Strategic Insights August 2019

Small Business Credit, Commercial Credit

Small Business Lending Stumbles

Is June Performance a Bump in the Road, or Something More?

Index Analysis

The PayNet Small Business Lending Index (SBLI) fell nearly 23 points (14.5%) to 135.0 in June — its sharpest monthly decline on record and lowest point since December — and is now 6.8% below year-ago levels. The SBLI 3-month moving average fell 1.1% compared to last month but remains positive on a year-over-year basis.

Regional Story: In June, lending contracted relative to the prior month in each of the ten largest states, with the most pronounced dips affecting Illinois (-1.4% M/M) and Ohio (-1.3% M/M). Still, SBLI levels in each state remain at or near the top quarter of historical readings. However, compared to 12 months ago, eight of the largest ten states saw lending expand, led by Pennsylvania (+9.4%). Notably, six of the ten largest states have experienced at least 18 consecutive months of annual lending growth.

Industry Story: All private-sector industries saw lending shrink on a monthly basis in June. Mining, Quarrying, and Oil and Gas Extraction (-6.1% M/M) experienced its largest month-on-month decline in a decade, while Manufacturing (-1.9% M/M) saw lending hit its lowest level in more than four years. On an annual basis, the majority of industries saw lending activity fall, including double-digit declines in Accommodation and Food Services (-13.1% Y/Y), which experienced its sixteenth consecutive month of year-over-year decline, and Public Administration (-10.7% Y/Y).

Economic Context

The record-long economic expansion continued in the second quarter as GDP expanded 2.1%, beating most economists’ expectations. Growth was driven almost entirely by strong consumer spending and a surge in government spending, while business investment contracted for the first time in three years. The outlook for the remainder of 2019 is mixed. On the positive side, most measures of Main Street sentient remain elevated, including the Conference Board Consumer Confidence Index (which rebounded strongly in July) the NFIB Small Business Optimism Index (which ticked down due to rising business uncertainty but remains near all-time highs), and the PayNet SBLI. However, weakness abounds in the manufacturing sector, and the slowing global economy is likely to keep the pressure on U.S. exporters. Moreover, U.S. farmers continue to battle headwinds caused by trade disputes, and PayNet data indicate that agricultural lending declined at the fastest monthly rate in nearly three years in June. Overall, Main Street appears to be in good shape for the remainder of 2019, but small business lending activity may well have peaked earlier in the year.

Short-Term Delinquency Rates Continue to Climb

Index Analysis

The PayNet Small Business Delinquency Index (SBDI) 31–90 Days Past Due increased 3 basis points in June to 1.55%, its highest point since early 2012, and is now up 14 basis points from a year ago. The SBDI 91–180 Days Past Due was unchanged in June but is up 2 basis points on a year-over-year basis.

Regional Story: Half of the ten largest states experienced delinquency growth in June, including Illinois (+8bp M/M), which saw delinquencies rise for the eighth consecutive month and reach their highest point since 2012. Georgia (-9bp M/M) and Florida (-10 bp M/M), on the other hand, each saw sizable delinquency declines. On a year-over-year basis, most large states saw delinquencies rise, though SBDI readings are generally below historical medians. Regarding defaults, most large states experienced higher default rates compared to last year, led by Georgia (+75bp Y/Y) and North Carolina (+30bp Y/Y).

Industry Story: Delinquencies rose on a monthly basis in most major industries in June, including Transportation (+13 bp M/M) and Construction (+3bp M/M), which each reached new multi-year highs. Delinquencies also rose on an annual basis across major industries, led once again by increases in Transportation (+64 bp Y/Y). Notably, Construction has now experienced 43 consecutive months of year-over-year delinquency growth. Regarding defaults, nearly every industry experienced higher annual default rates, with notable increases in Construction (+29bp Y/Y) and Retail (+27bp Y/Y).

Economic Context

Though Main Street continues to be an area of relative strength in the U.S. economy, financial stress is slowly and steadily building. ADP and Moody’s estimated that small businesses shed jobs on net in June, while the NFIB Small Business Jobs Report continues to show that small business owners are having difficulty hiring qualified employees. These difficulties help to drive wages higher: the Paychex | IHS Markit Small Business Employment Watch saw hourly earnings growth for small businesses reach a 1.5-year high in July, and the NFIB reports that over a quarter of small business owners reported plans to raise compensation in June. Wage gains are clearly a positive development for employees, but they also add financial pressure on small businesses. Still, small businesses’ financial footing remains relatively strong overall and should remain healthy in the near term given current levels of consumer spending, and the Fed’s recent decision to cut rates may also alleviate some of the financial pressure felt by Main Street businesses.