Q1 2014 Experian / Moody's Analytics Small Business Credit Index

Experian/Moody’s Analytics Small Business Credit Index

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Current quarter (2014 Q1): 110.5

Previous quarter (2013 Q4): 111.2

Q1 2014

Experian/Moody’s Analytics Small Business Credit IndexSmall-business credit conditions backpedal

to start 2014Executive summarySmall-business credit conditions started 2014 on a sour note. The Experian/Moody’s Analytics Small

Business Credit Index fell 0.7 points to 110.5 from a revised 111.2 (previously 117 ) in the third quarter. The

index measures credit quality for firms with fewer than 100 workers.

Credit balances receded slightly from the end of 2013, and the delinquency rate ticked higher to 9.8

percent from 9.6 percent. Also contributing to the loss in the Experian/Moody’s Analytics Small Business

Credit Index was a deceleration in employment gains as well as what appears to be softer gross domestic

product (GDP) growth in the first quarter. Also, retail sales growth decelerated sharply to just 0.3 percent

annualized in the first quarter from 2.9 percent in the final quarter of 2013. However, incoming data

increasingly support the notion that the slowdown was weather-related and, thus, temporary.

The Experian/Moody’s Analytics Small Business Credit Index initially reported increase in the final three

months of 2013 did not withstand the test of time, as revisions revealed a modest 0.3-point loss from the

previous quarter. Though downward adjustments are unwelcome typically, the revisions weren’t a surprise

given our projections of the effect from October’s partial government shutdown. Fiscal drag shaved a

percentage point off of growth in the last quarter of 2013, at least half of which we suspect was from the

shutdown. Fourth quarter retail sales and GDP each were revised lower as more data became available.

The economy is reclaiming some lost ground after an unusually harsh winter put a dent in business

activity. The job market is poised to resume its late-2013 pace of just more than 200,000 new jobs per

month, which will put it on track to absorb more of the pool of unemployed workers. As this happens,

average earnings will rise, supporting discretionary consumer spending and, in turn, small-business

revenues. We expect the Experian/Moody’s Analytics Small Business Credit Index to rise as 2014

progresses, since small companies will be in a stronger position to pay down past-due balances. This will

be true especially for struggling construction companies that already have reaped some of the benefits of

the strengthening housing recovery.

Revisions include adjustments to the economic data as well as a reclassification of firmographic credit data

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Q1 2014


Table of ContentsExecutive summary 2

Experian/Moody’s Analytics Small Business Credit Index 3

Behind the numbers 4

Recent performance 4

Shifting industry patterns 4

Credit quality diverging across states 6

Looking ahead 8

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Small-business credit conditions backpedal to start 2014

Executive summarySmall-business credit conditions started 2014 on a sour note. The Experian/Moody’s Analytics Small Business Credit Index fell 0.7 points to 110.5 from a revised 111.2 (previously 117 ) in the fourth quarter. The index measures credit quality for firms with fewer than 100 workers.

Credit balances receded slightly from the end of 2013, and the delinquency rate ticked higher to 9.8 percent from 9.6 percent. Also contributing to the loss in the Experian/Moody’s Analytics Small Business Credit Index was a deceleration in employment gains as well as what appears to be softer gross domestic product (GDP) growth in the first quarter. Also, retail sales growth decelerated sharply to just 0.3 percent annualized in the first quarter from 2.9 percent in the final quarter of 2013. However, incoming data increasingly support the notion that the slowdown was weather-related and, thus, temporary.

The Experian/Moody’s Analytics Small Business Credit Index initially reported increase in the final three months of 2013 did not withstand the test of time, as revisions revealed a modest 0.3-point loss from the previous quarter. Though downward adjustments are unwelcome typically, the revisions weren’t a surprise given our projections of the effect from October’s partial government shutdown. Fiscal drag shaved a percentage point off of growth in the last quarter of 2013, at least half of which we suspect was from the shutdown. Fourth quarter retail sales and GDP each were revised lower as more data became available.

The economy is reclaiming some lost ground after an unusually harsh winter put a dent in business activity. The job market is poised to resume its late-2013 pace of just more than 200,000 new jobs per month, which will put it on track to absorb more of the pool of unemployed workers. As this happens, average earnings will rise, supporting discretionary consumer spending and, in turn, small-business revenues. We expect the Experian/Moody’s Analytics Small Business Credit Index to rise as 2014 progresses, since small companies will be in a stronger position to pay down past-due balances. This will be true especially for struggling construction companies that already have reaped some of the benefits of the strengthening housing recovery.

Revisions include adjustments to the economic data as well as a reclassification of firmographic credit data2


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Current quarter (2014 Q1): 110.5 Previous quarter (2013 Q4): 111.2


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Behind the numbers

The Experian/Moody’s Analytics Small Business Credit Index was carried lower by a multitude of factors in the first quarter of 2014. After expanding through nearly all of 2012 and 2013, outstanding balances fell 1.2 percent. Additionally, the delinquency rate edged higher to 9.8 percent from 9.6 percent in the fourth quarter, marking its second consecutive quarterly rise (see chart 1). The uptick was the result of delinquency rising in every bucket, though a rise in 60- to 90-day delinquency did the most damage (see chart 2). This implies that the problem paying down balances is a recent one, since any longer-standing issues would have resulted in higher delinquency beyond a two- to three-month window.

Job gains averaged just 162,000 per month in the first quarter as harsh winter weather postponed hiring. This is down from a monthly average of 208,000 in the final three months of last year. Retail sales are tracking at a loss from the fourth quarter, and GDP growth is not likely to clock in much above 2 percent annualized, compared with 2.6 percent in the previous quarter.

The drop in credit balances seems to run counter to the Senior Loan Officer Opinion Survey, which says a majority of banks continued to loosen standards for small-business commercial and industrial loans in the first quarter. However, this conveys only a fraction of what is going on with small-business lending. Financial lines of credit comprise only about 25 percent of the data used in the Experian/Moody’s Analytics Small Business Credit Index. The other three-quarters represents business-to-business credit transactions.

The downdraft in balance volumes could represent a pulling back among larger business-to-business creditors struggling with their own financial problems. For instance, several leading big-box retailers announced store closures in order to trim costs. It also may be that small businesses are reticent to take on more debt, given what appears to have been a hard winter for many. The truth likely rests somewhere in between. Demand for credit among small companies should firm up as the economy returns to normal over the next several months, and assuming banks continue to loosen standards on commercial and industrial loans for small customers, balance growth will resume this year.

Recent performance

October’s government shutdown was followed by a long, cold and snowy winter that put pressure on small firms’ finances. Federally backed loans through the U.S. Small Business Administration were hit hard by the agency’s closure during the shutdown. Balances came back quickly once the government reopened only to be met with a drop in consumer activity in December that lingered into February. As noted, this may have caused a drop in balance growth as businesses held off on making credit-based purchases until they could assess better whether the blip in the economy was transient and weather-related or a more fundamental shift towards weakness.

These trends also are apparent in other small-business metrics. According to the Small Business Survey conducted by the National Federation of Independent Businesses (NFIB), small-business

confidence perked up in March after retreating the month before, lifted by more optimism over future sales. Still, the overall story is mixed, with a majority of respondents signaling they feel the recovery will lose traction during that time, and most project tight credit conditions over the next few months. Moreover, small companies currently are struggling to capture more sales, which apparently has been a problem since the recovery began nearly five years ago.

Many of the findings in the NFIB survey are echoed in the monthly employment and revenue indexes produced by payroll processor Intuit. Revenues for firms with fewer than 20 workers declined for the six months ended February, and employment gains have ground to a halt. Yet the Intuit data show a rise in worker compensation and hours in March, which also is shown in the NFIB survey (see charts 3 & 4 ). This could be a first indication that labor demand is firming and may be a positive leading indicator for employment heading into the summer. Though the NFIB survey includes firms with as many as 499 workers, businesses with fewer than 20 workers account for the vast majority, making the Intuit indexes a decent proxy.

Shifting industry patterns

Until recently, construction had the worst track record among industries for delinquency. Fortunately, construction spending is on the rise, enabling builder firms to pay down some of their past-due debt. Residential projects are leading the charge for private spending on new structures, which is a testament to the growing strength of the housing recovery. Also, the public sector has


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All private workers Firms with greater than 20 workers

Chart 3: Labor Income Slowly Comes Back…Labor income proxy, percentage change a year ago

Sources: Intuit, BLS, Moody’s Analytics

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-4

-2

0

2

4

6

8

08 09 10 11 12 13 14

Actually raised comp Are planning to raise comp

Chart 4: …And Looks Likely to Rise FurtherNet percentage of small firms who…, 3 months moving average

Sources: NFIB Small Business Survey, Moody’s Analytics

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0

5

10

15

20

25

30

06 07 08 09 10 11 12 13 14

9.2

9.4

9.6

9.8

10.0

10.2

10.4

10.6

-0.50.00.51.01.52.02.53.03.5

13Q1 13Q2 13Q3 13Q4 14Q1

Chart 1: Credit Index Flanked on Both Sides

Sources: Experian, Moody’s Analytics

Firms with greater then 100 workers

Out

stan

ding

cre

dit,

%

chan

ge y

ear a

go

Del

inqu

ency

rate

%

Outstanding credit, % change year ago Delinquency rate % -1.0

-0.5

0.0

0.5

1.0

10 11 12 13 14


99+ days 90-day

60-day 30-day Total

Chart 2: 60-Day Delinquency Edges HigherPPT contribution to change in delinquency rate


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been less of a drag and will contribute more meaningfully, especially now that state and local fiscal situations have improved (see chart 5 ).

The delinquency rate for small construction companies eased to 15.6 percent from 15.8 percent in the previous quarter, and rests at 7.7 percentage points below its 2010 Q4 peak (see chart 6). Construction companies, nearly all of which employ fewer than 100 workers, will benefit as new orders for homes translate into revenue gains. This already has been the case, according to Intuit, which shows revenues for the nation’s smallest builder firms steadily on the rise despite falling revenues in most other industries. This trend is almost certain to stick, which will mean continued credit-quality improvement within the industry.

The delinquency rate for transportation companies jumped 2.8 percentage points to 18.1 percent in the first quarter, fueled entirely by a rise in 30- to 60-day delinquencies and enough for the industry to achieve the dubious distinction of the highest delinquency rate among supersectors (see chart 6). This seems to be weather-related, as winter storms made it difficult to ship items. For instance, exceptional cold in the northern Midwest threw a wrench into operations at oil and natural gas fields across the country by making it nearly impossible to mine sand in northern Wisconsin used in petroleum extraction. Revenues were hurt at least in part by the absence of sand shipments to the nation’s shale formations, and transportation companies likely suffered further as oil and natural gas shipments were

delayed. Housing activity also slowed, dampening lumber, fabricated metals, appliance and furniture shipments.

While still relatively low, the share of delinquent dollars in agriculture rose 1.1 percentage points in the first quarter to 8.7 percent (see chart 6). Personal income took a hit in the upper Midwest and other agriculture-heavy regions in the fourth quarter (see chart 7). The deceleration in income growth was caused in large part by falling grain prices, which crimped farmers’ incomes and is a likely reason why delinquency is trekking higher. Grain prices received by farmers tumbled 16 percent in the fourth quarter following a 10 percent drop the quarter before. Grain prices have recouped some of their losses since then but remain lower than where they were in early 2013.

Falling grain prices have put Midwest land-buyers on notice. Farmland prices appear most inflated in Iowa and Illinois, where sharply rising grain prices fueled speculative buying (see chart 8). Together, these two states account for a quarter of the Midwest’s agricultural output, and although farmland values have not fallen yet, the pace of gains slowed dramatically in the fourth quarter, and a correction may be in store. A bumper corn crop lowered prices considerably late last year, reducing the incentive to expand. A drop in land prices would crimp lending by agricultural banks, in turn leading credit conditions to deteriorate further for ag-related industries.

Credit quality diverging across states

The gap between the nation’s best and worst performing states is widening. Many states that already boasted solid

small-business credit quality are moving up the ranks, whereas those states where delinquency persistently has been high haven’t been able to improve their relative standing significantly (see chart 9).

Since data tracking began in early 2010, Florida has been among the worst performers. The housing collapse decimated the local construction industry, and the Great Recession choked off population growth as seniors across the United States held off on retirement. The share of balances being paid late by small companies in Florida is stuck at 25.6 percent, up 0.8 percentage point from the final quarter of 2013. Eleven of Florida’s 22 metro areas, including Miami, Tallahassee, and Orlando, are in the bottom 10 percent of U.S. metros in terms of credit performance, and it is construction that is hurting overall credit the most.

Fortunately, the economies of many Florida metro areas are showing some signs of life. Population growth is picking back up, and the corresponding household formation should allow construction companies finally to get some relief. Also, retirees are an important source of revenue for Florida businesses, so other industries will benefit as demographic trends normalize.

Illinois, which also had a long stretch at the bottom in 2012 and 2013, is making its way to greener pastures. The improving fortunes of Chicago’s economy are helping to improve the state’s relative standing. At 20 percent in the first quarter, the share of delinquent balances still holds Illinois in the bottom quintile of states, but the delinquency


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Private Public Total

Chart 5: Private Construction Lifts SpendingConstruction spending, percentage change a year ago, 3 months moving average

Sources: Census Bureau, Moody’s Analytics

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-20

-15

-10

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09 10 11 12 13 14

Chart 6: Construction Makes Some Headway


Delinquency rate by industry, percentage of $ volume

6 8 10 12 14 16 18

Other

Finance

Agriculture

Services

Trade

Manufacturing

Construction

Administration

Transportation

Chart 7: Farmers Hard Hit by Falling Grain PricesPercentage change in personal income, 2013Q4

Sources: BEA, Moody’s Analytics

0.27 to 0.66 0.67 to 1.18

-0.59 to 0.26

Chart 8: Farmland Price Correction May Be a Threat

Sources: USDA, Moody’s Analytics

Price per acre of farmland, $ thousands, Aug 2013

1 2 3 4 5 6 7 8 9

N. DakotaS. Dakota

KansasNebraskaMissouri

WisconsinMinnesotaMichigan

OhioIndianaIllinois

Iowa

Chart 9: Stronger Credit Profiles in the WestDelinquency rate, percentage of $ volume


6.5% to 20.9% 21.0% to 32.2%0.8% to 6.4%

U.S.= 9.8%


rate has improved by nearly 7 percentage points over the past year. Like Florida, a return to more normal patterns in the housing market is giving construction firms the wherewithal to pay down delinquent debt. In the first three months of 2014, 37 percent of all balances owed by construction companies in Chicago were past due. While still very high, this represents a 10 percentage point improvement from a year ago.

By contrast, Utah has held the top spot among states in every quarter since the end of 2009. The share of balances past due has not exceeded 2 percent since data tracking began, which is by far the strongest record of any state. Utah is joined in the top ranks by many of its Mountain West neighbors, including Colorado, Wyoming and Idaho. The Mountain West has enjoyed strong population growth and job gains in lucrative fields, including high tech, which have put small companies at an advantage as consumers spend more.

The widening performance gap among states doesn’t immediately sound alarms. The emerging signs of strength appearing in some of the worst performing states mean small companies in the East should begin to make headway relative to their western counterparts this year and next.

Looking ahead

The small-business recovery will accelerate along with the consumer recovery this year. In terms of the more persistent problem of weak consumer spending growth amid weak earnings, the job market again is trending near its late-2013 pace of 200,000 net monthly job growth as economic activity returns to normal. This will help to absorb the still-broad pool of unemployed workers looking for work. As the labor market tightens, employers will be forced to raise compensation in order to attract and retain workers. Once this happens, discretionary consumer spending

growth should pick back up, which will provide one of the most crucial ingredients missing thus far in the small-business recovery.

Moreover, the delay of the employer mandate portion of the Affordable Care Act that requires businesses with more than 50 workers to provide affordable health coverage to their employees takes some of the uncertainty out of the near-term outlook. Assuming the Moody’s Analytics forecast is realized in 2014 and 2015, small businesses affected by the healthcare law will be positioned better to absorb any added costs once the mandate takes effect in 2016. This also is true if a push to raise the federal minimum wage to $10.10 over the next several years gains more traction and eventually is adopted.

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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 them mitigate risk and improve profitability. The company’s business database provides comprehensive, third-party-verified information 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 is available at www.moodysanalytics.com.

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Economy & Finance

Q1 2014 Experian / Moody's Analytics Small Business Credit Index