Strategic Insights July 2019
Commercial Credit, Small Business Credit
Small Business Lending Remains Near Historic Highs
The PayNet Small Business Lending Index (SBLI) fell slightly to 157.2 in May but is up 1.3% compared to twelve months ago and remains near an all-time high. The SBLI 3-month moving average rose on a monthly basis and currently stands 2.4% above its year-ago level.
Regional Story: In May, lending rose or stayed flat in eight of the ten largest states, led by New York (+0.8% M/M) and Georgia (+0.6% M/M), Notably, small business lending activity in Pennsylvania (+0.5% M/M) and Texas (+0.1% M/M) reached all-time highs. Two states — Illinois (-1.3% M.M) and Michigan (-0.3% M/M) — saw lending contract, though index levels in both states remain above the 90th percentile. On an annual basis, nine of the ten largest states saw lending grow, led by Pennsylvania (+11.2%).
Industry Story: On an industry basis, small business lending growth was mixed. More than half of industries saw lending contract on a monthly basis, with the sharpest decline occurring in Mining, Quarrying, and Oil and Gas Extraction (-3.8% M/M). Also experiencing declines were Information (-1.4% M/M), which saw its lowest level of lending since late 2011, and Construction (-0.5% M/M), for which lending has declined on a monthly basis in seven of the last nine months. On an annual basis, lending expanded in eight industries, led by strong growth in Transportation and Warehousing (+10.7% Y/Y) for the eighteenth month in a row.
The U.S. economy continues to display signs of moderation, even as the current expansion becomes the longest on record this month. Although economic growth was solid in Q1, a variety of economic headwinds — including rising trade tensions, a slowing industrial sector, and softening business investment expectations — point to slower growth ahead. All five regional Federal Reserve manufacturing indices declined in June, while durable goods orders fell again in May and new orders for nondefense capital goods (a useful indicator for near-term business investment) grew tepidly. Still, Main Street signals remain strong. The SBLI is just shy of a record high, while the National Federation of Independent Business (“NFIB”) Small Business Optimism Index ticked up in May and is also historically elevated. One factor to watch next month is whether consumer confidence will continue to slide after falling sharply in June to its lowest reading in nearly two years — if it does, it could signal slower spending and harm small businesses. For now, however, PayNet data indicate that the small business sector remains a pillar of strength in the U.S. economy.
Financial Stress Holds Steady, Remains In Check
The PayNet Small Business Delinquency Index (SBDI) 31–90 Days Past Due held at 1.51% in May following six months of consecutive increases and is up nine basis points on an annual basis, remaining near its historical median. The SBDI 91–180 Days Past Due also held steady at 0.40%, while edging up by two basis points year-over-year.
Regional Story: Nine of the ten largest states saw delinquencies fall in April, with Georgia (-14bp M/M) and Florida (-11bp M/M) experiencing the most dramatic month-over-month declines. Illinois (+3bp M/M) was the sole state to see monthly delinquencies rise. Compared to a year ago, however, delinquencies rose in six of the ten largest states, including Florida (+21bp Y/Y) and North Carolina (+20bp Y/Y). Defaults also increased in most large states, reaching nearly seven-year highs in Florida, Michigan, and North Carolina.
Industry Story: On a monthly basis, delinquencies were generally unchanged across most major industries, though one notable exception is Transportation (+10bp M/M), where delinquencies rose for the seventh consecutive month. On an annual basis, most industries saw delinquencies increase, led by Transportation (+53bp Y/Y) and Construction (+20bp Y/Y). Meanwhile, most industries saw defaults rise on year-over-year basis, including Retail (+23bp Y/Y) and Construction (+21bp Y/Y), where defaults reached their highest point in six years.
Small business owners remain on solid financial footing, but measures of financial stress continue to slowly rise. For example, separate financial stress indices produced by the Kansas City and St. Louis Fed both inched up in May, loan delinquencies rose to 1.14% in Q1 (increasing for the first time since mid-2016), and lease delinquencies climbed to 1.17%, its highest level since 2011. A tight labor market continues to put pressure on small business owners, who face rising wage costs and increasingly report challenges hiring employees. The NFIB reported in May that over half of small business owners trying to hire employees reported “few or no qualified applicants” for their openings, up five points from the previous month. The problem was particularly pervasive in the construction and manufacturing sector, where owners were likely than to cite “difficulty finding qualified workers” as their most important business problem. Overall, however, financial stress appears to be manageable for most small businesses, and if the Fed cuts the prime rate later this year as financial markets anticipate, it would likely filter through to credit card rates and marginally reduce small business payment obligations. Nonetheless, at this late stage in the business cycle, financial stress will likely continue to build over the course of the year.