Achieving New Highs – The Small Business Credit Index

The Experian/Moody’s Analytics Small Business Credit Index (SBCI) that measures credit quality for firms with less than 100 workers hit an all-time high of 112.2 in the last quarter. From a revised 109.8 in the first quarter, the Index gained 2.4 points in the second quarter, accompanied by accelerated job growth and an annualized GDP growth rate of 4%.

This spells good news for the economy, especially the small business segment. During the first quarter of the current year, the Index had shown lacklustre performance, mainly due to the unusually harsh winter which slowed down business activity. However, improvements in numerous factors have led to its rise in the second quarter, indicating that good times for the economy are perhaps just around the corner.

The SBCI report uses Experian credit data in collaboration with Moody’s macroeconomic data to gauge how well small businesses are paying today. As per the report, there are several significant findings that point towards a positive outlook. First, outstanding credit balances grew at an annualized rate of 4.8% in the second quarter while delinquency rates fell to 9.3% from previous levels of 9.7%. Jobs grew at an average monthly rate of 277,000 jobs in the second quarter in comparison to 190,000 jobs in the first quarter. In fact, the strength in the job market lifted The Conference Board’s Consumer Confidence Index to a nearly seven-year high in July. Apart from this, small business bankruptcies improved by nearly 12% from the second quarter of 2013, and the number of days that small businesses paid their bills shortened by 4.5%.

If you take a look at the report, you will find that the average commercial risk score also showed a 5.8% increase year-over-year increase to 61.4 in the second quarter of the current year. Additionally, the Small Business Optimism Index rose by .7 points to 95.7 in July, owing to an uptick in the outlook for expansion and business conditions. Retail sales showed an improvement in the second quarter, after falling in January and February of 2014, clocking a growth rate of 4.3% year-over-year. According to the report, business confidence is improving for companies of all sizes, and household debt-service burdens are the lowest in decades.

Among the other things contributing to the feel-good factor, the report also stated that “consumers are feeling better about their current finances than they have in a long time,” and pointed towards increased spending in the upcoming months. As per the report, signs of upward wage pressure and a growth in job rates should soon decrease unemployment rates. This seems to indicate that a recovery in the housing sector is also on the horizon, although it is difficult to predict the timing.

If you are a small business owner, you stand to benefit further as the Fed’s Senior Loan Officer Opinion Survey conveyed that the banks are now less nervous about originating loans to small companies.

On the negative side, geopolitical tensions in Ukraine and the Middle East pose a risk to the outlook, particularly sanctions on Russia, and U.S.-led air-strikes in Iraq. However, Moody’s Analytics states that domestic fundamentals seem to be strong and escalating conflicts will remain ineffective in destabilizing the strengthening U.S. economy – forecasting that growth should be strong in the second half of 2014 and beyond.