Strategic Insights February 2021
Commercial Credit, Small Business Credit
Lending Down Overall in 2020, but Green Shoots Continue to Emerge
In December, the Equifax Small Business Lending Index (SBLI) fell 4.4% to 132.3, finishing the year down 10.7 points (-7.5%). The SBLI 3-month moving average fell 3.1% to 138.9 — the first decline since May — and is 3.7% below its year-ago level.
Regional Story: Lending activity was mixed in December as four of the ten largest states saw improvements and the other six saw declines. While Texas (+1.5% M/M) and Michigan (+0.9% M/M) experienced modest improvements, Pennsylvania (-2.4% M/M), New York (-1.7% M/M), and California (-1.4% M/M) declined to their lowest levels since 2014. As the year closed, lending activity weakened in all ten of the largest states, including double-digit declines in New York (-16.0% Y/Y) and Pennsylvania (-15.5% Y/Y). Lending conditions were somewhat better in Georgia (-3.2% Y/Y) and Illinois (-4.0% Y/Y).
Industry Story: In December, small business lending weakened in 14 of 18 industries, some of which remain at or near their historic lows. Mining, Quarrying, Oil & Gas (-0.9% M/M; 8th percentile), Professional Services (-1.7% M/M; 2nd percentile), and Information (-2.7% M/M; all-time low) are exhibiting particularly weak lending conditions. On an annual basis, four industries experienced lending growth in 2020, including Agriculture (+7.8% Y/Y) and Construction (+6.2% Y/Y). In stark contrast (and perhaps not surprisingly given the pandemic), lending in Accommodations (-28.7% Y/Y) plunged in 2020, while Health Care (-16.5% Y/Y), Arts and Recreation (-25.7% Y/Y), and Education (-19.3% Y/Y) experienced their largest-ever annual declines.
Small business lending ended 2020 on a sour note, as the Equifax SBLI declined in consecutive months for the first time since April. Nonetheless, the economy continued to grow at a solid 4% clip in the fourth quarter despite weakness in November and December, and the end-of-year stimulus effort — including a renewal of the PPP program that led to $35 billion in loan approvals through the first two weeks of January — should provide a needed boost. Another positive development for Main Street is the robust bounce-back in consumer spending in January, which was triggered by a second round of stimulus payments and a renewal and extension of enhanced unemployment insurance benefits. Though the December Personal Income Report revealed that real consumer spending declined for the second consecutive month, preliminary January data from Opportunity Insights shows a surge in consumer spending growth from -2.5% to 6.2% (relative to January 2020) following the disbursement of stimulus payments, a trend supported by weekly payment card spending trends published by the Department of Commerce. Further, the January WSJ / Vistage Small Business CEO Confidence Index rose for the second straight month with 69% of owners expecting an increase in revenues this year, the highest share since the pandemic began. While the small business outlook remains contingent on the success of vaccine deployment and the effectiveness of vaccines against new virus variants, federal support for small businesses and consumers should help bolster Main Street revenues and lending in early 2021.
Financial Stress Builds, but Renewed Federal Support Offers Some Relief
The Equifax Small Business Delinquency Index (SBDI) 31–90 Days Past Due inched down 2 basis points (bp) in December, finishing 2020 just 4bp above its December 2019 level. The SBDI 91–180 Days Past Due ticked up 2bp and is 21bp above its year-ago level. Defaults declined for the second straight month, easing 3 bp to 3.24%.
Regional Story: Delinquencies rose in nine of the ten largest states in December, despite the slight decrease in the headline number. Four states have seen at least a 17-20bp increase in delinquencies over the last two months: Florida (+9bp M/M; -13bp Y/Y), Georgia (+3bp M/M; +1bp Y/Y), Illinois (+4bp M/M; +56bp Y/Y), and Pennsylvania (+17bp M/M; +29bp Y/Y). Meanwhile, defaults rose in four states including Ohio (+8bp M/M) and New York (+5bp M/M). In contrast, Florida (-14bp M/M), Georgia (-9bp M/M), and North Carolina (-7bp M/M) experienced sizable declines in defaults, though they remain elevated by historical standards.
Industry Story: In December, delinquencies declined in four of the six tracked industries including Health Care (-9bp M/M), Transportation (-5bp M/M), and Agriculture (-4bp M/M). Construction (+8bp M/M; -34bp Y/Y) was the only industry to increase, though it remains on solid footing compared to a year ago. On an annual basis, delinquencies are down sharply in Transportation (-82bp Y/Y) but remain elevated in Retail (+67bp Y/Y) and Health Care (+24bp Y/Y). Regarding defaults, several industries experienced an increase, including Agriculture (+16bp M/M; +82bp Y/Y), Accommodations (+16bp M/M; +365bp Y/Y), and Information (+8bp M/M; +278bp Y/Y). Transportation (-35bp M/M; -15bp Y/Y) is the only industry in which defaults declined in 2020.
Small business defaults and delinquencies declined in the last month of 2020, a welcome improvement given broader signs of economic deterioration in December. However, data continue to suggest that significant financial stress remains beneath the surface for many Main Street firms, particularly in industries heavily impacted by the pandemic. For example, in the Accommodations/Hospitality industry, Equifax SBDFI data indicate that default levels (7.02%) are more than double the headline index (3.24%). Small business revenue data from Opportunity Insights point to a similar conclusion, as revenues have declined more than twice as much for the Leisure & Hospitality industry (-63.8%) than the average small business (-31.1%) since last January. The newly-recapitalized PPP program should help relieve some of these pressures, as the relief program is now targeted to the most impacted industries and companies. Further, President Biden's COVID relief proposal includes a supplemental $15 billion in grants to support the hardest hit small businesses and another $35 billion for future small business financing programs. While it is unclear what Congress will ultimately pass regarding economic relief, small business support is traditionally an area of common ground for both parties. The additional support should improve the near-term financial health of many struggling small businesses.