Strategic Insights April 2020

Main Street Braces For COVID-19 Crisis

Index Analysis

The PayNet Small Business Lending Index (SBLI) ticked down 1.1 points (-0.7%) to 147.7 in February while edging up 0.5% from February a year-ago. The SBLI 3-month moving rose 1.6% last month and is up 2.3% compared to February last year. The index’s February movement predates the impact of COVID-19.

Regional Story: Lending activity growth was modest last month, though seven of the ten largest states saw improvements. Georgia (+0.7% M/M) and New York (+0.8% M/M) saw the most growth, while lending contracted modestly in Florida (-0.6% M/M), Illinois (-0.4% M/M), and Texas (-0.3% M/M). Over the last year, the strongest states have been Georgia (+2.6% Y/Y) and California (+2.0%), while lending conditions continue to deteriorate in Illinois (-8.6% Y/Y). Overall, all large states remain in the top 30% of historical readings, though future activity will decline due to the pandemic.

Industry Story: In February, lending activity was mixed across major industries. While Construction (+1.4 M/M), Real Estate (+1.1. M/M), and Information (+1.2% M/M) experienced solid growth, Transportation and Warehousing (-1.8% M/M) and Manufacturing (-0.4% M/M) continued to trend downward. Compared to a year ago, lending remains down in Transportation and Warehousing (-9.1% Y/Y), Mining, Quarrying, and Oil and Gas Extraction (-6.6% Y/Y), and Finance and Insurance (-5.3% Y/Y). More positively, lending continues to expand in Construction (+7.6% Y/Y) , Health Care (+8.6% Y/Y), and Public Administration (+4.2% Y/Y).

Economic Context

Although we have yet to see the full extant of damage from the coronavirus shutdown in the data, the first results show some troubling signs. IHS Markit’s Flash Services PMI for March was 39.1, indicating the worst contraction in the services sector in the series' history. Meanwhile, the University of Michigan Index of Consumer Sentiment had its fourth largest drop in the last 50 years, with further declines expected in the coming months. On Main Street, developments are similarly bleak. The March WSJ/Vistage Small Business CEO Confidence Index fell significantly despite the survey taking place before COVID-19 had become rampant in the U.S, suggesting that further declines are likely next month. More recently, the Canadian Federation of Independent Businesses (CFIB) March Business Barometer hit an all-time low, plummeting from 60.5 to 30.8 and likely presaging future U.S. data. More positively, federal policymakers have taken important steps to support Main Street and ensure smooth operation of financial markets, including the Fed’s 150 bp rate cut and new Main Street Business Lending program aimed at small and mid-sized businesses,. Additionally, forgivable SBA loans authorized in the CARES Act should help some small businesses avoid layoffs for at least the next 10 weeks. There is significant uncertainty regarding the timeliness and sufficiency of these support mechanisms however, and it appears that Main Street will face a treacherous path in the months ahead.

Coronavirus Poses Existential Threat

Index Analysis

The PayNet Small Business Delinquency Index (SBDI) 31–90 Days Past Due inched down 1 basis point (bp) in February and has risen 13bp over the last twelve months. The SBDI 91–180 Days Past Due has not moved since October and is 4bp above year-ago levels. The index’s February movement predates the impact of COVID-19.

Regional Story: In February, delinquencies rose in six of the ten largest states, highlighted by Michigan (+12bp M/M), Pennsylvania (+10bp M/M), and Texas (+2bp M/M) rising to 8-year highs. More positively, delinquencies fell in Florida (-4bp M/M) and Illinois (-1bp M/M) for the second consecutive month. Measured on an annual basis, delinquencies increased in nine of the largest states while remaining unchanged in Florida. Similarly, default levels continue to rise across the country. Specifically, Texas (+11bp M/M; +50bp Y/Y), California (+10bp M/M; +67bp Y/Y), and Georgia (+6bp M/M; +34bp Y/Y) saw sharp upticks last month.

Industry Story: In February, Construction (+1bp M/M) was the only major industry in which delinquencies increased, while delinquencies fell in Agriculture (-2bp M/M) and Health Care (-3bp M/M) for the fifth straight month. Furthermore, Agriculture (-6bp Y/Y) is the only major industry with lower delinquencies compared to year-ago levels and is now at a 17-month low. Regarding defaults, Transportation (+15bp M/M; +212bp Y/Y), Accommodations (+14bp M/M; +68bp Y/Y), and Mining (+22bp M/M; -43bp Y/Y), increased sharply last month. Meanwhile, Education (-5bp M/M; +32bp Y/Y) defaults declined for the first time in seven months, while the Agriculture industry continues to see modest improvements in financial health (-3bp M/M; +1bp Y/Y).

Economic Context

While PayNet data suggest that financial stress was little changed in February, the pandemic has dramatically shifted the financial outlook for small businesses. By mid-March, the NFIB reported roughly 75% of small businesses had already been negatively impacted by COVID-19, while Goldman Sachs reported that 96% of small firms are already feeling the consequences. Most small firms operate on tight margins and are ill-equipped to handle a cratering in consumer demand, as evidenced by a JP Morgan Chase report that found the median cash buffer for small businesses is just 27 days (other estimates are a slightly more positive 30–45 days). With most states enacting movement restrictions that will remain in effect for weeks or months, many small businesses will be forced to make tough decisions as they exhaust cash reserves. Furloughs and lay-offs have been the first step, as seen in last week’s staggering 3.3 million unemployment claims filed — a number that will almost certainly grow by millions more in the weeks ahead. There is some hope coming from the $377 billion in small business loans and grants in the CARES Act, but it will be critical for small firms to get access to these funds as soon as possible to maintain payrolls, meet financial obligations, and survive until movement restrictions can be eased.