Strategic Insights July 2020

Small Business Credit, Commercial Credit

Small Business Lending Index Ticks Up

Index Analysis

The PayNet Small Business Lending Index (SBLI) stemmed its freefall in May, ticking up 2.1 points (+1.9%) to 111.4 but is still nearly 30% below its year-ago level. The SBLI 3-month moving average declined 8.9% and is down 25% compared to a year ago.

Regional Story: Despite a slight uptick in the national SBLI, lending contracted in all ten of the largest states in May with the steepest declines occurring in New York (-3.7% M/M), North Carolina (-2.9% M/M), and California (-2.4% M/M). On a year-on-year basis, lending deteriorated the most in Illinois (-11.9% Y/Y), Pennsylvania (-10.3% Y/Y), and Florida (-9.9% Y/Y). There continues to be significant variability in lending across large states: California and New York are the only two below their historical averages, while Texas, Michigan, and North Carolina are in the top 20% of historical readings.

Industry Story: Lending activity fell in most major industries in May, including largest-ever declines in Health Care (-3.4% M/M), Professional Services (-3.4% M/M), and Accommodation and Food Services (-5.5% M/M), and a record low reading for Information (-3.8% M/M). More positively, Mining and Oil & Gas (+0.9% M/M) and Construction (+0.2% M/M) improved modestly. Compared to a year ago, lending expanded in Public Administration (+8.1% Y/Y) and Construction (+3.6% Y/Y) while declining in all other industries, most notably in Transportation and Warehousing (-17.5% Y/Y) and Arts, Entertainment & Recreation (-13.9% Y/Y; largest-ever decline).

Economic Context

Economic activity improved in May as Main Street began to reopen. Employment rose by 2.5 million (followed by a record-setting additional 4.8 million jobs in June) and this job growth — combined with an unprecedented level of federal stimulus via the CARES Act — drove an 8% rebound in real consumer spending. Government benefits accounted for nearly 30% of personal income over the last two months (almost double normal levels), though with stimulus checks mostly spent and enhanced unemployment benefits set to expire in July, additional support may be necessary to avoid a spending collapse given historically high unemployment. Indeed, the recovery may have stalled in June: nearly 30 million people are currently receiving unemployment benefits even as businesses reopen, and at 1.4 million, weekly initial unemployment claims (NSA) remain well above pre-pandemic all-time highs (and jobs lost at this stage are unlikely to be short-term furloughs). Main Street remains on a knife’s edge: the number of small businesses open and small business revenues have essentially flatlined since late-May and remain 15-20% below pre-COVID levels. Moreover, the reappearance of COVID-19 hotspots in the South and Southwest is a concerning development for public health, but also has economic implications: reservations at Houston restaurants are down 25% in the last week per OpenTable. it is increasingly clear that recovering from the pandemic’s economic carnage will be slow and uneven, and Main Street businesses will need to be adaptable and creative to survive.

Financial Stress Continues to Spike

Index Analysis

The PayNet Small Business Delinquency Index (SBDI) 31–90 Days Past Due spiked 31 basis points (bp) in May following a 36bp rise in April. The SBDI is now 86bp above its year-ago level. Meanwhile, the SBDI 91–180 Days Past Due increased a more modest 6bp and is now up 15bp since May of last year.

Regional Story: In May, delinquencies continued to rise in the ten largest states, with New York (+55bp M/M), Pennsylvania (+33bp M/M), and California (+29bp M/M) setting records for largest monthly increases. Similarly, delinquencies have risen significantly over the last year in Florida (+118bp Y/Y), Georgia (+114bp Y/Y), and New York (+115bp Y/Y; largest-ever annual increase). Meanwhile, defaults are at their highest level since late-2011 for most of the largest states, with the situation most acute in Michigan (+27bp M/M; +64bp Y/Y), New York (+39bp M/M; +89bp Y/Y), and Texas (+42bp M/M; +127bp Y/Y) — all recording their largest-ever monthly increases.

Industry Story: Outside of Construction (+5bp M/M; +62bp Y/Y) SBDI readings for every major industry reached their highest point in a decade in May and are now in the top 25% of historical readings. Of particular concern is Health Care (+53bp M/M; +115 bp Y/Y) and Retail (+60bp M/M; +141bp Y/Y), which both set monthly and yearly increase records and are on track to reach or exceed record-highs next month if current trends hold. Defaults are also rising, led by Accommodations (+44bp M/M; +167bp Y/Y), Transportation (+14bp M/M; +245bp Y/Y), Finance (+17bp M/M; +114bp Y/Y), and Health Care (+26bp M/M; +47bp Y/Y; largest-ever monthly increase).

Economic Context

While the beginning of July marked the end of the initial PPP application window, federal support remains a critical priority for small businesses. PPP has provided a lifeline for millions of small firms, and two-thirds of loan recipients cited the program as “very helpful” in financially supporting their business according to a June NFIB survey. Nonetheless, nearly half of recipients anticipate needing additional financial support over the next 12 months — and this was before the surge in new cases led to the first decline in Morning Consult’s consumer comfort tracking poll since April. While Main Street financial stress will likely continue to rise, Congress has signaled that it will ensure the remaining $130 billion in unallocated PPP funds will remain available to targeted small business. The Fed's Main Street Lending Facility is another potential avenue for small businesses in need of financial support to weather the storm. The program has gotten off to a rocky start, but Chairman Powell appears receptive to the idea of adjusting the program to entice greater participation from both lenders and small business borrowers. As small business owners across the nation attempt to stay afloat as the pandemic rages, the federal government is likely to continue to play a critical role in helping Main Street mitigate the worst of the damage and adjust their operations for a post-COVID world.

For more insights, watch the recording of our July 2020 Small Business Insights webinar.