Experian/Moody's Analytics Small Business Credit Index Report Q2 2013

Experian/Moody’s Analytics Small Business Credit Index

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Previous quarter (2013 Q1): 108.9

Current quarter (2013 Q2): 111.7

106

104

102

110

112

108

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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.

Experian/Moody’s Analytics Small Business Credit IndexCredit quality continued to improve in Q2 lifting

index to highest point on record

2

Executive summarySmall-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 in

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

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 the

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

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.

Q2 2013Q2 2013


Table of Contents

1

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 lifting index to highest point on record

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Executive summarySmall-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 in the East. Housing also has been a major player in the relative weakness of small-business balance sheets in 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 the western United States lately, but this will be short-lived. Growth in Asia, particularly China, will pick up again 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.


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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

•TheExperian/Moody’sAnalyticsSmallBusinessCreditIndexadded2.8pointstosettleat111.7from108.9inQ12013(previously109.0inQ42012).Thisistheindex’shighestreadingsinceitsinception.

•Smallfirmshavesteadilyreducedtheirdelinquentdebtoverthepastyear.Balancevolumesforallbusinesssizesrecededmeasurablyfromayearearlier,bringingdowndelinquencyrates.

•Creditqualityhasstrengthenedforeverybusiness-size.Atanaverageof10.2percent.

•Thetotalshareofdelinquentdollarsis2.4percentagepointslowerthanitwasayearago.


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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 backstopped a 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 are still 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 (the 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 briskly 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 company in the United States employs fewer than 100 workers. Despite adding to payrolls, small firms are keeping a lid on labor costs by adjusting average worker hours and compensation, keeping ample cash 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 spigot finally is beginning to reopen for small companies. The improved credit quality of small companies is one factor leading 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). Besides 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 spells in sales.


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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

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17.0

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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 DebtsHousehold financial obligations ratio, % of disposable income

Sources: Federal Reserve, Moody’s Analytics


-3.5-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.5

11 12 13

0-19 employees

20-49 employees

50-99 employees

Chart 2: Stronger Credit Across Firm SizesChange in delinquency rate from a year ago (percentage points)



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Clear regional leaders (and laggards) 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 is particularly 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 course of 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 delinquency rates, 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 are among the furthest behind on making payments — between three weeks and a 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 credit 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

2.3NortheastMidwestSouthWest

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

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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 that small firms were pumping the brakes on hiring full-time employees to avoid penalty assessments. However, now that 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 Analytics 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 impact. However, employment gains will pick up again early next year and will top 200,000 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.

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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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Experian/Moody's Analytics Small Business Credit Index Report Q2 2013

Economy & Finance

smallbusiness credit

uneven smallbusiness

small businesses

small companies

small firms

consumer recovery

business sizes

consumer confidence