Strategic Insights May 2019
Commercial Credit, Small Business Credit
Small Business Lending Beginning to Lose Steam?
The PayNet Small Business Lending Index (SBLI) fell 6.5 points to 140.0 in March and is now down 3.8% compared to year-ago levels. However, the index remains in the top 10% of all historical readings. The SBLI 3-month moving average rose on a monthly basis and currently stands 0.7% above its year-ago level.
Regional Story: Compared to February, six of the ten largest states saw lending fall in March, including Ohio (-1.9% M/M) and Georgia (-1.5% M/M), which experienced its sharpest drop in more than nine years. Small business lending in other states remains strong, however, with Pennsylvania (+0.7% M/M) and Texas (+0.2% M/M) reaching record highs in March. On an annual basis, nine of the ten largest states saw lending expand, including Pennsylvania (+12.1% Y/Y) and Illinois (+10.0% Y/Y) — though in Ohio (-1.5% Y/Y), annualized lending contracted for the first time in 2.5 years.
Industry Story: On a monthly basis, lending contracted across all but two industries in March, with Information (-3.6% M/M) experienced the strongest decline. Both Accommodation & Food Services (-1.3% M/M) and Professional, Scientific, & Technical Services (-0.6% M/M) saw the weakest lending activity in nearly six years. However, compared to year-ago levels, lending remains positive across most major industries, led by Transportation & Warehousing (+16.4% Y/Y), Arts, Entertainment, & Recreation (+6.5% Y/Y), and Mining (+5.1% Y/Y). Annualized lending in Accommodation and Food Services (-14.8% Y/Y) has fallen by double-digits for 10 consecutive months.
The U.S. economy expanded 3.2% in the first quarter, exceeding most forecasts. However, business investment growth softened in Q1, and expectations of slower economic growth this year have narrowed expansion prospects on Main Street. According to the latest Wells Fargo/Gallup Small Business Index, attracting new business was the second-greatest challenge small business owners currently face. Small business confidence has weakened in recent months, with the National Federation of Independent Business (“NFIB”) Small Business Optimism Index falling more than 6% between its peak last August and its latest reading in March, and the CNBC/SurveyMonkey Small Business Confidence Index declining four points to 58 in the first quarter. Nevertheless, a 2019 Small Business Survey conducted by TD Bank found that small business owners across the U.S. expect larger increases in revenue this year than in 2018, and recession fears that rattled markets earlier in the year have mostly subsided. Overall, Main Street remains healthy, but borrowing activity may continue to ease if economic growth slows as expected.
Financial Stress Picks Up on Main Street
The PayNet Small Business Delinquency Index (SBDI) 31–90 Days Past Due rose three basis points to 1.49% in March — its fifth monthly increase in a row and highest reading since early 2012 — and is up seven basis points from a year ago. The SBDI 91–180 Days Past Due held steady at 0.39%, but is up three basis points compared to last year.
Regional Story: Delinquencies rose in five of the ten largest states on a monthly basis, led by Michigan (+5bp M/M) and New York (+5bp M/M). Compared to year-ago levels, delinquencies rose in eight of the ten largest states, including California (+12bp Y/Y) which reached its highest level in over six years, and Florida (+30bp Y/Y) which posted its 30th consecutive double-digit increase. Regarding defaults, seven of the ten largest states experienced increases compared to year-ago levels, though current levels remain in the bottom half of historical readings across all ten states.
Industry Story: Delinquencies increased across all major industries compared to February, led by Transportation & Warehousing (+13bp M/M) which saw its first double-digit increase on a monthly basis since July 2016. On an annual basis, delinquencies increased across all major industries except Health Care (-2bp Y/Y), with Agriculture (+4bp Y/Y) rising to its highest level since December 2010. Regarding defaults, most industries saw year-over-year increases, with notable gains in Information (+60bp Y/Y), Accommodation & Food Services (+35bp Y/Y), and Mining (+34bp Y/Y). Defaults in most industries are at or below historical averages, however.
Small business financial stress has continued to slowly build, consistent with a business cycle in its late stages. A tightening labor market has made it more difficult for Main Street businesses to hire qualified candidates, which has induced wage pressures and could stifle growth if positions are not filled. Indeed, according to the NFIB Small Business Optimism Index, 54% of March respondents indicated that there were few or no qualified candidates for job openings. Furthermore, the Federal Reserve’s latest Senior Loan Officer Survey reported that more than a quarter of banks expect the quality of their C&I loans to small firms to deteriorate in 2019, compared to just 3% that expect the quality to improve. Notably, however, downward revisions to global growth outlooks have pushed the Federal Reserve to shelve planned rate hikes for 2019, which should help to alleviate financial pressures on small business this year. Overall, small businesses remain well-positioned to meet their financial obligations in most industries, but financial stress will likely continue to build this year.