experian moodys analytics small business credit index q2 2013

7/18/2019 Experian Moodys Analytics Small Business Credit Index q2 2013

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Q2 2013



Experian/Moody’s Analytics Small Business Credit Index

Table of Contents

Executive summary 2

Experian/Moody’s Analytics Small Business Credit Index 3

Behind the numbers 4

Recent performance 4

Clear regional leaders (and laggards) emerge 6

Looking ahead 8




Credit quality continued to improve in Q2 liftingindex to highest point on record

2

Executive summary

Small-business credit conditions strengthened in Q2 2013, lifting the Experian/Moody’s Analytics Small

Business Credit Index 2.8 points to 111.7. Fiscal drag has been less severe than expected; consumer

spending growth is modest but relatively steady despite heavier tax burdens; and sequestration is not yet

noticeably affecting jobs recovery. Consumer confidence is perched at multiyear highs, a reassuring signal

that consumer spending is unlikely to backtrack in the near term. Much of this stems from the long-awaited

housing market recovery and, to a lesser extent, stock prices that are significantly higher than they were

a year ago.

Drilling down into regional data reveals an uneven small-business recovery. As has been the case since the

recession ended, small companies west of the Mississippi are faring noticeably better than their Eastern

counterparts. Weakness in Europe has subdued exports, and a dearth of new factory orders has crimped

manufacturing output and job growth along the Eastern Seaboard. Some of this weakness spilled into

services, holding back broader job gains, thereby hampering consumer recovery. The Eurozone is once

again growing, but it will take time for an upswing in manufacturing to ripple through to small businesses

the East. Housing also has been a major player in the relative weakness of small-business balance sheets i

the East.

By contrast, Western states have benefited from technology and energy exports to Canada, Mexico and

Asia. This has created high-paying jobs in many industries, ranging from manufacturing and mining to

downstream industries, including business and professional services. The associated income growth is

fueling consumer spending, bolstering small businesses’ bottom lines. Job growth in skilled professions is

leading to robust population expansion, particularly in the Mountain West, which in turn is strengthening

real-estate markets in many major western metros and supporting services growth. The slowdown in

economic growth in Asia and a weaker yen due to easier monetary policy have weighed on exports from th

western United States lately, but this will be short-lived. Growth in Asia, particularly China, will pick up aga

as the U.S. and European recoveries strengthen.

Notwithstanding the relatively upbeat Q2 2013 report, small firms still will face some headwinds during

the latter half of 2013. Yes, the consumer confidence index is trending at the upper bound of its recovery

range. However, consumer sentiment still is consistent with year-over-year real consumer spending growth

of a little more than 2 percent — well below the average of more than 3 percent from 2002 to 2007. Further

improvements in small-business credit quality will continue in coming quarters but at a modest pace until

spending growth accelerates sometime

in 2014.




Previous quarter (2013 Q1): 108.9Current quarter (2013 Q2): 111.7

106

104

102

110

112

108

100

98

96

94

Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13

• The Experian/Moody’s Analytics

Small Business Credit Index

added 2.8 points to settle at 111.7

from 108.9 in Q1 2013 (previously

109.0 in Q4 2012). This is the

index’s highest reading since its

inception.

• Small firms have steadily

reduced their delinquent debt

over the past year. Balance

volumes for all business sizes

receded measurably from a

year earlier, bringing down

delinquency rates.

• Credit quality has strengthened

for every business-size. At an

average of 10.2 percent.

• The total share of delinquent

dollars is 2.4 percentage points

lower than it was a year ago.




4

Behind the numbers

Small-business credit quality was

supported in Q2 by an acceleration

in personal income growth and retail

sales, along with steady employment

gains. These factors contributed to a

year-over-year decline in delinquent

balances owed by firms with fewer than

100 workers. The Experian/Moody’s

Analytics Small Business Credit Index

added 2.8 points to settle at 111.7 from

108.9 in Q1 2013 (previously 109.0 in Q4

2012). This is the index’s highest reading

since its inception.

Consumer confidence has firmed

considerably in recent months by

nearly every measure. In particular,

buyers seem significantly more upbeat

about their current financial situation.

This is due in no small part to rising

home values and, to a lesser extent,

rising stock prices, which are helping

homeowners feel wealthier. Further,

inflation has been subdued, easing

some of the pressure on budgets that

have been strained by slow average

earnings growth since the recovery

began. Consumers also may be feeling

better about less debt overhang.

Households deleveraged aggressively

after the Great Recession, freeing up

cash. According to the Federal Reserve

System, the household financial

obligations ratio is at a near 30-year low

(see Chart 1).

Improving sentiment has backstoppeda severe retrenchment in consumer

spending — a principal reason why

small-business credit quality has

improved. Yet consumers remain

cautious about opening their wallets,

and a breakout spending spree isn’t

likely anytime soon. First, inflation-

adjusted average earnings have

essentially gone nowhere since the

recovery began. Second, the financial

wounds of the Great Recession arestill fresh in shoppers’ minds, and

shoppers aren’t likely to jump back into

debt to fund discretionary purchases.

Consequently, any acceleration in

consumer spending isn’t likely until

debt-averse households make more

money on the job.

That being said, the labor market still

has a substantial amount of slack

left in it, tilting bargaining power

toward employers. Average earnings

are unlikely to rise much before an

oversupply of qualified workers is

scooped up, thereby forcing companies

to compete more fiercely to acquire

and retain talented employees. All

told, the Moody’s Analytics forecast

anticipates full employment to be

reached in 2017, meaning consumer

spending growth is unlikely to reach

prerecession norms until well into 2014

at the earliest. Small firms will continue

to make do amid razor-thin margins as

revenues grow only slowly over the next

several quarters.

Recent performance

Small firms have steadily worked

down their delinquent balances over

the past year. Balance volumes in

every delinquency bucket receded

measurably from a year earlier, bringing

down their corresponding delinquency

rates. Further, credit quality has

strengthened for every business-size

class (see Chart 2). At 10.2 percent, the

total share of delinquent dollars is 2.4

percentage points lower than it was a

year ago and is the lowest it has been

since data began being tracked.

Small-business employment data

furnished by payroll processor ADP

points to a slightly faster pace of hiring

by firms with fewer than 50 workers (th

next-largest employee-size class in the

report is 50 to 499, leaving uncertain the

pace of job growth among firms with

50 to 99 workers). The housing recovery

is playing a role in this. Construction

firms are adding to payrolls more brisk

as home sales gather pace amid tight

inventories, and an almost identical

trajectory for job growth is emerging

among the nation’s realtors. Nearly

every realtor and construction compan

in the United States employs fewer tha

100 workers. Despite adding to payrolls

small firms are keeping a lid on labor

costs by adjusting average worker hou

and compensation, keeping ample cas

free to pay down delinquent debt.

Easier access to bank loans also

supported small-business credit quality

in Q2. According to the Senior Loan

Officer Opinion Survey, the credit spigo

finally is beginning to reopen for small

companies. The improved credit quality

of small companies is one factor leadin

banks to approve more small-business

loans. This trend is apparent in the

small-business credit data; most states

had an increase in the number of lines

of credit extended to small businesses

over the past year (see Chart 3). Beside

helping small-business managers and

owners to stay on top of debt payments

ample credit is an important factor in

safeguarding jobs at small companies,

since many rely on short-term loans to

cover payroll expenses during dry spell

in sales.




Chart 3: Account Growth Concentrated in West

0.0% to 4.0%

-16.5% to -0.1%

4.0% to 29.6%

# of trade accounts, % change year ago, 2013 Q2

U.S.=-0.4%

Sources: Experian, Moody’s Analytics

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

19.0

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Chart 1: Households Shell Out Less to Pay Debts

Household financial obligations ratio, % of disposable income

Sources: Federal Reserve, Moody’s Analytics


-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

11 12 13

0-19 employees

20-49 employees

50-99 employees

Chart 2: Stronger Credit Across Firm Sizes

Change in delinquency rate from a year ago (percentage points)





6

Clear regional leaders (andlaggards) emerge

Regional differences in the recovery

are becoming more pronounced, with

the West and the South widening

their leads over the Northeast and

the Midwest (see Chart 4). Much of the

recent pattern arises from the vibrant

housing markets and construction

industries in the South and the West,

where construction employment is rising

rapidly with an increase in residential

and nonresidential construction. While

residential construction is up nearly

everywhere across the country, in the

South and the West the growth of

manufacturing is spurring a broader

construction cycle that also includes

the expansion of industrial and logistics

facilities. Construction is adding to

job creation in each of the four broad

regions of the country but at a slower

pace in the Northeast and the Midwest.

Rising house prices add to the impact on

the housing market through the wealth

effect for homeowners. This effect isparticularly notable in the West and the

Southwest. Through May, single-family

house prices have risen over the year by

20 percent on average across all states

in the West. Other regions have not been

left behind, but price appreciation is in

the low- to mid-single digits.

Earnings in the West have risen from

well below average to the highest

among the four regions over the courseof about four years. This reflects growth

in the region’s high-value industries

and the contribution they make to

income and spending. This also is

one factor that has helped to drive

demand for housing in the West. It also

has lured new residents to the region,

lifting demand for services and directly

benefiting small companies. Hence,

delinquency rates are significantly

lower than the national average for

small companies in Idaho, Wyoming,Arizona and Utah (see Chart 5). Large

Western cities, including Phoenix, Ariz.;

Houston, Texas; San Francisco, Calif.; Las

Vegas, Nev.; San Diego, Calif.; and Salt

Lake City, Utah, are all in the top 10th

percentile among metro areas for small-

business credit quality.

Manufacturing slowed further during

this year’s first half, particularly in the

Midwest and the Northeast. Inventories

were contained, and caution was the

norm as uncertainty arose in export

markets. The weakness spilled over

into services, and the corresponding

hit to job and income growth has

capped consumer spending, making it

especially difficult for small companies

to work down delinquent debt. With

the exception of those in New York,

Connecticut, New Hampshire and

Maine, small businesses in every state

along the Atlantic Seaboard have a

significantly higher delinquency rate

than that elsewhere in the country.

Illinois is the only landlocked state

to join these ranks, made lower by

Chicago’s tenuous recovery.

The share of delinquent dollars is

highest in Florida, which has been the

norm since data was tracked. Every

one of the state’s major metro areas

suffered a larger than average house

price correction in the wake of the real-

estate bust. In terms of housing market

performance, Miami, Orlando, West Palm

Beach and Fort Lauderdale are all in the

bottom 10 percent of U.S. metros.

Miami’s small businesses have the

highest delinquency rate of any U.S.

metro area, with 45 percent of balances

being paid beyond contracted terms. In

terms of small-business delinquencyrates, five other Florida metros are

included in the 20 worst-performing

cities in America — including Orlando,

the state’s third-largest metro area by

population. Not surprisingly, perhaps,

construction is faring particularly poorly

across the state. Of the five U.S. metro

areas with the highest delinquency

rates among small construction firms,

four of them are in Florida: Fort Myers,

Naples, Punta Gorda and Tallahassee.Construction firms in these cities also a

among the furthest behind on making

payments — between three weeks and

month overdue on average.

Illinois has been subject to the same

perils as Florida, with the housing

collapse striking Chicago especially

hard. This is nothing new; both states

have been among the worst performers

in the country for more than a year. The

small-business delinquency rates in

both states have fallen quickly over the

past year, though not necessarily for

the right reasons. Florida and Illinois

were the only two states to experience a

sudden downshift in the number of cred

accounts over the past year, suggesting

lenders may have charged off accounts

that were severely past-due.




Chart 5: Eastern Businesses Paying Late

4.7% to 15.7%

15.8% to 25.3%

1.2% to 4.6% U.S.= 10.2%


Small-business delinquency rate, 2013 Q2

Chart 4: A Clearer Pattern Emerges

11 12 13

Sources: BLS, Moody’s Analytics

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

NortheastMidwest

South

West

Payroll employment, % change year ago, 3-months moving average




Looking ahead

The second half of 2013 will not be

as bad as initially feared, but small-

business credit improvement will be

slow nonetheless. There is a good

chance that manufacturing will regain

some momentum in this year’s second

half. The Manufacturers’ Alliance/MAPI

survey showed strengthening in Q2, with

current conditions and forward-looking

investment components improving.

Orders, shipments and backlogs of core

capital goods, less aircraft, also are

rising. The Midwest, the South and the

West all should benefit if such a trend

plays out through the year. This will keep

a floor underneath consumer spending,

but shoppers are unlikely to go on any

large-scale shopping sprees until real

average earnings growth accelerates.

Expect this to happen by mid- to late

2014, as the healing job market feeds

back to increased consumer spending,

which in turn leads firms to keep hiring.

Housing will buoy all regions, especially

the South and the West, well into 2014.

Florida’s metro-area housing markets

are starting to make the long climb

back, which will provide a much-needed

shot in the arm to ailing construction

companies. Outside of Florida, the

positive effects of a housing renaissance

in the South will be a bellwether for

improving small-company balance

sheets and credit quality in other states

along the lower Eastern Seaboard. A

surge of homebuying in the Midwest,where housing is the most affordable,

cannot be ruled out. In May, the region

led all others for home sales, an

especially good sign for real estate in

struggling Illinois.

Given the emerging lead for job creation

in the West and the South, chances are

that the long-awaited reacceleration of

domestic migration into these regions

is occurring. Data for all of 2013 will not

be available for another six months,

but this trend is included in the near-

term forecast assumptions for the

regional economies. This will ensure a

continuance of the trends seen thus far

in the recovery, where small companies

in Western states continue to outperform

their peers in other regions.

With the enforcement date for the

Affordable Care Act, or Obamacare,

pushed back until 2015, small companies

could hire more aggressively in the

near term. Under the act, companies

with more than 50 full-time equivalent

employees must provide affordable

health insurance or face a penalty of

up to $2,000 per uninsured worker.

Originally, the act should have taken

effect in 2014, leading to speculation th

small firms were pumping the brakes

on hiring full-time employees to avoid

penalty assessments. However, nowthat the act isn’t taking effect until 2015

the rise in revenues associated with

the strengthening economic recovery

will better position small companies to

absorb healthcare costs for employees.

This lends some upside risk to the

employment forecast over the next

few quarters.

Given the Moody’s Analytics base line

forecast, the Experian/Moody’s Analytic

Small Business Credit Index should

improve gradually as 2013 winds down

and 2014 begins. Job growth will slow

slightly from its current pace of about

200,000 jobs per month to around

175,000 in the second half of this year as

sequestration begins to make an impac

However, employment gains will pick u

again early next year and will top 200,00

jobs per month by mid-2014, tightening

some slack in the job market and

lifting average wages. As this happens,

consumers will spend more freely and

small companies will enjoy a more

robust recovery.

8



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About the index

Experian joined forces with Moody’s Analytics, a leading independent provider of economic forecasting, to create a business

index and detailed report that provides insight into the health of U.S. businesses. The Experian/Moody’s Analytics Small

Business Credit Index is reported quarterly to show fluctuations in the market and discuss factors that are impacting the

business economy.

About Experian’s Business Information Services

Experian’s Business Information Services is a leader in providing data and predictive insights to organizations, helping themmitigate risk and improve profitability. The company’s business database provides comprehensive, third-party-verified informatio

on 99.9 percent of all U.S. companies. Experian provides market-leading tools that assist clients of all sizes in making real-time

decisions, processing new applications, managing customer relationships and collecting on delinquent accounts. For more

information about Experian’s advanced business-to-business products and services, visit www.experian.com/b2b.

About Moody’s Analytics

Moody’s Analytics, a unit of Moody’s Corporation, helps capital markets and credit risk management professionals worldwide

respond to an evolving marketplace with confidence. The company offers unique tools and best practices for measuring and

managing risk through expertise and experience in credit analysis, economic research and financial risk management. By

offering leading-edge software and advisory services, as well as the proprietary credit research produced by Moody’s Investors

Service, Moody’s Analytics integrates and customizes its offerings to address specific business challenges. Further information

available at www.moodysanalytics.com.

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experian moodys analytics small business credit index q2 2013

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