Strategic Insights September 2019
Main Street Confidence Shaky
The PayNet Small Business Lending Index (SBLI) rebounded in July, jumping 15 points (+11% M/M) to 152.2. The SBLI now stands near its all-time high and 5% above year-ago levels. The SBLI 3-month moving average fell 1.3% on a monthly basis and ticked up slightly on an annual basis.
Regional Story: In July, lending contracted on a monthly basis in six of the ten largest states. Michigan (-1.8% M/M) and Illinois (-1.5% M/M) experienced particularly large declines, and each state is currently at its lowest level in a year. On an annual basis, however, most large states saw lending expand, particularly in Pennsylvania (+6.9% Y/Y) and Texas (+2.3% Y/Y). Seven states have now seen 17+ consecutive months of year-over-year lending growth, and SBLI readings across all large states remain elevated by historical standards.
Industry Story: Lending was mixed across major industries. On the positive side, Mining (+4.4% M/M) rebounded following two anemic months. However, Information (-3.9% M/M) hit an all-time low and Manufacturing (-0.3% M/M) fell to its lowest level since early 2015. On an annual basis, most industries saw lending activity decline. Accommodation and Food Services (-11.1% Y/Y) saw its 14th consecutive double-digit contraction, but Transportation and Warehousing (+5.7% Y/Y) and Health Care (+5.8% Y/Y) improved and are among six industries in the top quintile of historical readings.
Small businesses face an increasingly murky U.S. economy. Sluggish business investment and a slowing global economy threaten to put a damper on U.S. economic growth in Q3, even as U.S. consumers continue to display strength. The manufacturing sector is clearly struggling, as non-defense capital goods shipments — a typically reliable indicator of business activity — weakened in July, while the IHS Markit PMI entered contractionary territory for the first time in nearly a decade. Trade uncertainty remains a major concern, and the tit-for-tat escalation of the U.S.– China trade war continues to weigh on business confidence. On the positive side, however, consumer activity is quite strong: real consumer spending over the past 5 months has exceeded a 5% annualized pace — one of the strongest stretches in decades — and the Conference Board Consumer Confidence Index is near a record high (though a related measure of confidence, the Index of Consumer Sentiment, fell sharply in August). As long as consumers remain confident and active in the economy, Main Street business lending should continue to expand. However, headwinds appear to be building.
Small Business Delinquencies Continue Slow Upward March
The PayNet Small Business Delinquency Index (SBDI) 31–90 Days Past Due ticked up 1 basis point in July to 1.56%, a 7.5-year high and 16 basis points above its year-ago level. The SBDI 91–180 Days Past Due was unchanged in July but is up 3 basis points on an annual basis.
Regional Story: Six of the ten largest states saw delinquency levels rise on a monthly basis, with Illinois (+6 bp M/M), North Carolina (+4 bp M/M), and Texas (+4 bp M/M) leading the pack. Illinois extended its streak of rising delinquencies to nine months and hit a nearly 8-year high. On an annual basis, all large states saw delinquencies rise except Georgia (-15 bp Y/Y), but most statewide readings remain below historical medians. Defaults also climbed in most large states, including Georgia (+65 bp Y/Y) and Florida (+43 bp Y/Y).
Industry Story: Most major industries saw delinquencies tick up in July, most notably in Transportation (+9 bp M/M), where delinquencies rose for the ninth consecutive month and are now at an 8-year high. Compared to a year ago, all major industries saw delinquencies rise in July, and both Retail (+20 bp Y/Y) and Construction (+ 20 bp Y/Y) have experienced at least 40 consecutive months of year-over-year delinquency increases. Regarding defaults, most industries experienced rising defaults on a year-over-year basis, including Retail (+33 bp Y/Y), Transportation (+31 bp Y/Y), and Construction (+27 bp Y/Y).
Main Street remains on relatively strong financial footing, but stress indicators continue to slowly build. Small businesses continue to face financial pressures stemming from rising compensation costs, a byproduct of low unemployment. Recruiting and hiring remains a top challenge for small businesses according to NFIB, with the share of small businesses citing “finding qualified workers” as their top concern reached a nearly 50-year high in July. Still, small businesses continue to benefit from generally favorable credit market conditions, as borrowing costs remain low. The Q3 Wells Fargo/Gallup Small Business Index reflects these conditions, as one-third of small business owners expect to apply for new credit products in the next year. Small businesses also continue to be more insulated from acute effects of ongoing trade disputes, although certain sectors (e.g., wholesale trade, retail trade, and agriculture) are more vulnerable to the resulting uncertainty and costs. Small businesses in general may well find themselves increasingly at risk if the trade disputes worsen. Overall, however, Main Street lending portfolios remain in reasonably good shape, even as headwinds swirl.