Euler Hermes, the world’s leading provider of trade credit insurance, announced in a report released today that there has been no year-to-date improvement in the number of past due payments to U.S. businesses. At the same time, the average dollar amount of past due payments has increased about 2 percent during the first three quarters of 2014 compared to the same period in 2013. Euler Hermes therefore projects that Q3 2014’s healthy 3.5 percent GDP growth is likely to slow to about 3 percent in Q4 due to the strong correlation between payment behavior and GDP activity.
“While the dollar amount of past due payments has improved by 60 percent since 2008, the current figures suggest that we can expect to see slower GDP growth for the balance of the year,” said Dan North, lead economist for Euler Hermes North America. “We have found a strong correlation between payment behavior and GDP, including an increase in past due payments in 2007 as the recession approached and a decrease before the recovery began in 2009.”
Past Due Payment Amounts vs. GDP
Sources: BEA, Euler Hermes
The insights on past due payment behavior also predict a mixed outlook for individual industries. For example, retail industry payment behavior strengthened 8 percent from Q2 to Q3, suggesting retailers are likely to see stronger activity in Q4. Similarly, the auto and energy industries experienced payment improvements and are expected to have better fourth quarters.
Industry Activity forecast
for 4Q vs. 3Q
Auto Stronger Chemicals Weaker Commodities Weaker Electronics Weaker Energy Stronger Food Weaker Metals Weaker Retail Stronger
Source: Euler Hermes
In contrast, payment behavior in the metals industry deteriorated 8 percent in Q3. This suggests that the recent high performance of companies buying metals, such as equipment manufacturers, may cool in Q4. In addition, past due payments have become more frequent in the chemicals, commodities, electronics and food industries, indicating activity will slow in Q4.
Businesses can also further gauge the riskiness of their industry by comparing the long-term frequency and severity of past due payments to an economy-wide average. For example, long-term data suggests that the commodities industry is riskier than others, since past dues occur unexpectedly (frequency), but each loss is larger than average (severity). By contrast, the past due payments of the electronics industry appears to be more predictable and of smaller amounts -- a less risky combination.
Long-Term Severity & Frequency vs. Average
Source: Euler Hermes
“Euler Hermes’ research and data provide valuable proprietary insights, helping businesses better assess trends in payment patterns, which in turn can be indicative of the risks associated with their industries,” said North. “The U.S. business payment experiences which form the basis for this data show high correlations with broad macroeconomic and industry indicators, often signaling new developments in those indicators.”
For more information, please refer to Euler Hermes’ report on past dues and payment behavior trends.
Infographic: Payment Behavior Trends