PayNet Strategic Insights April 2019

Index Analysis

The PayNet Small Business Lending Index (SBLI) remains in the top 3% of all historical readings. While the SBLI edged down 2.4 points to 146.9 in February, it rose 2.1% on an annual basis, its 16th year-over-year increase in the last 17 months. The SBLI 3-month moving average ticked up in February and currently stands 0.6% above its year-ago level.

Regional Story: Compared to January, seven of the ten largest states saw lending increase in February, with gains led by Florida (+1.2% M/M) and Illinois (+0.4% M/M). On an annual basis, lending rose across all ten of the largest states for the 12th straight month. Year-over-year gains were led by Illinois (+13.6% Y/Y), Pennsylvania (+11.1% Y/Y), and Texas (+7.6% Y/Y), which all saw lending activity reach an all-time high in February.

Industry Story: Lending growth on a monthly basis was a mixed bag across the major industries. On a year-over-year basis, however, lending activity increased in most industries. Annualized gains were led by Transportation & Warehousing (+18.8% Y/Y) which posted its 12th consecutive double-digit Y/Y gain and is now at an all-time high. Arts & Entertainment (+8.9% Y/Y) and Educational Services (+3.5% Y/Y) are also at or near record highs. However, some industries are struggling, including Accommodation & Food Services (-16.5% Y/Y), which saw lending fall to its lowest level in over 5 years.

Economic Context

The U.S. economy has cooled in recent months, with GDP slowing to 2.2% in the fourth quarter as consumers began to pull back on spending. Small business confidence metrics have reflected this slowdown: the Wells Fargo/Gallup Small Business Index fell to its lowest level since mid-2017 in the first quarter, while the NFIB Small Business Optimism Index remains nearly 7% below its 2018 peak after a modest increase in February. Further, the Fed’s latest Senior Loan Officer Survey released in February reported that nearly one in five banks expect C&I loan demand from small businesses to weaken in the coming year, roughly four times the share that expect demand to strengthen. However, while small businesses are unlikely to match last year’s strong performance in 2019, PayNet data suggest that small business lending activity remains healthy. Main Street should remain open for business for at least the first half of the year.

 

Index Analysis

The PayNet Small Business Delinquency Index (SBDI) 31–90 Days Past Due edged up one basis point to 1.46% in February to its highest level in nearly seven years. While up six basis points on an annual basis, the index remains slightly below its long-term average. The SBDI 91–180 Days Past Due also rose slightly to 0.39% and is four basis points above its year-ago level.

Regional Story: Delinquencies rose across nine of the ten largest states on a monthly basis, led by New York (+16bp M/M) and Pennsylvania (+9bp M/M). On a year-over-year basis, delinquencies rose in seven of the ten largest states, most notably in Florida (+31bp Y/Y) and Georgia (+11bp Y/Y). Regarding defaults, eight of the ten largest states experienced increases compared to year-ago levels, including Florida (+33bp Y/Y), where defaults rose to the highest level since mid-2012.

Industry Story:

Delinquencies increased across most major industries compared to January, including Retail (+2bp M/M) which rose to its highest level since May 2012. On an annual basis, delinquencies increased across all major industries except Health Care, with substantial gains in Construction (+25bp Y/Y) and Transportation (+16bp Y/Y). Notably, Transportation delinquencies rose on an annual basis for the second month in a row after 17 consecutive declines. Regarding defaults, 13 of the 18 major industries saw year-over-year increases — the broadest expansion since mid-2017.

Economic Context

U.S. credit markets remain generally healthy. Measures of financial stress in the overall economy are subdued, with the St. Louis Financial Stress Index seeing consistent declines throughout the first 12 weeks of 2019 and the Kansas City Fed Financial Stress Index experiencing its sharpest monthly decline in nearly three years in its latest reading. Further, the Fed’s recent decision to halt rate hikes for the time being should help tamp down financial pressures. Nevertheless, financial stress on Main Street has continued to creep up as the credit cycle matures. Indeed, according to the latest Wells Fargo/Gallup Small Business Survey, the share of small businesses that rated their cash flow over the prior 12 months as “good” fell eight points to 66% in Q1 2019 — still a solid result, but also indicative of stress building beneath the surface. Looking ahead, small business financial health may continue to weaken — especially if economic growth softens, as expected — but current stress levels are not yet cause for concern.