Q2 2013

Experian/Moodys Analytics Small Business Credit Index

Table of Contents
Executive summary

Experian/Moodys Analytics Small Business Credit Index

Behind the numbers

Recent performance

Clear regional leaders (and laggards) emerge

Looking ahead

Experian/Moodys Analytics Small Business Credit Index

Credit quality continued to improve in Q2 lifting

index to highest point on record
Executive summary
Small-business credit conditions strengthened in Q2 2013, lifting the Experian/Moodys 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.

Experian/Moodys Analytics Small Business Credit Index

112
110
108
106
104
102
100
98
96
94
Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Current quarter (2013 Q2): 111.7

The Experian/Moodys 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
indexs highest reading since its
inception.

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Previous quarter (2013 Q1): 108.9

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/Moodys Analytics Small Business Credit Index

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/Moodys
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 indexs 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 isnt

likely anytime soon. First, inflationadjusted 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 arent likely to jump back into
debt to fund discretionary purchases.
Consequently, any acceleration in
consumer spending isnt 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 Moodys 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 nations 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.

Experian/Moodys Analytics Small Business Credit Index

Chart 1: Households Shell Out Less to Pay Debts

Household financial obligations ratio, % of disposable income
19.0
18.5
18.0
17.5
17.0
16.5
16.0
15.5
15.0

80

82

84

86

88

90

92

94

96

98

00

02

04

06

08

10

12

Sources: Federal Reserve, Moodys Analytics

Chart 2: Stronger Credit Across Firm Sizes

Change in delinquency rate from a year ago (percentage points)
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
-3.5

0-19 employees
20-49 employees
50-99 employees
11

12

13

Sources: Experian, Moodys Analytics

Chart 3: Account Growth Concentrated in West

# of trade accounts, % change year ago, 2013 Q2

4.0% to 29.6%
0.0% to 4.0%
-16.5% to -0.1%

U.S.= -0.4%

Sources: Experian, Moodys Analytics

Experian/Moodys Analytics Small Business Credit Index

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 regions 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 smallbusiness credit quality.
Manufacturing slowed further during
this years 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
Chicagos tenuous recovery.
The share of delinquent dollars is
highest in Florida, which has been the
norm since data was tracked. Every
one of the states major metro areas
suffered a larger than average house
price correction in the wake of the realestate 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.

Miamis 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 states 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.

Experian/Moodys Analytics Small Business Credit Index

Chart 4: A Clearer Pattern Emerges

Payroll employment, % change year ago, 3-months moving average
2.3

Northeast
Midwest
South
West

2.1
1.9
1.7
1.5
1.3
1.1
0.9
0.7
11

12

13

Sources: BLS, Moodys Analytics

Chart 5: Eastern Businesses Paying Late

Small-business delinquency rate, 2013 Q2

1.2% to 4.6%
4.7% to 15.7%
15.8% to 25.3%

U.S.= 10.2%

Sources: Experian, Moodys Analytics

Experian/Moodys Analytics Small Business Credit Index

Looking ahead
The second half of 2013 will not be
as bad as initially feared, but smallbusiness credit improvement will be
slow nonetheless. There is a good
chance that manufacturing will regain
some momentum in this years 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.
Floridas 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 nearterm 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 isnt 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 Moodys Analytics base line
forecast, the Experian/Moodys 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.

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.

About Experians Business Information Services

Experians Business Information Services is a leader in providing data and predictive insights to organizations, helping them
mitigate risk and improve profitability. The companys 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 Experians advanced business-to-business products and services, visit www.experian.com/b2b.

About Moodys Analytics

Moodys Analytics, a unit of Moodys 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 Moodys Investors
Service, Moodys Analytics integrates and customizes its offerings to address specific business challenges. Further information is
available at www.moodysanalytics.com.

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