Strategic Insights May 2021

5/5/2021
Small Business Credit, Commercial Credit

Main Street Rebound Continues as the Economy Begins to Normalize

Index Analysis

In March 2021, the Equifax Small Business Lending Index (SBLI) improved 11.7 points to 155.7 (+8.1%), its second highest reading in series history and nearly 28% above its year-ago level. The SBLI 3-month moving average rose to 145.8 and is now 5.4% above its level from 12 months prior.

Regional Story: Lending activity improved in all ten of the largest states in March for the first time since December 2019, with the largest gains occurring in North Carolina (+4.2% M/M), Illinois (+2.8% M/M), and Texas (+2.6% M/M). Lending activity also improved on an annual basis — a trend likely to continue due to pandemic-influenced base effects — with the strongest growth occurring in Georgia (+3.3% Y/Y) and Illinois (+1.5% Y/Y). While conditions improved across the board, gains are not evenly distributed among the largest states: North Carolina and Georgia, for example, are in the top 12% of their historical readings, while New York and California are in the bottom 40%.

Industry Story: In March, 11 of 18 industries saw lending conditions improve, the most in a single month since December 2019. Many of these industries saw lending activity pick up for the first time since the pandemic began, including Professional Services (+0.9% M/M), Real Estate (+1.1% M/M), and Retail Trade (+1.1% M/M). Meanwhile, lending conditions continued to soften in Accommodations (-3.7% M/M), Finance & Insurance (-1.4% M/M), and Arts, Entertainment, & Recreation (-1.4% M/M). Compared to a year ago, most industries were little changed from the prior month, other than a modest improvement in Transportation and Warehousing (+0.4% Y/Y).

Economic Context

The second-highest SBLI reading in series history is the latest evidence that the small business sector is on the mend. Part of the improvement stems from the $1.9 trillion American Rescue Plan, which quickly injected a massive amount of federal stimulus into the hands of consumers and small businesses. While this positive economic shock is temporary, structural improvements also appear to be driving growth. For example, per a late-April Morning Consult survey, a pandemic-era record number of Americans reported feeling comfortable dining out (60%) and taking a vacation (53%), readings which have undoubtedly been helped by the fact that nearly 150 million Americans have received at least one dose of the vaccine. Thanks to these developments, small business confidence is rising: in April, the WSJ Vistage CEO Index accelerated from a then-pandemic high in March to its highest level since early 2018. Similarly, a TD Bank survey shows that 41% of small business owners expect revenues to grow this year compared to 9% that anticipate a decline, and just 3% of owners anticipate having to close permanently. While not all data are as rosy — the Census Bureau's Small Business Pulse survey indicates that one-fifth of small business reported a decrease in sales compared to mid-April, essentially unchanged since March after large improvements earlier in the year — it is not surprising to see increased levels of optimism stemming from Main Street as the economy continues to transition to a post-pandemic normal.

Financial Stress Continues to Fall, Though New Challenges May Loom

Index Analysis

The Equifax Small Business Delinquency Index (SBDI) 31–90 Days Past Due declined 10bp in March and is now 22bp below its year-ago level. The SBDI 91–180 Days Past Due declined 3bp in March but is up 17bp Y/Y. Defaults fell 11bp to 3.11% — their lowest level since June — but remain 72bp above year-ago levels.

Regional Story: Delinquencies fell in all ten of the largest states for the first time since October, with large declines in Pennsylvania (-18bp M/M), California (-16bp M/M), and Illinois (-30bp M/M; largest-ever monthly decline). Compared to a year ago, delinquencies have risen in just two of the ten largest states: Illinois (+12bp Y/Y) and Pennsylvania (+4bp Y/Y). In contrast, delinquencies are down sharply in Georgia (-48bp Y/Y), Florida (-26bp Y/Y), and North Carolina (-26bp Y/Y). Meanwhile, defaults declined in all ten of the largest states for the first time in over six years with the largest declines occurring in Florida (-29bp M/M; +50bp Y/Y), Georgia (-21bp M/M; +3bp Y/Y), and North Carolina (-17bp M/M; +31bp Y/Y).

Industry Story: Delinquencies fell in all six tracked industries for the second consecutive month. After improvements in Health Care (-10bp M/M; -10bp Y/Y) and General (-11bp M/M; -18bp Y/Y), the Retail sector (-19bp M/M; +17bp Y/Y) is now the only tracked industry with delinquencies above year-ago levels. Regarding defaults, just two of eighteen industries — Information (+31bp M/M) and Public (+2bp M/M) — saw a rise, while most industries experienced large decreases. These include hard-hit industries such as Accommodations (-17bp M/M), Health (-16bp M/M), and Arts (-11bp M/M). While conditions continue to improve, default rates in several industries remain well above pre-COVID levels, including Accommodations (+305bp Y/Y), Health (+135bp Y/Y), and Education (+104bp Y/Y).

Economic Context

Main Street financial stress continued to ease in March, with delinquencies falling to a nearly two-year low and defaults declining at the sharpest M/M rate in a decade. Though Equifax data point to broad improvement in Main Street’s financial outlook, a slowdown or backsliding in the recovery could cause prolonged financial stress for some of the hardest hit industries. For example, at its March rate of decline, it would still take the Accommodations industry an additional 19 months to reach pre-COVID SBDFI levels, and it would take Health Care and Education nine months. Meanwhile, as operating restrictions begin to subside, other consequences of the pandemic are on the rise, including supply chain problems and labor shortages. According to the April WSJ Vistage Small Business CEO Survey, 44% of businesses face supply chain problems that have resulted in shortages and higher prices, while 42% of respondents in the March NFIB Jobs report noted difficulties filling vacancies with qualified workers — problems which, if sustained, could negatively affect small business profitability. The good news is that it is apparent that the initial financial stress on small business owners triggered by the pandemic has been mitigated with the help of aggressive government interventions. However, the road could get bumpier for some businesses as these interventions expire, particularly in industries where the “new normal” falls short of pre-pandemic levels of activity.