Strategic Insights December 2020
Small Business Credit, Commercial Credit
SMB Lending Rebounds Despite Headwinds
In October, the PayNet Small Business Lending Index (SBLI) increased 2.5 points (+1.7%) to 147.3 but remained 0.9% below its October 2019 level. Similarly, the SBLI 3-month moving average edged up 0.3% to 141.3, but still sits 1.7% below its year-ago level. Year-to-date, the index is up 3.0%.
Regional Story: Lending activity increased in eight of the ten largest states in October. Modest improvements were seen in both North Carolina (+1.1% M/M) and Illinois (+1.0% M/M). Less positively, lending declined for the eighth straight month in New York (-1.6% M/M) and the tenth straight month in Texas (-0.3% M/M). Year-on-year lending remains down across the board, though Michigan (-0.7% Y/Y) and Georgia (-2.1% Y/Y) are the closest to reaching their year ago level of lending activity. Disparate interstate trends remain, with states like California and New York in the bottom 40% of their historical readings while Michigan and North Carolina are in the top 20% of theirs.
Industry Story: In October, lending activity improved in six of 18 industries. Notable improvements included Wholesale Trade (+0.7% M/M) increasing for the first time in ten months and Mining, Quarrying, and Oil & Gas (+1.8% M/M) increasing for the first time in four months. Meanwhile, large decreases were seen in Accommodation & Food Services (-4.7% M/M) and Arts, Entertainment, & Recreation (-5.0% M/M) while Finance and Insurance (-1.8% M/M) and Information (-2.2% M/M) fell to all-time lows. On a year-on-year basis, Construction (+9.6% Y/Y) was strong, though its performance remains an outlier; ten of 18 industries saw double-digit year-on-year declines, including record-setting decreases in Education (-17.9% Y/Y) and Arts (-23.2% Y/Y).
While the SBLI rose moderately again last month, preliminary November data suggests a bumpy road ahead for Main Street as COVID-19 cases rise once again. At a macro level, the economy continued its recovery in October, albeit at a slower pace. Retail sales rose for the sixth-straight month (+0.3% M/M), though this marked the weakest growth of the recovery. Meanwhile, initial unemployment claims (including Pandemic Unemployment Assistance) declined from 1.27 million the first week in October to 1.02 million the first week in November. While these developments are encouraging, the massive surge in COVID cases and corresponding business and mobility restrictions appear to be triggering some backsliding. For example, Morning Consult’s November consumer sentiment index fell to its lowest level since early-August, while mid-November Opportunity Insights data showed small business closures reaching their highest level since mid-May. And yet, despite the distressing data, there is reason for cautious optimism on Main Street. Multiple successful vaccine trials have provided a light at the end of the tunnel for the pandemic, and the long stretch of election-related uncertainty is all but over. As such, while the next few months may prove difficult for many small businesses as virus case levels rise and consumers continue to weather the storm, the prospect of a widely available and highly effective vaccine by late spring / early summer is extremely encouraging for small businesses that are able to hold out long enough for quasi-normalcy to return.
SMB Defaults Continue Climbing Higher
The PayNet Small Business Delinquency Index (SBDI) 31–90 Days Past Due decreased for the fifth-straight month in October, falling 9 basis points (bp) but remaining 5bp above its October 2019 level. The SBDI 91–180 Days Past Due inched up 1bp and is 19bp above its year-ago level. Defaults ticked up 2 bp to 3.28%.
Regional Story: Delinquencies again fell in all ten of the largest states, including Florida (-16bp M/M), New York (-17bp M/M), and Illinois (-16bp M/M). There are now three large states where delinquencies are below year-ago levels: North Carolina (-24bp Y/Y), Florida (-24bp Y/Y), and Texas (-10bp Y/Y). Defaults are more of a mixed bag as California (+20bp M/M) and New York (+13bp M/M) continue to see notable upswings, while Ohio (-5bp M/M) and Texas (-4bp M/M) see improvements. Compared to last year, defaults are up at least 50bp in all ten of the largest states with the largest increases occurring in New York (+255bp Y/Y) and California (+209bp Y/Y).
Industry Story: In October, delinquency rates fell in all six of the tracked industries, with Health Care (-21bp M/M) and Transportation (-13bp M/M) experiencing the largest declines. Meanwhile, Construction (-47bp Y/Y) and Transportation (-64bp Y/Y) were the only two industries with year-on-year delinquency declines, though Agriculture (unchng. Y/Y) is even with its October 2019 level. Regarding defaults, six of 18 industries experienced declines including Transportation (-23bp M/M), Finance (-10bp M/M), and Education (-7bp M/M). On a less positive note, defaults continue to rise rapidly in Accommodations (+21bp M/M), Agriculture (+11bp M/M), and Arts (+16bp M/M). Defaults are at elevated levels on a year-on-year basis for all industries.
October PayNet data again showed easing Main Street financial stress, with the SBDI declining while the SBDFI was mostly unchanged. However, the recent surge in COVID cases and reimposition of restrictions may increase financial stress. High-frequency indicators bear this out: in mid-November, the Census Bureau’s weekly Small Business Pulse Survey found that 38% of small businesses reported declining revenues in the previous week (the highest level since July), while weekly Opportunity Insights data showed small business revenues falling back to May levels (-32% below pre-pandemic readings). Given falling revenues, small firms are increasingly cutting costs: the Census Bureau reports that 12% of small businesses decreased their number of paid employees during the prior week, while 21% decreased the number of employee-hours worked — both survey-highs since early summer (the downward drift could be influenced by the Thanksgiving holiday but is consistent with recent trends). Regardless, the last time small business data was this weak, $600 billion in PPP funds was making its way through the system to support business owners and their employees. It remains unclear when or if Main Street will see additional relief. In the meantime, many small business owners may find themselves in a precarious financial position heading into 2021.
For further insights on this data, click here to watch the playback of our December 2020 Small Business Insights webinar.