PayNet Strategic Insights June 2019

Commercial Credit, Small Business Credit

Small Business Lending Rebounds to Record High

Index Analysis

The PayNet Small Business Lending Index (SBLI) rose 20.1 points to an all-time high of 159.7 in April and is now up 11.4% compared to year-ago levels. The SBLI 3-month moving average also rose on a monthly basis and currently stands 3.2% above its year-ago level.

Regional Story: In April, lending rose on a monthly basis in each of the ten largest states, including notable increases in Ohio (+2.2% M/M), North Carolina (+1.6% M/M), and New York (+1.3% M/M). Three states — Illinois (+0.9% M/M), Pennsylvania (+1.2% M/M), and Texas (+0.8% M/M) — saw the index reach record highs. Similarly, all ten of the largest states saw lending expand compared to a year ago, led by a double-digit increase in Pennsylvania (+12.2% Y/Y).

Industry Story: On a monthly basis, lending expanded in the majority of industries in April, led by Mining, Quarrying, and Oil and Gas Extraction (+4.5% M/M), Healthcare and Social Assistance (+1.4% M/M), Construction (+1.3% M/M), and Wholesale Trade (+1.3% M/M). Lending in other industries contracted, including Finance and Insurance (-1.1% M/M) and Accommodation and Food Services (-0.9% M/M), which is now at a 6-year low. Compared to year-ago levels, ten industries saw lending expand, led by a double-digit increase in Transportation and Warehousing (+13.7% Y/Y). Manufacturing (-0.4% Y/Y) slipped on an annual basis for the second consecutive month.

Economic Context

Following unexpectedly strong GDP growth in the first quarter, the U.S. economy has exhibited mixed signals in recent weeks. On the positive side, consumer confidence is historically high, unemployment remains historically low, and low inflation and solid wage growth support spending. Businesses (particularly small businesses) remain confident despite increasing trade friction with China and other key trading partners, with both the PayNet SBLI and the National Federation of Independent Business (“NFIB”) Small Business Optimism Index rebounding in April. However, industrial production contracted again in April, durable goods shipments and new orders — strong indicators of economic health — are in decline, and the IHS Markit US Manufacturing PMI fell to 50.6 in May, its lowest level since late 2009. Moreover, recently proposed tariffs on Mexico threaten to disrupt the highly integrated supply chain for automobile production, which would harm U.S. small businesses and raise costs on consumers. Overall, PayNet data point to continued strength on Main Street, but the broader economic picture, while still positive, is cloudier.


Financial Stress Climbs to Seven-Year High

Index Analysis

The PayNet Small Business Delinquency Index (SBDI) 31–90 Days Past Due rose three basis points to 1.52% in April — its sixth consecutive increase and highest point in more than seven years — and is up ten basis points annually. The SBDI 91–180 Days Past Due held at 0.39% for the third straight month but rose two basis points year-over-year.

Regional Story: Three of the ten largest states — Illinois (+5bp M/M), North Carolina (+5bp M/M), and Pennsylvania (+5bp M/M) — saw delinquencies increase in April. On an annual basis, delinquencies rose in all ten of the largest states, led by Florida (+26bp Y/Y) and North Carolina (+24bp Y/Y). Despite the uptick, delinquencies remain in the bottom half of historical readings in most large states. Regarding defaults, most large states saw annual increases, with default rates in three states (Georgia, Michigan, and Florida) reaching their highest points since 2012.

Industry Story: On a monthly basis, delinquencies increased in most major industries, led Transportation (+12bp M/M) and Health Care (+6 bp M/M). On an annual basis, all major industries saw delinquencies rise, including double-digit jumps in Transportation (+46 bp Y/Y), Construction (+24 bp Y/Y), and Retail (+14 bp Y/Y), All major industries are now at or above their long-term median reading. Regarding defaults, most industries saw higher default rates compared to twelve months ago, including Mining (+20bp Y/Y) and Manufacturing (+13bp Y/Y), where defaults have increased for three months in a row after falling throughout 2018.

Economic Context

Small business financial stress continues to build incrementally across the U.S. economy, and as labor markets continue to tighten, Main Street is finding it increasingly challenging to attract and retain high-quality workers. According to Moody’s Analytics, employment at firms with fewer than 20 workers grew by less than 1% on an annual basis in both March and April, while NFIB reported in April that nearly a quarter of its small business members cited “difficulty finding qualified workers” as their most important business problem in April (near an all-time high). Rising wages have also put pressure on small businesses’ bottom line, though it appears unlikely that the Federal Reserve Board will raise interest rates in the near term due to subdued inflationary pressures — indeed, many analysts expect a rate cut at some point in 2019, which should help to alleviate financial stress by lowering borrowing costs. Overall, small businesses remain well-positioned to meet their financial obligations in most industries, but financial stress will likely continue to build in the coming months — particularly if the growing risk of additional tariffs leads to higher input costs and/or reduced demand for small business products.