PayNet Expects Improved Small Business Investment Post-Election

According to PayNet’s Q3/16 Small Business Credit Outlook, the outcome of the November election should lift some of the uncertainty that has pervaded the small business sector for much of 2016. While many of President-elect Trump’s policies remain undefined, the election provides certainty on the current administration.

Small businesses can start to plan now that they know the direction on taxes, lower healthcare costs and regulations. This administration’s plans for big public- infrastructure programs and higher defense spending will create opportunities for many firms.

PayNet said small businesses are well placed to take advantage of these growth- oriented policies. Their finances are, by and large, in good shape.

Many have held back on new investments during the recent period of uncertainty, so they now have some financial firepower in reserve, and will have even more if taxes fall and the regulatory burden lightens.

The business cycle has remained in a low-risk expansion mode through this election cycle. PayNet noted that a downturn in investment in Q4/16 means less risk-taking by small businesses. The good news is that financial health remains strong. As a result, the business cycle, even with the investment pullback, remains in expansion at low risk.

Many small businesses played possum ahead of the election, waiting for the political dust to settle before making decisions on hiring and on investment in new plant and equipment. The Thomson Reuters/PayNet Small Business Lending Index fell to 121.3 in October. This is a 5% drop from October 2015 and the seventh month of year-over-year declines so far this year.

The silver lining is that the severity of the fall has been moderate. PayNet believes with some confidence that the contraction is more a reflection of business owners’ hesitancy to invest prior to the election, rather than the signal of a major economic shift.

While economically sensitive sectors remain in contraction, the pace of decreases is slowing. Agriculture, accommodation and mining segments showed less contraction, falling 13.7%, 7.3% and 8.6%, respectively. As a bright sign, arts and entertainment increased 11.2% and construction increased 9.0% to lead the sectors.

Even so PayNet advises some caution. It may be a while before the full picture of the new economy takes effect, given that some key elements – such as tax cuts – require Congressional approval.

The combination of tax cuts and higher fiscal spending on infrastructure may boost economic growth, but such a massive fiscal stimulus will also push up the budget deficit and public debt. PayNet says that this will cause the Fed to raise interest rates faster than seemed likely just a month or two ago. Thus, businesses carrying heavy debt burdens may come under pressure, leading to higher delinquency rates. PayNet expects some deterioration in the credit quality of loans that fund small business, especially in 2018 and 2019, depending on how fast rates climb.

The Thomson Reuters/PayNet Small Business Delinquency Index 31-90 days past due rose two basis points from 1.32% in September 2016 to 1.34% in October – its highest level since December 2012. The delinquency rate was 15 basis points higher in October than a year earlier, making the sixth straight month of year-over-year increases. The transportation sector’s delinquency rate was up two basis points to 1.87% – its 20th monthly advance in a row and its highest level since September 2011. Retailers’ delinquencies climbed by six basis points to 1.27% – the highest level since April 2013. All segments posted deterioration from September 2016.

The Thomson Reuters/PayNet Small Business Delinquency Index 91-180 days past due also rose two basis points from 0.32% in September 2016 to 0.34% in October – its highest level since August 2012. This index has now gone 14 months without a drop in delinquencies. It was up nine basis points in October from a year earlier, the largest year-over-year increase since February 2010. The transportation sector’s delinquency rate moved up for the 14th consecutive month, rising three basis points to 0.71% – its highest level since April 2011. The healthcare sector’s delinquencies were up four basis points in October to 0.36% – the highest since April 2013. All segments were up or flat compared to September.

The 10 largest U.S. states follow the trend for national investing and credit risk with the majority of states showing decreases in investment. Six of the 10 largest states showed decreases of 8.7% (Illinois) to 2.2% (Pennsylvania).

States showing positive increases in investments remain those in the South and Southeast where the recovery was slowest to take hold. Florida (4.7%), North Carolina (3.4%), Georgia (2.8%) and New York (2.6%) are increasing the most of the biggest states. Much of this trend towards growth in the Southeast and pulling back in the Midwest is due to cyclical factors in the economy such as commodities and agriculture.

PayNet is forecasting more defaults of private businesses in 2016. While defaults are expected to rise to 1.9% in 2016, based on current levels of GDP and interest rates, PayNet expects them to remain about flat to slightly lower in 2017. The data shows defaults ended 2015 at 1.5% which remains some of the lowest default rates on record for private small companies. Industry sectors showing the largest default increases remain the most cyclical. Transportation and warehouse companies are showing a spike to 5% in 2016 which follows the increase in loans past-due for these businesses. Defaults of mining companies will jump to above average in 2016 to 4.3%. Agriculture firms also show a material rise in defaults to 2.1% in 2016 from 1.4% in the 2015. More business investment and rising loans past-due will likely result in more defaults in the next several years.

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