Strategic Insights March 2020

Main Street Strength Threatened by Coronavirus

Index Analysis

The PayNet Small Business Lending Index (SBLI) increased 4.8 points (+3.4%) to 147.9 in January while declining 1.0% from January last year. The SBLI 3-month moving average edged down on a monthly basis (-0.1%) but improved from year-ago levels (+1.3%).

Regional Story: Lending activity growth was mixed among the largest states in January. Michigan (+0.6% M/M), Illinois (+0.5% M/M), and Texas (+0.4% M/M) saw modest lending expansion, with Texas reached its highest index reading ever. Meanwhile, Pennsylvania (-2.4% M/M) had the biggest monthly decline of any of the ten largest states since July 2012. Compared to a year-ago, lending in California (+2.5% Y/Y) and Georgia (+2.2% Y/Y), improved the most, while lending contracted in Illinois (-7.2% Y/Y).

Industry Story: Compared to December, lending activity was mixed across major industries in January, with Real Estate (+0.8% M/M), Retail Trade (+0.1% M/M), and Construction (+0.4% M/M) remaining at decade-long highs. In contrast, Mining, Quarrying, and Oil and Gas Extraction (-1.9% M/M) and Transportation and Warehousing (-1.8% M/M) both saw sharp lending declines. Measured on an annual basis, lending in the Health Care (+9.2% Y/Y) and Construction (+6.0% Y/Y) industries expanded at a health rate. Information (-14.5% Y/Y) remained at its historic trough, while Transportation (-7.4% Y/Y) further deteriorated.

Economic Context

Although surveys of small business confidence remain elevated, the prospect of a coronavirus outbreak has introduced major uncertainty into Main Street's economic outlook. On the bright side, small business optimism remains near historic highs: the CNBC/Survey Monkey Q1 Small Business Survey ticked up, while the February WSJ/Vistage Small Business CEO Confidence Index hit a 15-month high. Further, January new orders for nondefense capital goods excluding aircraft (a commonly-used proxy for business investment) had its largest monthly increase in a year (+1.1% M/M), indicating a potential rebound for business investment. Unfortunately, coronavirus fallout is likely to threaten recent signs of optimism. Chinese February data indicate the worst-case scenario: both the February Manufacturing PMI (35.7) and Services PMI (29.6) dropped to their lowest readings ever, while small business sentiment in the oft-cited CKGSB Business Conditions Index also plunged to an all-time low. While most U.S. indicators do not yet reflect the decline in China, the February IHS Markit U.S. Composite PMI fell 49.6, signaling a contraction of business activity for the first time in 76 months — and it is difficult to see how this measure would improve in the near term given the coronavirus’s spread. Small business owners should track developments closely, as a slowdown or pause in business activity due to the coronavirus is a significant threat to the current economic expansion.

Main Street Hopes to Stay Healthy from Coronavirus Threat

Index Analysis

The PayNet Small Business Delinquency Index (SBDI) 31–90 Days Past Due ticked down 2 basis point (bp) in January and has risen 15bp over the last twelve months. The SBDI 91–180 Days Past Due was unchanged for the third straight month while increasing 5bp from year-ago levels.

Regional Story: In January, delinquencies rose in five of the ten largest states, including a sharp increase in Georgia (+17bp M/M) and 8+-year highs in Texas (+4bp M/M), Florida (+1bp M/M), and California (+3bp M/M). More positively, delinquencies fell in Ohio (-8bp M/M) for the first time in nine months. Measured on annual basis, delinquencies increased in all ten of the largest states for the fourth straight month. Meanwhile, defaults continue to rise on annual basis across the country, with U.S. defaults (+4bp M/M; +31bp Y/Y) at an 8-year high. However, both delinquencies and defaults rates remain relatively modest by historical standards.

Industry Story: In January, delinquency levels did not increase in any major industries for the first time since November 2016, as Retail (-4bp M/M) and Agriculture (-4bp M/M) experienced the largest industry declines. Compared to year-ago levels however, delinquencies are up in five of the six tracked industries, including a sharp increase in Transportation (+82bp Y/Y). Regarding defaults, Transportation (+14bp M/M; +196bp Y/Y) continues to experience substantial increases, while Information (-8bp M/M; -75bp Y/Y) and Health (-4bp M/M; -5bp Y/Y) trend downward.

Economic Context

Main Street financial stress remains in check, but small businesses may face challenges as concerns of the coronavirus mount. The January NFIB Small Business Optimism Index Report noted “the biggest risk appears to be potential global implications of the Wuhan coronavirus,” a risk that has come to fruition. The primary economic effects of coronavirus thus far have been to supply chains: factory shutdowns in China have placed major pressures on inventories for small merchants on Amazon, while cargo traffic at the Port of Los Angeles fell a sharp 25% in February. However, if a pandemic occurs in the United States, millions of public and private sector workers could be furloughed, disrupting labor supply at a time when Main Street is already struggling to hire new employees. Furthermore, the spread of the virus could have demand-side consequences, cutting into revenues as a result of reduced consumption. While a 50bp rate cut by the Fed in early March could help blunt some of the negative economic consequences, it is unclear whether looser monetary policy can boost economic growth if people become increasingly fearful for their health. Fortunately, Main Street financial health remains relatively strong, which should help small business owners weather the storm if a pandemic brings the economy to a temporary standstill.