Q3 Macroeconomic Update

Commercial Credit, Small Business Credit

Current state and what that means for small businesses

A series of economic headwinds — including a weakening industrial sector, ongoing trade tensions, and softening business investment — are creating an increasingly uncertain operating environment for small business. U.S. manufacturers continue to sound alarm bells: the IHS Markit Manufacturing Index is barely above its expansion threshold, while the Institute for Supply Management (ISM) Manufacturing Index is in contraction territory after falling to its lowest level since June 2009 — a particularly notable occurrence given that the ISM was at a 14-year high just 12 months ago. 

Meanwhile, cooling business investment and a slowing global economy led economists to further downgrade their Q3 growth expectations. The key bright spot for the U.S. economy, however, is also its largest component: consumer spending remains strong despite ongoing trade conflicts, which is helping to shore up Main Street businesses. Measures of consumer optimism are trending downward overall but remain healthy by historical standards, and most market watchers expect another strong holiday shopping season. A pillar of small business health, sustained consumer activity will be a key metric to watch over the remainder of the year.

Highs, Lows and Some Concerning Signs

The economy weakened this year compared with 2017 and 2018, but consumers – backed by a strong labor market – have remained resilient so far. Most core consumer drivers remain solid, with generally healthy wage growth, an unemployment rate near 50-year lows, historically high consumer confidence and manageable consumer debts.

However, there are some concerns: 

  • Real income growth has plateaued
  • The boost from the 2018 tax cuts is fading
  • Exports, a powerful engine of growth in late 2017 and 2018, are falling
  • The industrial sector has weakened noticeably

The question is whether this is a temporary lull or something more persistent.

Implications on Main Street

According to the NFIB, small business confidence has eased from last year’s all-time highs, and capital expenditure plans point to increased cautiousness among Main Street business owners.

The PayNet Small Business Lending Index fell 8 points to 142.2 in August and is down 5.5% compared to a year ago. The SBLI 3-month moving average also fell and is now below its year-ago level for the first time in more than two years. Despite the decline, the SBLI is still in the top 10% of historical readings.

Regional Story: Eight of the ten largest states saw lending contract in August compared to last month, including steep drops in Michigan (-1.3% M/M), Illinois (-1.2% M/M), and Florida (-1.1% M/M). North Carolina (+0.3% M/M) and Ohio (+0.2% M/M) experienced tepid lending growth. On an annual basis, eight of the ten largest states saw lending contract or stagnate, led by Michigan (-3.6% Y/Y). Pennsylvania had the strongest performance among large states (+5.4% Y/Y), but this growth rate was still the state’s slowest in more than a year.

Industry Story: Lending declined in August across most major industries. Information (-1.3% M/M) dropped to a new historic low, while Professional Services (-0.9% M/M) fell to a six-year low and Manufacturing (-1.1% M/M) fell to a five-year low. On the positive side, Health Care (+0.5% M/M) rose to its highest level since mid-2016. Most industries also experienced lower lending on a year-over-year basis, including double-digit declines in Information (-11.1% Y/Y) and Public Administration (-10.9% Y/Y). Notably, Construction (-0.04% Y/Y) saw its first annual decline since late 2010.

Trade Tensions and More

Trade tensions and a slowing global economy are taking a toll on large companies, with confidence at its lowest point since mid-2016, but still well above recession levels, according to the Business Roundtable CEO Outlook Index.

Goods exports have weakened considerably since 2017-18 and have contracted on a year-over-year basis for four consecutive months, a biproduct of slower global growth, ongoing trade disputes, and a strong dollar. Meanwhile, casting shadows over the global economy are a mix of old and new worries:

  • Weakening Chinese industrial activity
  • Saudi oil supply disruptions
  • Unrest in Hong Kong
  • No-deal Brexit on October 31

On a somewhat positive note, industrial production and capacity utilization — two reliable metrics of the industrial economy’s health — improved in August, a welcome development given recent declines. And, forward-looking indices from Keybridge for the construction, electrical equipment, and metals sectors remain weak, but do not appear to be getting worse. Meanwhile, we are also beginning to see evidence of potential improvement in equipment investment over the next 6–9 months.

The effects of all of this on U.S. growth are unclear. 

Be Prepared for Whatever Lies Ahead

Whether there is a pause in economic growth, tampered growth or a full-blown recession remains to be seen. Preparation will be crucial for those who want to thrive through the next economic phase. 

Commercial lenders can run their portfolios through a moderate recession scenario with PayNet’s Recession Readiness toolkit, which pairs Keybridge perspective with PayNet tools to help organizations mitigate risk while keeping an eye on growth. We also recommend lenders run custom scenarios that take into consideration the uniqueness of their geographies and industries. PayNet is here to help and is offering recession scenario results upon request.

Learn more and get ready.