In August, the PayNet Small Business Lending Index (SBLI) declined for the first time since April, falling 13.5 points (-9.1%) to 134.7 and 5.5% below its year-ago level. In contrast, the SBLI three-month moving average increased 4.6% but remains slightly below August 2019 levels.

Small business lending contracted in eight of the t10 largest states in August. The largest declines occurred in Pennsylvania (-1.7% M/M), Ohio (-1.1% M/M) and New York (-1% M/M), while lending activity increased in Illinois (0.7% M/M) and North Carolina (0.1% M/M). Compared with a year ago, lending activity declined in all of the largest states, although large discrepancies exist: Michigan (-1.2% Y/Y) and Georgia (-2.8% Y/Y) are only modestly below year-ago levels, while Pennsylvania (-12.1% Y/Y) and New York (-9.7% Y/Y) have experienced much more significant declines.

Lending activity improved in five of 18 industries in August, highlighted by public administration (1.2% M/M) and construction (1% M/M). Meanwhile, the information SBLI (-5% M/M; largest-ever monthly decline) set a new record-low, while lending in education (-5.9% M/M; largest-ever monthly decline) and mining (-5.6% M/M) continued to fall. On a year-over-year basis, a similar trend has emerged, with public administration (10% Y/Y) and construction (7.8% M/M) performing strongly, while mining (-17.7% Y/Y), education (-14.9% Y/Y), and arts, entertainment and recreation (-15.9% Y/Y) declined at record or near-record rates.

After three months of recovery, the PayNet SBLI declined in August, signaling that the summer small business lending surge fueled in part by the Paycheck Protection Program may be slowing.

Meanwhile, in the labor market, after a stronger-than-expected rebound this summer, the longer-term scarring effects are becoming increasingly apparent. Since April, permanent job losses have increased by 1.8 million — half of which occurred in August and September — and several large companies have announced plans to lay off employees in the coming months, including Disney (28,000), American Airlines (19,000) and United Airlines (13,000).

While consumer spending rose for the fourth-straight month in August, it remains 3.4% below its pre-COVID-19-pandemic level. Nonetheless, there are some positive developments worth noting. Despite concerns of the coronavirus in the coming winter months, a recent Comcast Business survey found 78% of small and mid-sized businesses are at least somewhat confident they can handle a surge in cases this fall/winter. Separately, a recent WSJ report highlighted how the pandemic has been a boon for some entrepreneurs, as new business applications among likely employers are at their highest point in a decade. While many small businesses are managing to hold their own (and some are thriving), according to the Census Bureau’s Small Business Pulse survey, 8.5% have either permanently closed or do not believe their operations will ever return to normal, and nearly half believe it will take more than six months for business operations to normalize.

Main Street Remains Under Duress

The PayNet Small Business Delinquency Index (SBDI) 31–90 Days Past Due fell 14 basis points last month but is 37 basis points above its year-ago level. The SBDI 91–180 Days Past Due was unchanged, remaining 23 basis points above its year-ago level. Defaults rose six basis points to 3.26% and have increased 96 basis points since February.

Delinquencies fell in all 10 of the largest states in August, with Florida (-29 bp M/M), New York (-22 bp M/M) and Georgia (-19 bp M/M) experiencing the largest declines. Compared with a year ago, delinquencies fell in North Carolina (-13 bp Y/Y) but rose sharply in Illinois (77 bp Y/Y) and California (60 bp Y/Y). Defaults, however, fell in some large states for the first time in four months, including Georgia (-21 bp M/M) and Texas (-9 bp M/M). However, defaults continued to rise sharply in New York (30 bp M/M; 239 bp Y/Y) and California (26 bp M/M; 213 bp Y/Y).

Delinquency rates fell in every major industry for the second-straight month, highlighted by transportation (-25 bp M/M) and construction (-20 bp M/M). Measured on an annual basis, however, delinquencies are well above year-ago levels in retail (102 bp Y/Y) and healthcare (91 bp Y/Y), although construction (-28 bp Y/Y) and transportation (-17bp Y/Y) are below their August 2019 levels. Regarding defaults, transportation (-22 bp M/M) and construction (-8 bp M/M) fell; however, information (+31 bp M/M), real estate (+16 bp M/M), education (+16 bp M/M) and arts (16 bp M/M) continued to experience double-digit monthly increases

The rise in small business defaults moderated in August as small business delinquencies — likely subdued by payment deferrals — declined for the third straight month. The slowdown in defaults may indicate a stabilization of sorts occurring in the small business sector.

Compared with January, small business revenues and the share of small businesses open have mostly oscillated between -20% and -25% since mid-May, per Opportunity Insights. A similar narrative can be seen in the Census Bureau’s weekly Small Business Pulse, which shows the share of small business reporting year-on-year declines in operating capacity has hovered from 51% to 55% since early August, while only a third of small businesses are either back to normal or expect operations to normalize in the next three months. However, the onset of colder weather and the resulting implications for some businesses (as well as public health) may be an emerging headwind. As such, financial relief remains a critical need for many small businesses.

A September Goldman Sachs survey found that without additional financial relief from Congress, 36% of small businesses will begin to lay off workers soon, while 30% will run out of cash reserves by the end of the year. And although there appears to be substantial bipartisan support for additional targeted small business relief, negotiations in Washington have been unsuccessful thus far. Main Street may be left to fend for itself until after the election.