q4 2013 experian/moody's analytics small business credit index

Experian/Moody’s Analytics Small Business Credit Index

3

Current quarter (2013 Q4): 116.9

Previous quarter (2013 Q3): 115.8

Experian/Moody’s Analytics Small Business Credit IndexSmall-business credit conditions improve for fourth

consecutive quarter as index rises to highest levelExecutive summarySmall-business credit conditions improved for the fourth consecutive quarter in the final three months of

2013. The Experian/Moody’s Analytics Small Business Credit Index advanced 1.1 points to 116.9 from a

revised 115.8 (previously 118.5*) in the third quarter. The fourth quarter reading is the highest since data

tracking for the index began and is a solid indication that small businesses are finally reaping some of the

benefits of the nearly five-year-old U.S. recovery.The index measures credit quality for firms with fewer than 100 workers, and notwithstanding a couple of

modest declines along the way, the trend has been decidedly positive for the past two years. The fourth

quarter rise was supported most directly by credit balance growth in the latter half of 2013. However,

improvement was tempered last quarter by a slight rise in the delinquency rate, which crept higher to 10.2%

from 10.1% in the previous quarter.As expected, October’s federal government shutdown had little impact on credit balance growth. According

to the U.S. Small Business Administration, federally-backed small-business loan volumes were 25% below

year-ago levels as October ended, but closed the year just 4% lower. The small-business credit spigot

appears to be opening back up at private lenders as well, according to the Federal Reserve’s quarterly

Senior Loan Officer Survey. A bipartisan deal to fund the government through fiscal 2014 removes a great deal of uncertainty in the

near term, and risks to the outlook appear less threatening. Assuming Congress passes a resolution to

raise the debt ceiling before March, two of the most prominent policy hurdles facing small firms will have

been removed. Still, the failure by Congress to extend emergency unemployment benefits will likely hurt

consumer spending growth early in the year. Later in the year, rising costs associated with the Affordable

Care Act could be a setback for credit improvement at companies with more than 50 workers as they begin

to put mandated employee health policies in place. However, assuming the recovery plays out to script,

accelerating economic growth should make it easier for these firms to absorb the added costs.

*Recalibration of the index led to the larger-than-average revision.

2

Q4 2013Q4 2013


Table of ContentsExecutive summary 2

Experian/Moody’s Analytics Small Business Credit Index 3

Behind the numbers 4

Recent performance 4

Few industries improve 4

Eastern companies continue to pay late 6

Looking ahead 6

1


Small-business credit conditions improve for fourth consecutive quarter as index rises to highest level

Executive summarySmall-business credit conditions improved for the fourth consecutive quarter in the final three months of 2013. The Experian/Moody’s Analytics Small Business Credit Index advanced 1.2 points to 117 from a revised 115.8 (previously 118.5*) in the third quarter. The fourth quarter reading is the highest since data tracking for the index began and is a solid indication that small businesses are finally reaping some of the benefits of the nearly five-year-old U.S. recovery.

The index measures credit quality for firms with fewer than 100 workers, and notwithstanding a couple of modest declines along the way, the trend has been decidedly positive for the past two years. The fourth quarter rise was supported most directly by credit balance growth in the latter half of 2013. However, improvement was tempered last quarter by a slight rise in the delinquency rate, which crept higher to 10.2 percent from 10.1 percent in the previous quarter.

As expected, October’s federal government shutdown had little impact on credit balance growth. According to the U.S. Small Business Administration, federally backed small-business loan volumes were 25 percent below year-ago levels as October ended, but closed the year just 4 percent lower. The small-business credit spigot appears to be opening back up at private lenders as well, according to the Federal Reserve’s quarterly Senior Loan Officer Survey.

A bipartisan deal to fund the government through fiscal 2014 removes a great deal of financial uncertainty in the near term, and risks to the outlook of the U.S. economy appear less threatening. Assuming Congress passes a resolution to raise the debt ceiling before March, two of the most prominent policy hurdles facing small firms will have been removed. Still, the failure by Congress to extend emergency unemployment benefits likely will hurt consumer spending growth early in the year. Later in the year, rising costs associated with the Affordable Care Act could be a setback for credit improvement at companies with more than 50 workers as they begin to put mandated employee health policies in place. However, assuming the recovery plays out to script, accelerating economic growth should make it easier for these firms to absorb the added costs.

*Recalibration of the index led to the larger-than-average revision.2


3

Current quarter (2013 Q4): 117.0 Previous quarter (2013 Q3): 115.8


4

Behind the numbers

Expanding credit balances in the second half of 2013 contributed most meaningfully to the 1.2-point rise in the Experian/Moody’s Analytics Small Business Credit Index in the fourth quarter. Acceleration in job gains also lifted the index. Even with December’s dismal jobs report, the economy added an average of 194,000 new payroll jobs each month, on net, compared to 160,000 in the third quarter. Moreover, retail sales expanded by 4.2 percent on an annualized basis in the fourth quarter, and Gross Domestic Product growth clocked in at 3.2 percent.

The rise in credit balances is in line with responses from the Federal Reserve’s Senior Loan Officer Opinion Survey, which indicates a majority of banks consistently have loosened credit terms for small businesses for the past three years. 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 Small Business Credit Index. The other three-quarters represent business-to-business credit transactions. It may be that nonfinancial lenders are following in the footsteps of banks and opening more accounts as they seek out revenues.

Recent performance

The positive crosscurrents surrounding the Small Business Credit Index have for the most part overpowered the negative, though the delinquency rate has failed to improve much since early 2013. The share of delinquent dollars retreated from 11.2 percent to a recovery low of 10.1 percent in the second quarter,

well below the 12.9 percent peak in the third quarter of 2011. However, the rate remained at 10.1 percent in the third quarter and notched 0.1 of a percentage point higher to 10.2 percent in the fourth quarter (see chart 1). The uptick was solely the result of a rise in 30-day to 60-day delinquent balances.

Credit quality in the 30-day to 60-day delinquency bucket was expected to deteriorate slightly given the temporary hit to business orders stemming from the government shutdown and a drop in personal income because of federal worker furloughs. Yet only a third of the rise in 30-day past due balances is attributable to accounts formerly current becoming delinquent. The other two-thirds stems from declines in slower paying delinquency buckets (see chart 2). In light of this, the rise in 30-day balances is not altogether a bad thing, since it implies a greater number of severely delinquent businesses are paying down their debts faster.

Aside from the shutdown, consumer spending continues to elude small businesses. Data provided by payroll processor Intuit show small-business revenues on the decline from August through November. This is echoed by the monthly Small Business Optimism Survey conducted by the National Federation of Independent Businesses that indicates a decrease in sales volumes for a majority of its respondents.

Despite the modest setback last quarter, small companies have avoided falling even further behind on payments by keeping their labor costs in check; the Intuit Small Business Employment Index is rising more slowly on a year-ago

basis, and average worker hours and compensation both rest below year-ago levels (see chart 3). Though the Intuit index only measures firms with fewer than 20 workers, businesses in this size class account for more than 90 percent of all companies with fewer than 100 workers, making it a decent proxy for trends for firms in our sample set.

Few industries improve

Credit quality either deteriorated or remained unchanged for small companies in nearly every industry in the fourth quarter. In fact, services and finance were the only two industries where the delinquency rate receded (see chart 4).

Balance sheets at small banks are being supported by a return to lending, fueled by a greater appetite for loans among companies and consumers, particularly people looking to buy a home. According to the Institute for Supply Management (ISM) nonmanufacturing survey, service-providing businesses have benefited from solid expansion in new orders, giving them the wherewithal to whittle away their overdue debt. Orders stumbled in December, but anecdotes in the survey cited weather as a culprit in the unexpected drop, meaning the lull should prove temporary.

Farmers fell behind on payments as falling grain and livestock prices coincided with employment gains in the second half of 2013. Paradoxically, it may have been the addition of staff that caused the drop in prices, since price weakness was attributed to a strong harvest. The strengthening global economy will lift oil prices in 2014, increasing input prices for farmers


5

9.5

10.0

10.5

11.0

11.5

12.0

12.5

13.0

-10

-5

0

5

10

15

11 12 13

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 1.5

Finance

Services

Transportation

Trade

Manufacturing

Construction

Other

Agriculture

Chart 4: Most Industries Lose Some GroundPPT change in delinquency rate by industry from Q3 to Q4

Sources: Experian, Moody’s Analytics

(no change)

Chart 1: Credit Conditions Mixed in Q4


Chart 3: Keeping a Close Eye on Labor CostsSmall-business employment, % change yr ago, <20 workers

Sources: Intuit Small Business Employment Index, Moody’s Analytics

Employment Average hours worked Average compensation

-2

-1

0

1

2

3

4

5

-0.6

-0.3

0.0

0.3

0.6

0.9

1.2

1.5

11 12 13

Empl

oym

ent

Avg

hou

rs w

orke

d / A

vg C

ompe

nsat

ion

Chart 2: Rise in Delinquency Confined to 30-Day


PPT contribution to change in delinquency rate

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

10 11 12 13

99+ days 90-day

60-day 30-day Total


6

this year. As such, their credit quality will hinge on whether they are able to pass rising costs onto customers, which is unlikely until later in the year once average earnings growth picks up. The U.S. Department of Agriculture also plans to destroy much of the crop oversupply, supporting grain prices.

Small manufacturers and construction companies also backpedaled on recent credit improvements. This likely is due at least in part to the government shutdown, which disrupted federal production and building contract originations and payments in October. Construction, not surprisingly, has the worst track record among industries for delinquency, making the minor setback last quarter particularly painful (see chart 5).

Eastern companies continue to pay late

Throughout the recovery, companies in the eastern half of the U.S. have paid later than their western peers, and the past quarter was no different. Credit profiles are especially strong in the Mountain West, whereas the Eastern Seaboard remains a regional laggard (see chart 6).

Small companies in Utah boast the strongest credit profiles in the nation, with just a tiny 1.1 percent of all balances in the state being paid beyond contracted terms in the fourth quarter. Not far behind was Wyoming, with a 3.6 percent delinquency rate. Arizona rounded out the top three, with 4.2 percent of balances being paid late.

Utah has consistently been the top performer in the country. In fact, the delinquency rate there peaked at just 2.6 percent in the final quarter of 2010

before declining steadily. For context, the national rate rose to 12.9 percent before receding, and delinquency in poorly performing Florida peaked at nearly 40 percent in the early part of the recovery.

Wyoming has benefited greatly from oil and natural gas drilling, particularly in the highly productive Niobrara Shale formation in the southeastern part of the state. Job growth in lucrative white-collar industries, including high-tech and professional, technical, and scientific services, has supported the economies in Salt Lake City, Utah, and Provo, Utah. Real estate is recovering in Phoenix, Ariz., after being decimated in the housing bust, and this is lifting payrolls at real estate, rental and leasing companies.

In each of these places, the composition of job growth is supporting consumer spending as bigger paychecks pad household finances. Consequently, small businesses there are finding it easier to stay current on their debt payments. The delinquency rate is just 0.8 percent in both Salt Lake City and Provo; the rate is just 1.2 percent in Flagstaff, Ariz., 2.5 percent in Tucson, Ariz., and 3.7 percent in Phoenix.

Also contributing to the low delinquency rates in these cities is a churn within the small business communities where a relatively higher share of companies are declaring bankruptcy and thereby clearing the path for stronger performers.

By contrast, many eastern states and cities continue to carry high delinquency rates coupled with low bankruptcy rates. This is and has been particularly true in Florida, where five of the state’s metro areas are among the worst 25 performers nationally, including Miami and Orlando.

In Miami, 30.6 percent of all balances are being paid late, and 26.9 percent of balances are past due in Orlando. Orlando’s delinquency rate has fallen an impressive 8.4 percentage points over the past year, though Miami’s rose 1.4 percentage points during that time.

Florida’s housing market was especially hit hard by the mortgage meltdown, and home values were cut in half from 2007 to 2011. The number of foreclosed properties per 1,000 households peaked at four times the national average. A slowing in population growth complicated matters as would-be retirees waited out the recession.

In Miami, an alarming 38.8 percent of construction firms’ balances are being paid beyond contracted terms, and this value barely has improved over the past year. Builder firms are paying balances back an average of 20 days beyond terms there. The situation is even worse in Orlando where 39.4 percent of balances are being paid an average of 24 days late by construction companies. Similar to Miami, builder firms in Orlando have not shown much improvement from a year earlier.

Given these trends, an uptick in bankruptcies seems probable for many companies as nonperforming firms are flushed out not just in Florida, but in other high-delinquency states, including Washington, D.C., Illinois and Pennsylvania.

Looking ahead

The U.S. economy finally appears ready for liftoff. December’s terrible jobs report was most likely affected by weather, and odds favor a quick return to job growth of more than 200,000


7

Chart 6: More of the Same Across RegionsDelinquency rate, % of $ volume

U.S.= 10.2%


4.4% to 16.1%16.2% to 26.4%

1.1% to 4.4%

Chart 5: Builders Still Face High Delinquency


Delinquency rate by industry, % of $ volume

5 8 11 14 17 20

Other

Finance

Agriculture

Services

Manufacturing

Trade

Transportation

Construction


per month. The ISM manufacturing survey suggests 2014 could start off well for factories. Corporations are flush with cash, and the global economy is showing signs of life.

Key to Moody’s Analytics’ optimistic outlook is the expected acceleration in the housing recovery. Housing starts have trended higher since last year, and construction companies are finally adding staff after years of layoffs. The additional jobs will drive employment growth to more than 2.5 million jobs in 2014, and payroll expansion will top $3 million in 2015. Rising house prices will spur consumer spending as households feel wealthier. Rising property values will also replenish local government tax revenues, allowing them to restore services and jobs. Additionally, vehicle sales will benefit as contactors replace worn-out vans and trucks.

The acceleration in economic activity will provide a much-needed windfall to small companies in every industry, particularly builders, as revenues bounce back. In light of this, small-business credit conditions are expected to improve throughout 2014 and 2015. Small companies will get a leg up on their debt payments as sales grow, and lenders will extend more credit so they too can broaden their revenue pool.

The outlook is not free of risks. In particular, it will be crucial how well small businesses adapt to the Affordable Care Act, or Obamacare. The law states that companies with more than 50 workers must provide affordable, approved health insurance plans to their workers by January 2015.

Many believe that the costs will be too much for small companies to bear. However, the net effect from the law may be far less malignant than many people fear. A study conducted by the Kaiser Family Foundation concluded that the share of affected firms is quite small — only about 0.5 percent of all firms with more than 50 workers. It is also encouraging that a healthier recovery will lift revenues, allowing companies to absorb the costs associated with providing approved health coverage to their employees more easily.

8

CONTACT EXPERIAN BUSINESS INFORMATION SERVICES

T: 1 877 565 8153W: experian.com/b2b

© 2014 Experian Information Solutions, Inc. All rights reserved

CONTACT MOODY’S ANALYTICS

T: 1 866 275 3266E: [email protected]: moodysanalytics.com

© Copyright 2014 Moody’s Analytics, Inc. All Rights Reserved.

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.

Copyright Notices and Legal Disclaimers

© 2014 Moody’s Analytics, Inc. and Experian Information Solutions, Inc. and/or their respective licensors and affiliates (collectively, the “Providers”). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT THE PROVIDERS’ PRIOR WRITTEN CONSENT. All information contained herein is obtained by the Providers from sources believed to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall the Providers, or their sources, have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of Providers or any of their directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if the Providers are advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY THE PROVIDERS IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding, or selling.