrong this time around and we're in for some really serious trouble ahead.

Either way, from the perspective of trade credit managers, the worst may still be yet to come.