Strategic Insights June 2020
Commercial Credit, Small Business Credit, PayNet Strategic Insights
Small Business Lending Index Craters as Firms Turn to PPP
The PayNet Small Business Lending Index (SBLI) fell 14.4 points (-11.8%) to 107.4 in April and is now 32% below its year-ago level, potentially suggesting that small businesses are substituting traditional lending with PPP loans. The SBLI 3-month moving average declined 9.8%, its largest-ever monthly decrease, and is down 16% over the last year.
Regional Story: In April, lending contracted in all ten of the largest states, with New York (-4.4% M/M), Pennsylvania (-3.8% M/M), Ohio (-3.5% M/M), Florida (-3.3% M/M), and Illinois (-3.0% M/M) recording their largest-ever monthly declines. Compared to a year ago, lending is also down in all ten of the largest states, with the sharpest contractions occurring in Illinois (-12% Y/Y), Pennsylvania (-8.2% Y/Y), and Florida (-8.1% Y/Y). Texas (-2.2% Y/Y) and Georgia (-2.5% Y/Y) — among the first states to begin reopening their economies — declined the least but were still heavily impacted.
Industry Story: Lending activity fell in every non-agricultural major industry in April, led by Accommodations and Food Services (-5.0% M/M); Transportation & Warehousing (-4.6% M/M); Arts, Entertainment, & Recreation (-4.3% M/M); and Mining and Oil & Gas (-4.0% M/M). Despite monthly declines, Public Administration (+11% Y/Y), Construction (+3.5% Y/Y), and Health Care (+3.5% Y/Y) still exhibited year-over-year growth, while Transportation & Warehousing (-15% Y/Y), Mining and Oil & Gas (-14% Y/Y), and Information (-10% Y/Y) continued to deteriorate compared to year-ago levels.
Small business lending contracted severely in April for the second consecutive month. Millions of initial unemployment claims are being filed each week, the consensus estimate for the May unemployment rate is around 20%, and a recent poll found that 58% of Americans think it's too early to return to stores, restaurants and other public places as they did pre-COVID. Additionally, 38% of small business owners expect new government regulations to have a negative impact on their business in the next month — another indication that for many firms, re-opening will impose significant new costs. Despite the bad news in April, however, some green shoots are beginning to emerge. The Bloomberg Consumer Comfort Index ticked up in late May for the first time since the crisis began, while on Main Street, the WSJ Vistage Small Business CEO Confidence Index increased in May for the first time since February. Moreover, small business revenues are up 43% since mid-April according to Opportunity Insight, though they remain down more than 26% compared to January. While economic activity may have bottomed out, Main Street still faces major headwinds, particularly if temporary measures to soften the downturn — including enhanced unemployment benefits, loan forbearance, and hundreds of billions of emergency assistance to small businesses — are not extended. The next six months will reveal whether small firms currently trying to hang on are able to adjust and remain profitable in a post-COVID world.
Financial Pain Intensifies on Main Street
The PayNet Small Business Delinquency Index (SBDI) 31–90 Days Past Due rose 36 basis points (bp) in April — more than doubling the previous largest monthly increase of 16bp set last month — and is now 59bp above its year-ago level. Meanwhile, the SBDI 91–180 Days Past Due increased 5bp and has risen 11bp over the last year.
Regional Story: Delinquencies rose in all ten of the largest states in April as six states, including New York (+40bp M/M), Florida (+43bp M/M), and Illinois (+35bp M/M) recorded their largest-ever monthly increases. Likewise, delinquencies increased on a year-on-year basis across the board, led by Georgia (+90bp Y/Y) and Ohio (+58bp Y/Y; largest-ever annual increase). Defaults rose in the largest states with New York (+22bp M/M) and Texas (+24bp M/M) recording their largest-ever monthly increases, though Illinois (+1bp M/M) saw only a minor uptick. Compared to a year-ago, defaults are up considerably in California (+114bp Y/Y), Texas (+91bp Y/Y) and Florida (+75bp Y/Y).
Industry Story: In April, outside of Agriculture (+6bp M/M), every major industry recorded its largest-ever SBDI monthly increase led by Retail (+60bp M/M) and Health Care (+43bp M/M). Compared to a year ago, delinquencies are up the most in Transportation (+101bp Y/Y) and Retail (+81bp Y/Y) with every major industry now in the top one-third of historical readings. Regarding defaults, the largest upticks occurred in the Public Sector (+35bp M/M; largest-ever monthly increase), Accommodations (+20bp M/M), and Information (+23bp M/M). Compared to a year ago, defaults have surged in Transportation (+236bp Y/Y), Finance (+91bp Y/Y), and Retail (+82bp Y/Y).
Delinquencies and defaults accelerated in April at an unprecedented pace, underscoring how financial pressures continue to mount on Main Street. While PPP disbursement issues have been mostly resolved, concerns with the program have now shifted to loan forgiveness: a recent LendingTree survey found that more than half of PPP recipients are worried about meeting the forgiveness criteria. While Congress considers PPP reform legislation, small business owners are dipping further into their income to save their businesses: proprietor income fell 12.2% M/M in the April Personal Income Report after an 8.4% decline in March. Moreover, as states reopen, it is becoming increasingly apparent that temporary measures designed to stop the bleeding, while helpful, are likely insufficient. A recent Alignable poll found that nearly half of small business owners can’t pay June rent and other expenses in full, and a majority anticipate at least another 6 months of subnormal operations per the Census Bureau’s latest Small Business Pulse Survey. For many small businesses, the prospects of a quick bounce-back as movement restrictions ease are increasingly unlikely, and Main Street firms that have been able to weather the crisis thus far are likely to face continued financial stress in the months ahead.
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