Are We There Yet? Liquidation Performance A Key Indicator of Economic Recovery

The recovery executives within credit issuing companies whom we’ve spoken to recently report degradation in liquidation performance, both between April and May of this year, and between May 2008 and May 2009.  And while these reports are anecdotal, they give us reason to believe that the much-anticipated turnaround in collectability has yet to arrive.

Coming out of tax season, some dip in performance is to be expected.  Not only were tax refunds behind us, but May itself had fewer collection days available to recovery executives and collection agencies, with the Memorial Day holiday shortening the number of collector hours per month.  Still, with liquidation performance already low in May of 2008 as the recession deepened, some year over year improvements would have been welcomed by all.

Underlying these disappointing trends is the key barometer in the world of receivables management, the unemployment rate.  In May, the unemployment rate reached 9.4 percent, its highest point in 26 years.  That rate increases to 16.4 percent when it includes discouraged workers and part-time workers who would prefer full-time jobs.  Simply put, recovery figures are unlikely to improve as long as unemployment and underemployment continue to rise.

Still, the rate of job losses is slowing, even if the unemployment rate is increasing.  As this figure flattens, and then begins to decrease, collection agencies and the credit issuers they serve will begin to see the rewards of having managed their operations in more difficult times. 

We are often asked if the accounts receivable management industry is “recession proof.”  The experience of many executives in this industry over the past 18 months suggests that it is not.  Instead, collections can be called a leading indicator of economic trends – as collectability increases, consumer spending should increase as well, which should lead to better economic growth.  There may be no industry that has a better understanding of consumer financial health than the accounts receivable management industry.  Recovery data should suggest when the recession is ending. 

When it does, fortunes in this industry will turn.  Having had to create more efficient and more effective systems, collection and recovery leaders will produce much better results when the economy makes these results possible.  The turn is coming, even if it is not here yet.

Paul Legrady provides management consulting services to creditors and receivables management companies. To confidentially discuss your interests, or to learn more about Kaulkin Ginsberg’s Recovery Review program for credit issuers, contact Paul at 240-499-3818, or by email.