PayNet Strategic Insights March 2019

Index Analysis

The PayNet Small Business Lending Index (SBLI) rebounded with a 17.2 point jump to 150.7 in January, climbing to its second-highest level ever. On an annual basis, the SBLI increased 4.9%. The SBLI 3-month moving average also rose in January and currently stands 1.5% above its year-ago level.

Regional Story: Compared to December, lending increased in seven of the ten largest states in January, and rose to record highs in Pennsylvania (+2.7% M/M), Illinois (+1.5% M/M), and Texas (+0.4% M/M). On an annual basis, lending rose across all ten of the largest states for the 11th straight month. Lending in Ohio (+2.9% Y/Y) reached its highest level since July 2007, while Illinois (+14.0% Y/Y) and Pennsylvania (+11.3% Y/Y) posted double-digit annual gains.

Industry Story: Most major industries experienced monthly lending gains in January, though weakness persisted in select industries, including Mining (-1.0% M/M) and Accommodation & Food Services (-0.8% M/M). Compared to year-ago levels, all but four industries saw lending increase, with Transportation & Warehousing (+20.6% Y/Y) and Arts, Entertainment, & Recreation (+8.4% Y/Y) reaching all-time highs. Notably, Information saw its first year-over-year increase in 18 months (+3.6% Y/Y).

Economic Context

Business investment picked up in the fourth quarter after a deceleration in Q3, but overall economic growth cooled and is expected to weaken further in 2019.  Small business sentiment has also softened thus far in 2019, in part because of the January government shutdown: the National Federation of Independent Business (“NFIB”) Small Business Optimism Index fell 3.2 points in January to its lowest level since November 2016, and the Wells Fargo/Gallup Small Business Index dropped dramatically from a record high of 129 in Q4 2018 to 106 in Q1 2019. Meanwhile, the CNBC/SurveyMonkey Small Business Survey for the first quarter of 2019 revealed that expectations for revenue and hiring over the next 12 months have continued to decline from record highs in Q3 2018, and more than half of surveyed small business owners expect a recession in the coming year. This degree of pessimism appears to be overblown, as Main Street lending remains quite healthy for now — but there are signs that investment may ease in the months ahead.

 

Index Analysis

The PayNet Small Business Delinquency Index (SBDI) 31–90 Days Past Due edged up one basis point to 1.45% in January, and is up six basis points on an annual basis — its 33rd consecutive year-over-year increase. The SBDI 91–180 Days Past Due was unchanged at 0.38% but is three basis points above its year-ago level.

Regional Story: In January, delinquencies increased or held steady across all ten of the largest states on a monthly basis. Compared to year-ago levels, delinquencies rose in six of the ten largest states, led by Florida (+30bp Y/Y) and Georgia (+21bp Y/Y). Regarding defaults, seven of the largest states saw increases on an annual basis, including Ohio (+29bp Y/Y) and North Carolina (+25bp Y/Y). However, default levels remain more than 300 basis points below historic peaks across the ten largest states.

Industry Story:

Compared to the previous month, delinquencies rose across half of the major industries, including Construction (+2bp M/M) which posted its sixth consecutive monthly increase. On an annual basis, delinquencies increased across all major industries except Health Care (-3bp Y/Y). Regarding defaults, most industries experienced year-over-year increases, including Wholesale Trade which saw its 17th consecutive double-digit increase on an annual basis (+16bp Y/Y). Nonetheless, defaults in most industries remain in the bottom half of historical readings.

Economic Context

Small business financial stress continues to creep up as the business cycle matures, but current delinquency and default levels remain low by historical standards. U.S. credit markets are generally healthy and measures of overall financial stress in the economy remain muted. For example, the St. Louis Fed Financial Stress Index has declined consistently over the first eight weeks of 2019 and currently ranks in the bottom 15% of all readings, while the Kansas City Fed Financial Stress Index edged down in the latest reading and remains just below its historical average. Further, softening economic data has caused the Federal Reserve to slow its planned rate hike path in 2019, which should keep credit markets accommodative — a development reflected in the January NFIB Small Business Survey in which just 2% of small business owners rated financing as their top business problem. In short, financial stress may continue to climb on Main Street in 2019 — particularly if the U.S. economy weakens — but at present it remains in check.