Strategic Insights August 2020

8/3/2020
Commercial Credit, Small Business Credit

June Lending Jumps As Small Businesses Look For Lifeline

Index Analysis

The PayNet Small Business Lending Index (SBLI) recovered strongly in June, increasing 16 points (+13.8%) to 132.1 and is now just 3.7% below its year-ago level. The SBLI 3-month moving average increased 2.9% but remains 20.9% below its level from June of last year.

Regional Story: Lending expanded modestly in four of the ten largest states in June — the first positive movement among of the ten largest states since March. Growth occurred in Ohio (+0.9% M/M), Michigan (+0.7% M/M), Illinois (+0.4% M/M), and California (+0.4% M/M), while lending activity ticked down in New York (-1.2% M/M), Georgia (-0.4% M/M), and Florida (-0.3% M/M). Over the last year, lending conditions have weakened the most in Illinois (-10.2% Y/Y), Pennsylvania (-9.7% Y/Y), and Florida (-8.8% Y/Y).

Industry Story: Lending activity improved in five of 18 industries in June, led by Construction (+0.8% M/M) and Mining, Oil & Gas (+0.9% M/M). Lending declined in several other industries, including Arts, Entertainment & Recreation (-3.7% M/M) and Accommodation & Food Services (-2.6% M/M), while Information (-2.6% M/M) fell to an all-time low. Compared to a year ago, Transportation & Warehousing (-15.6% Y/Y) and Arts, Entertainment & Recreation (-15.9% Y/Y) remain the worst performers, though more positively, Public Administration (+8.3% Y/Y) and Construction (+5.2% Y/Y) continue to exhibit growth.

Economic Context

The SBLI showed a strong improvement in June, consistent with improving economic data: the NFIB Small Business Optimism Index increased 6.2 points to a COVID-era high of 100.6, while June retail sales rose 7.5% M/M and reflected positive year-on-year growth. However, in recent weeks coronavirus cases in the south and southwest have surged, dampening economic activity and causing the recovery to stall. Credit card data published by JP Morgan Chase shows consumer spending flatlining at 10% below year ago levels in mid-July, while the percentage of small businesses that are closed climbed from 12% to 15% during the first three weeks of July per Opportunity Insights. Small business owners do not expect a return to normal levels of economic activity until at least 2021 per a recent NFIB survey, and temporary layoffs and business closures are becoming permanent as the recession’s “knock-on” effects take their toll on the economy. The number of permanent job losses increased 26% in June, while Yelp data shows 55% of pandemic-era closures on its site are now permanent. While the strong recovery in June small business lending was certainly a welcome sign, more recent developments suggest the operating environment for Main Street will remain weak until the public health crisis is controlled and businesses are able to return to quasi-normal operations.

Defaults Surge as Financial Stress Continues to Build

Index Analysis

The PayNet Small Business Delinquency Index (SBDI) 31–90 Days Past Due declined by 11 basis points in June but remains 70bp above its year ago level. The SBDI 91–180 Days Past Due rose 5bp in June (+19bp Y/Y), while defaults jumped 25bp in June to 3.00% — the highest point since mid-2011 and 81bp above December 2019 levels.

Regional Story: Delinquencies fell in nine of the ten largest states in June, led by steep declines in Georgia (-27bp M/M), Florida (-21bp M/M), and Michigan (-16bp M/M), while Illinois (+1bp M/M) experienced a slight uptick. However, delinquencies continue to rise on year-over-year basis, as seen in New York (+111bp Y/Y), Florida (+107bp Y/Y), and California (+81bp Y/Y). In contrast to the modest monthly improvements in state SBDIs, defaults continued to surge in June as the headline U.S. index (+25bp M/M), Florida (+38bp M/M), Michigan (+28bp M/M), and New York (+49bp M/M) all recorded their largest-ever monthly increases.

Industry Story: The SBDI’s improvement in June was driven largely by sharp monthly declines in delinquencies for Construction (-39bp M/M; +22bp Y/Y) and Transportation (-31bp M/M; +51bp Y/Y). Meanwhile, Agriculture (+3bp M/M; +18bp Y/Y) and Retail (+3bp; +133bp Y/Y) increased to ten-year highs, while Health Care delinquencies (+10bp M/M; +121bp Y/Y) rose to their highest point ever. Similarly, defaults are up for every tracked industry, with Information (+67bp M/M; +49bp Y/Y), Accommodations (+85bp M/M; +245bp Y/Y), Education (+29bp M/M; +74bp Y/Y), Health Care (+40bp M/M; +92bp Y/Y) and Professional Services (+24bp M/M; +105bp Y/Y) all recording their largest-ever monthly increases.

Economic Context

Despite a reduction in the June SBDI, financial stress remains high on Main Street. The PPP was a critical stopgap to keep small businesses afloat, but a recent NFIB survey shows that 71% of recipients have exhausted their PPP funds. Meanwhile, half of small business owners are having difficultly making mortgage, rent, or lease payments due to declining revenues: a mid-July Goldman Sachs report found revenues are down at least 25% from pre-COVID levels for nearly two-thirds of small businesses — a problem that could be exacerbated by the lapse or reduction in enhanced unemployment benefits. While a reduction in benefits could lead to increased hiring (particularly if paired with a one-time “return to work” financial incentive), for the quarter of small business owners who expect to be out of business by the end of the year given current conditions, the reduced spending that will accompany a reduction in benefits will be far more consequential. Most lawmakers appear to be aware of the crisis facing Main Street businesses, but it is not yet clear what additional assistance will be provided. Proposals such as a $60 billion long-term loan initiative and additional PPP assistance targeted at the hardest-hit businesses would likely help, but the fate of small businesses in the months remains shrouded in uncertainty and will hinge on how policymakers respond to both the public health and economic crisis.

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