Q3 2014

Experian/Moodys Analytics Small Business Credit Index

Experian/Moodys Analytics Small Business Credit Index

Table of Contents
Executive summary

Experian/Moodys Analytics Small Business Credit Index

Behind the numbers

Recent performance

Construction industry in flux

Growing concerns about agriculture

Looking ahead

Experian/Moodys Analytics Small Business Credit Index

Small Business Credit Index reaches all-time

high in 2014 Q3
Executive summary
The Experian/Moodys Analytics Small Business Credit Index (SBCI) gained 2 points to reach 114.8 from
a revised 112.8 in the second quarter (previously reported as 112.2). The index measures credit conditions
for firms with fewer than 100 workers, and last quarters move puts it at an all-time high. This is the second
consecutive quarterly gain for the index after harsh winter weather pushed it lower in the first three months
of this year and provides compelling evidence that the small-business landscape continues to improve.
Credit balances and the number of trades each expanded in the third quarter, contributing to the rise
in the SBCI. This was accompanied by a decline in the delinquency rate to a cyclical low of 8.8 percent.
Additionally, job growth continued at a brisk clip last quarter, further supporting the topline index value.
The threat of a global economic slowdown has intensified in recent weeks, leading to gyrations in financial
markets. A weaker German economy is raising some alarms, and a triple-dip European recession could
hurt small companies, particularly in the northeastern part of the country. Further, households may go back
on the defensive if financial markets lose too much ground, eroding at least some of the gains in consumer
confidence over the past couple of months. This could be amplified by fears of a potential Ebola outbreak.
Consumer sentiment has been a bit tougher to gauge over the past couple of months. Despite falling
more than anticipated in September, the Conference Board consumer confidence index is still near sevenyear highs reached earlier in the year. The University of Michigan Consumer Sentiment Index logged its
strongest reading since July 2007 in October as shoppers indicated brighter views of the economic outlook.
Additionally, assessments of current household finances are trending at recovery highs amid stronger
hiring and lower unemployment, gasoline prices and borrowing costs. At least some of this additional
expendable cash could make its way to small businesses, meaning additional short-term improvements
are likely.
However, higher-frequency measures such as the Rasmussen Consumer Index and the Bloomberg
Consumer Comfort Index sank quickly in recent weeks and are struggling to reclaim lost ground, calling
into question the strength in the University of Michigan and Conference Board measures.
However, the positives still seem to outweigh the negatives. Moodys Analytics expects Gross Domestic
Product (GDP) growth to remain north of 3 percent through 2015, and the United States should be back
to full employment by the end of 2016. Average earnings will rise as the labor market tightens. This will go
a long way in boosting consumer sentiment and spending, which will ultimately support small-business
balance sheets.

Experian/Moodys Analytics Small Business Credit Index

116
114
112
110
108
106
104
102
100

Current quarter (2014 Q3): 114.8

2014Q3

2014Q2

2014Q1

2013Q4

2013Q3

2013Q2

2013Q1

2012Q4

2012Q3

2012Q2

2012Q1

2011Q4

2011Q3

2011Q2

2011Q1

2010Q4

2010Q3

2010Q2

2010Q1

98

Previous quarter (2012 Q4): 112.8

Experian/Moodys Analytics Small Business Credit Index

Behind the numbers
Several key factors lifted the Experian/
Moodys Analytics Small Business Credit
Index in the third quarter. Outstanding
credit balances grew by 4.9 percent
annualized and are up 1.9 percent from
a year ago. This marks a noticeable
acceleration from earlier in the recovery
and reinforces the notion that the smallbusiness credit spigot is reopening after
years of difficulty obtaining credit.
Not only are credit balances growing,
but the share being paid late fell to 8.8
percent last quarter, the lowest rate since
data tracking began (see Chart 1). This
represents a 0.5 percentage point drop
from 9.3 percent in the second quarter
and is the second steepest quarterly
decline in the indexs history.
The drop was led by a 0.7 percentage
point decline in severely delinquent
balances those that are more than
99 days past due (see Chart 2). It is
impossible to distinguish between
severely delinquent balances that are
being paid in a more timely fashion and
charge-offs by lenders, both of which
would lower the delinquency rate for
balances in that bucket. Yet the 4.4
percent annualized rise in the number of
tradelines would suggest that lenders are
not closing accounts for nonpayment.
Instead, it appears small businesses in
most industries are paying down their
arrears.

Recent performance
Following the harsh winter months in the
first quarter of 2014, small businesses
continued to see a significant rebound
in Q3. According to recent business
credit data from Experian, businesses
have improved their payment behavior,

reducing the number of days they paid

their bills beyond contracted terms by
more than a day or nearly 19 percent
from a year ago. Additionally, over the
same time period the data showed that
the average commercial risk score went
up 4.5 percent, going from 58 to 60.6.
Bankruptcy rates also showed significant
improvement with 11.9 percent fewer
businesses filing.
Despite improving credit conditions,
broader small-business performance
metrics still suggest some headwinds
are preventing a stronger recovery for
small companies. For instance, the
Small Business Survey conducted by
the National Federation of Independent
Businesses was a mixed bag in
September. Fewer respondents indicated
they plan to make capital expenditures,
and a smaller share have open job
positions to be filled.
Yet other details werent all that bad. The
largest share of firms since December
2007 indicated they think now is a
good time to expand, and plans to
raise compensation are still trending at
recovery highs.
Like consumers, Main Street businesses
are most likely learning to trust in the
staying power of the recovery. The past
five years have been riddled with false
starts, and 2014 feels like the first year
in which a natural disaster or gridlock
in Washington has not curtailed the
recovery. Therefore, it may be somewhat
natural at this point for small companies
to question whether the economy has
really hit its stride and is on its way back
to expansion (see Chart 3).
Some of the pullback in small-business
sentiment is probably fundamental as
well. Some of Septembers weakness

could reflect Augusts weak jobs report.

The associated slowdown in labor
income in August likely hit September
sales, which is evident in the National
Federation of Independent Business
(NFIB) report. If so, the index could pull
higher again in October.
Small-business employment data
have been mixed as well. Companies
with fewer than 20 workers added
approximately 10,000 jobs in September,
according to data from payroll processor
Intuit. The build comes on the heels
of a flat month in August. Despite
the increase in employment, worker
compensation and hours worked
edged lower, though this is partly
because of payback after gains in the
previous month. On the bright side,
revenues continued to grow, led by
gains in real estate, rental, leasing and
construction companies.
For the most part, small business across
most industries are faring better than
they have in years (see Charts 4 and 5).
However, construction could still face
some challenges even as the housing
recovery continues to gain momentum,
and small agriculture-related firms may
suffer from a steep drop in crop prices
over the past year.
Credit quality for manufacturing and
trade firms backslid, which is an
indication that slower global growth
may be hurting industry revenues.
Therefore, it will bear watching if credit
quality deteriorates further in the next
couple of quarters if global growth does
not pick back up, especially given the
risks to Europes near-term outlook
brought on by a dearth of private
business investment.

Experian/Moodys Analytics Small Business Credit Index

Chart 1: Delinquency Rate Hits Recovery Low Chart 2: Led Largely by Severe Delinquencies
Percentage point contribution to change in delinquency rate

Firms with fewer than 100 workers

4.0

10.6

1.5

3.5

10.4

3.0

10.2

1.0

2.5

10.0

2.0

9.8

0.0

1.5

9.6

-0.5

1.0

9.4

0.5

9.2

-1.0

0.0

9.0

-0.5

13Q1

13Q2

13Q3

13Q4

14Q1

Outstanding credit, % change year ago

14Q2

14Q3

8.8

0.5

-1.5
-2.0

12

13
99+ days

Delinquency rate %

90-day

14
60-day

30-day

Total

Sources: Experian, Moodys Analytics

Sources: Experian, Moodys Analytics

Chart 3: Firms Second-Guess the Recovery

Chart 4: Delinquency Down For Most Industries

116
114

Japanese
tsunami

112
110

97

Governments
shutdown

95

Fiscal cliff

108
106

93
91

104
102

Percentage point change in delinquency rate from 2014Q2

Manufacturing
Trade
Administrative
Finance
General Services
Other

89

100
98

Experian/Moody's Analytics SBCI, 2011Q1=100 (L)

96

NFIB Small Business Optimism Index, 1986=100 (R)

94

85
10

11

12

13

Agriculture

87

Construction
Transportation

14

Sources: Experian, Moodys Analytics, NFIB

-1.5

-1

-0.5

0.5

Sources: Experian, Moodys Analytics

Chart 5: Few Changes in Rank Order From Q2

Share of past-due balances, percentage, 2014Q3
Transportation
Administrative
Construction
Manufacturing
Trade
General Services
Other
Agriculture
Finance
6

10

12

14

16

18

Sources: Experian, Moodys Analytics

Experian/Moodys Analytics Small Business Credit Index

Construction industry in flux
The share of past-due balances owed
by small construction companies fell to
13 percent in the third quarter. This is
still above the 8.8 percent average for all
industries, but the rate is 1 percentage
point lower than in the second quarter
and 10.3 percentage points below the
peak reached in December 2010 in the
throes of the recession.
Unfortunately, the news may not
all be good here. The drop in total
delinquency was led solely by a steep
decline in severely delinquent balances,
accompanied by fewer tradelines and
a nearly 1.5 percent decline in the
volume of balances. This suggests that
at least some of the severely delinquent
accounts in the industry may have been
closed, marking a difference between the
construction industry and most others.
This is a setback to an industry that has
struggled more than most to recover
from the recession, and the future may
still present some problems. The housing
recovery has become more broad-based
regionally, but there are still pockets of
the country where weakness abounds.
In particular, the housing markets
in parts of New England, including
much of upstate New York and Maine,
are exhibiting few, if any, signs of
improvement, as well as several states in
the South, namely Louisiana, Mississippi
and Alabama. Areas of the upper
Midwest are also struggling.
Even in places where the housing
recovery has fully engaged, builders
are having a hard time finding enough
workers to cope with demand. The result
has been foregone revenues, which may
be delaying faster payments.

This has been the case especially in

the Mountain West and, in particular,
fast-growing states such as Utah and
Colorado (see Chart 6). Strong job
growth in a number of high-paying
white-collar industries such as
professional, scientific, and technical
services and tech-related fields has
drawn thousands of new residents
to the region in recent years. In both
states, the population has grown
at almost twice the national rate
throughout the recession and recovery,
providing sufficient demand to mop up
excess housing supply in the wake of the
housing collapse.
All of Colorados metro housing markets
are now undersupplied, and home
values in Denver, Boulder and Fort
Collins, Colo., have shattered records set
before the Great Recession. Yet builders
hands are tied until they can source
enough qualified workers to ramp up
homebuilding in these areas.
The case of the Mountain West is an
exception, not the rule, and pockets of
weakness are slowly becoming less
widespread. Therefore, the housing
recovery will continue to support small
construction firms, and the recent drop
in the number of accounts and balance
volumes should prove temporary.

Growing concerns about agriculture

Credit conditions among small
agricultural companies show a similar
pattern to construction companies. The
share of past-due balances declined
1 percentage point to 7.1 percent, a
recovery low. However, the decline was
driven by a smaller proportion of severely
delinquent balances along with fewer
trade accounts and a 0.5 percent decline

in total balances, again signaling lenders

may be closing nonperforming accounts.
At least part of the problem is a decline
in agriculture-related commodity
prices, which caused a slide in farmers
incomes in the Midwest in the second
half of last year and into 2014. Corn
prices began a steep decline in mid2013, corresponding with a 30 percent
reduction in the number of tradelines
to farmers and a 36 percent drop in
balances during that time.
The concern is that falling crop prices
could spread to other parts of the
Midwestern economy, where farming
is a larger piece of the commercial pie.
Farmland values soared to new heights
as rising commodities prices drove
speculation. Nowhere is this more
evident than in Iowa, where the per-acre
price of farmland was more than double
the U.S. average in 2012.
The drop in corn prices raises the specter
of a farmland value correction, and the
downward trend in crop prices may not
reverse itself right away. Not only will
this hasten the slide in farm income,
thereby slowing consumer spending,
but it also could put a damper on capital
expenditures for farm equipment and
erode profits at manufacturers. The
decline in crop prices should be watched
closely, and if it does not abate, a
backslide in small-business credit quality
in the Midwest is a distinct possibility as
consumers in the region face possible
job losses and farmers spend whats left
of their income more frugally.

Experian/Moodys Analytics Small Business Credit Index

Chart 6: Builder Markets Tightest in the West

Residential construction employment-to-housing starts ratio, 6 month moving average

-1.64 to 0.53
0.54 to 1.39
1.4 to 2.6
Normalized,
2004-2006=0
U.S.=0.92
Sources: Census Bureau, BLS, Moodys Analytics

Looking ahead
Notwithstanding the industry-specific
risks outlined above, the overall thrust
of the small-business recovery remains
positive. Steady revenue growth in
most industries is an encouraging sign,
especially for housing-related companies
that were hit the hardest in the recession.
Even though regional disparities will
continue, the national trend in revenue
growth will stick, which should induce
stronger hiring in this sector.
Given the deep roots of housing in
the economy, this pickup is key to
the Moodys Analytics forecast for
accelerated growth through 2015,
and recent revenue growth for small
construction companies is a first
indication that the forecast will play out
to script.
A strengthening consumer recovery
will reinforce the upswing in the
small-business recovery. As a share of
disposable personal income, household
debt burdens are near record lows.
Moreover, 2014 is on track to be the
strongest year for job growth since
1999, and the composition of jobs
being created has migrated toward

full-time positions in better-paying fields

compared with earlier in the recovery.
Nascent signs of upward wage pressure
are presenting themselves. The net
share of small firms surveyed by the
NFIB who plan on raising compensation
over the next three to six months is at a
recovery high. Historically, this metric
has correlated well with future wage
gains and would provide consumers
with the most conspicuous missing
piece to the recovery thus far: stronger
earnings growth.
Data from the Bureau of Labor Statistics
show inflation-adjusted average hourly
earnings have been essentially flat since
2009. However, payroll data from ADP
challenge this notion and indicate that
businesses may have already begun
doling out raises to workers. Either
way, a lift in average earnings will fuel
stronger consumer sentiment and
spending over the next six months to
a year, affording small companies the
opportunity to continue getting ahead on
debt payments.
The risk of a global slowdown has grown
more prominent in recent weeks; a
second-quarter contraction in German
GDP sparked fears that a triple-dip

eurozone recession is imminent, and

Chinas economy grew 7.3 percent in
the third quarter not bad by global
standards but still weak compared with
previous performance.
Sanctions on Russia played at least a
minor role in the German slowdown, but
weak investment amid waning business
confidence is still a major hurdle to
a rebound in the eurozone. Another
European recession would weigh on
U.S. exports to the region, placing an
additional burden on small companies,
particularly in northeastern states.
Similarly, a slowdown in China would
cool shipments across the Pacific, which
could ripple through to small companies
on the West Coast.
However, economic fundamentals
favor additional support from domestic
demand in coming months, which
should more than offset the effects of
a temporary weakening in economies
outside of the United States. All told,
the Experian/Moodys Analytics Small
Business Credit Index should maintain
its upward trend over the next couple of
years as the U.S. recovery evolves into a
full-fledged expansion.

About the index

Experian joined forces with Moodys 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/Moodys Analytics Small
Business Credit Index is reported quarterly to show fluctuations in the market and discuss factors that are impacting the
business economy.

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View a visual representation of business health broken down by
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Experians Business Information Services is a leader in providing data and predictive insights to organizations, helping them
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