Strategic Insights June 2021

Small Business Credit, Commercial Credit

Small Business Lending Hits All-Time High As Economy Surges

Index Analysis

In April 2021, the Equifax Small Business Lending Index (SBLI) surged 13.1 points to an all-time high of 167.7 (+8.5%), up nearly 52% on a year-over-year basis. The SBLI 3-month moving average also recorded a new all-time high, rising 6.9% to 155.5 and 23.7% above its level from a year ago.

Regional Story: Small business lending improved strongly in April as nine of the ten largest states experienced their largest ever monthly increase including New York (+5.6% M/M), Pennsylvania (+5.4% M/M), and North Carolina (+4.3% M/M; all-time high index reading). Compared to April 2020, lending expanded in Georgia (+9.3% Y/Y), Illinois (+8.4% Y/Y), and North Carolina (+7.2% Y/Y), though lending in New York (-8.9% Y/Y), Pennsylvania (-1.4% Y/Y), and Ohio (-1.1% Y/Y) remains below pre-pandemic levels.

Industry Story: Lending increased in 17 of 18 industries, including the largest ever monthly increase in eight industries. Health Care (+3.5% M/M; -14.5% Y/Y), Professional Services (+2.8% M/M; -14.2% Y/Y), and Retail Trade (+2.8% M/M; -4.4% Y/Y) were three of the strongest monthly performers, while Arts, Entertainment & Recreation (-0.9% M/M) saw the only decline. Despite a strong April, lending in many industries remains well below year-ago levels, including Accommodations (-35.3% Y/Y), Arts (-26.7% Y/Y), Information (-23.3% Y/Y), and Finance & Insurance (-15.8% Y/Y). Lending is higher than a year ago in Construction (+21.0% Y/Y), Agriculture (+16.2% Y/Y), and Transportation and Warehousing (+11.6% Y/Y).

Economic Context

Small business lending surged in April, providing further evidence of the strengthening economic recovery. Both the headline index and the 3MMA soared to all-time highs with the headline index exceeding the previous record by over 6%. Small business survey data corroborate these elevated readings. For example, the May WSJ/Vistage CEO Confidence Index increased to nearly a nine-year peak, with 80% of SMB owners reporting expectations for increased revenues and half of small businesses planning to increase fixed investment spending. Meanwhile, consumer spending continues to impress; April retail sales levels were 18% above pre-pandemic levels. Notably, a recent WSJ analysis found that vaccinated Americans have still not fully returned to normal economic activity, suggesting that the full potential of a post-COVID economy has not yet arrived.

Though the story is positive for businesses that are open, Opportunity Insights data from late May continue to paint a different picture for those that remain closed: the number of small businesses open is 37% below pre-COVID levels, and small business revenues are down 32%. Further, NFIB reported in early June that a record-high 48% of small business owners have unfilled job openings (seasonally adjusted), more than double the 48-year historical average. Nevertheless, the general economic climate on Main Street is very positive, and the all-time high in Equifax small business lending data indicate growing confidence in the sector.

Financial Stress Fading, Though Labor Availability a Growing Concern

Index Analysis

The Equifax Small Business Delinquency Index (SBDI) 31–90 Days Past Due declined 12bp in April to its lowest level in over two years and is 66bp below its year-ago level. The SBDI 91–180 Days Past Due declined 4bp and is up 7bp Y/Y. Defaults fell 17bp to 2.96% but remain 42bp above April 2020 levels.

Regional Story: Delinquencies fell by double digits in all ten of the largest states in April, including large declines in Georgia (-26bp M/M), Illinois (-26bp M/M), and Texas (-23bp M/M). Compared to April 2020, delinquencies are now lower in all ten of the largest states led by Georgia (-93bp Y/Y), Florida (-81bp Y/Y) and New York (-68bp Y/Y; lowest-ever index reading). Regarding defaults, all ten of the largest states saw sizable declines including New York (-32bp M/M; largest-ever monthly decrease), Georgia (-26bp M/M), and Florida (-26bp M/M). Measured on an annual basis, defaults are now below pre-pandemic levels in two states: Georgia (-52bp Y/Y) and Florida (-2bp Y/Y).

Industry Story:Delinquencies fell in all six tracked industries for the third consecutive month in April, highlighted by Construction (-16bp M/M) and Retail (-16bp M/M). Measured on annual basis, delinquencies declined in all tracked industries for the first time in over six years led by Transportation (-160bp Y/Y) and Construction (-112bp Y/Y). Similarly, defaults declined in all 18 tracked industries for the first time in over a decade, led by the largest-ever monthly declines in Information (-48bp M/M; +271bp Y/Y) and Health (-19bp M/M; +106bp Y/Y). Other notable declines include Accommodations (-40bp M/M; +238bp Y/Y) and Arts (-22bp M/M; +64bp Y/Y). However, defaults are still elevated on a year-over-year basis in most industries.

Economic Context

In April, considerable declines in both the SBDI and SBDFI brought further optimism to an improving Main Street financial outlook. While defaults are still 42bp above pre-COVID levels, delinquencies fell to their lowest point in over two and a half years. However, as pandemic-related pressures begin to fade, labor availability and input costs are quickly becoming a primary concern for small businesses. In the May WSJ/Vistage Small Business CEO survey, 69% of respondents indicated challenges finding qualified employees, while over a fifth of small business in the most recent Census Bureau SMB Pulse survey reported constrained operating capacity due to a lack of labor availability, the highest share since the pandemic began. The Census Bureau survey found labor availability issues are particularly acute in Accommodations & Food Service, where half of all small businesses cited worker availability as a constraint on operating capacity. In response to these hiring challenges, survey data suggests that many businesses are boosting wages to attract labor. In industries facing the greatest difficulties, this has quickly begun to pressure wages upwards on aggregate; for example, May Paychex IHS Markit data show hourly earnings growth of 6.3% in Leisure and Hospitality over the last 12 months. As small businesses begin to move on from pandemic-related challenges, new pain-points are arising on the hiring front that may persist over the coming months.