The PayNet Small Business Lending Index is up 3% year-to-date. In October, the index increased 2.5 points (1.7%) to 147.3, although that was 0.9% below last year’s October level. Similarly, the SBLI three-month moving average increased 0.3% to 141.3 but still sits 1.7% below its year-ago level.
In October, lending activity increased in eight of the 10 largest states. North Carolina increased 1.1% and Illinois increased 1% month over month. Lending declined for the eighth straight month in New York (-1.6% M/M) and the 10th straight month in Texas (-0.3% M/M). Year-on-year lending remains down across the board, with Michigan (-0.7% Y/Y) and Georgia (-2.1% Y/Y) the closest to reaching their year ago level of lending activity. Disparate interstate trends remain, with California and New York in the bottom 40% of their historical readings, while Michigan and North Carolina are in the top 20% of theirs.
In October, lending activity improved in six of 18 industries. Notable improvements included wholesale trade (0.7% M/M), which increased for the first time in 10 months, and mining, quarrying and oil and gas (1.8% M/M), which increased for the first time in four months. Meanwhile, large decreases occurred in accommodation and food services (-4.7% M/M) and arts, entertainment and recreation (-5% M/M), while finance and insurance (-1.8% M/M) and information (-2.2% M/M) fell to all-time lows. On a year-on-year basis, construction increased 9.6%, although its performance remains an outlier, as 10 of 18 industries experienced double-digit year-on-year declines, including record-setting decreases in education (-17.9% Y/Y) and arts (-23.2% Y/Y).
While the SBLI rose moderately again in October, preliminary November data suggests challenges ahead for Main Street as COVID-19 cases rise once again. At a macro level, the economy continued its recovery in October, albeit at a slower pace. Retail sales rose for the sixth-straight month by 0.3% month over month, although this marked the weakest growth of the recovery. Meanwhile, initial unemployment claims (including pandemic unemployment assistance) declined from 1.27 million the first week in October to 1.02 million the first week in November. While these developments are encouraging, the massive surge in COVID-19 cases and corresponding business and mobility restrictions appear to be triggering some backsliding. For example, Morning Consult’s November consumer sentiment index fell to its lowest level since early August, while mid-November Opportunity Insights data showed small business closures reached their highest level since mid-May.
Despite the distressing data, there is reason for cautious optimism on Main Street. Multiple successful vaccine trials have provided a light at the end of the tunnel for the pandemic and the long stretch of election-related uncertainty is over. While the next few months may prove difficult for many small businesses as virus case levels rise, the prospect of a widely available and highly effective vaccine by late spring/early summer is encouraging for small businesses that are able to hold out long enough.
The PayNet Small Business Delinquency Index 31–90 Days Past Due decreased for the fifth-straight month in October, falling nine basis points but remaining five basis points above its October 2019 level. The SBDI 91–180 Days Past Due inched up one basis point and was 19 basis points above its year-ago level. Defaults ticked up two basis points to 3.28%.
Delinquencies again fell in all 10 of the largest states, including Florida (-16 bp M/M), New York (-17 bp M/M) and Illinois (-16 bp M/M). There are now three large states where delinquencies are below year-ago levels: North Carolina (-24 bp Y/Y), Florida (-24 bp Y/Y) and Texas (-10 bp Y/Y). Defaults are more of a mixed bag, as California (20 bp M/M) and New York (13 bp M/M) continue to experience notable upswings, while Ohio (-5 bp M/M) and Texas (-4 bp M/M) experience improvements. Compared with last year, defaults are up at least 50 basis points in all 10 of the largest states, with the largest increases occurring in New York (255 bp Y/Y) and California (209 bp Y/Y).
In October, delinquency rates fell in all six of the tracked industries, with healthcare (-21 bp M/M) and transportation (-13 bp M/M) experiencing the largest declines. Meanwhile, construction (-47 bp Y/Y) and transportation (-64 bp Y/Y) were the only two industries with year-on-year delinquency declines, although agriculture is unchanged from its October 2019 level. Regarding defaults, six of 18 industries experienced declines, including transportation (-23 bp M/M), finance (-10 bp M/M) and education (-7 bp M/M). On a less positive note, defaults continued to rise rapidly in accommodations (21 bp M/M), agriculture (11 bp M/M) and arts (16 bp M/M). Defaults are at elevated levels on a year-on-year basis for all industries.
October PayNet data again showed easing Main Street financial stress, with the SBDI declining while the SBDFI was mostly unchanged. However, the recent surge in COVID-19 cases and reimposition of restrictions may increase financial stress. High-frequency indicators bear this out. In mid-November, the Census Bureau’s weekly Small Business Pulse Survey found that 38% of small businesses reported declining revenues in the previous week (the highest level since July), while weekly Opportunity Insights data showed small business revenues falling back to May levels (-32% below pre-pandemic readings). Given falling revenues, small firms are increasingly cutting costs. The Census Bureau reported that 12% of small businesses decreased their number of paid employees during the prior week, while 21% decreased the number of employee-hours worked — both survey-highs since early summer (the downward drift could be influenced by the Thanksgiving holiday but is consistent with recent trends). Regardless, the last time small business data was this weak, $600 billion in Paycheck Protection Program funds were making their way through the system to support business owners and their employees. It remains unclear when or if Main Street will see additional relief. In the meantime, many small business owners may find themselves in a precarious financial position heading into 2021.
