Small business credit conditions continued to improve in the second quarter according to the latest Experian/Moody's Analytics Main Street Report. In our upcoming Business Chat | Live, taking place on Tuesday, September 5th at 10:00 (Pacific), Derrek McCrank and Cristian DeRitis will be sharing some highlights from the most recent report and discuss what's keeping small business credit conditions going in a positive direction. We will be covering high-level findings in the latest report. Derrek and Christian will be going into further depth during the Quarterly Business Credit Review Webinar, taking place on Thursday, September 14th 10:00 a.m. (Pacific) 1:00 p.m. (Eastern.)
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Business Chat Transcript
Gary Stockton: Okay, I'd like to welcome everybody to Business Chat Live. Good morning, everybody. My name is Gary Stockton. I'm with Experian Business Information Services. I'm going to have a discussion today with Derrek Grunfelder-McCrank from Moody's Analytics about the Q2 Main Street Report that Experian and Moody's Analytics partners on. Every quarter, we give Moody's an extract of our data on small businesses, and Moody's economists dig into that data and really help tell the story of what's going on with small business credit. I'd like to introduce Derrek McCrank. Good morning, Derrek.
Derrek McCrank: Good morning, Gary. Pleasure to be here.
Gary Stockton: Okay. Let's get into the discussion, and we're going to talk about a couple of things here. We're going to kick off with business delinquency. In Q2, business delinquencies, they've been declining. They've been declining for about two years now. What's causing that? Are businesses better at managing debt, or are they just taking on less debt?
Derrek McCrank: I do think businesses are getting better at managing their debt. Part of the reason I say that is we've seen over time the number of businesses that have entered our dataset has been slightly declining, not a lot, just ever so slightly. What that is is businesses that didn't manage their money as well are no longer utilizing credit, whether that be a personal decision on the part of the business where they say, "We aren't going to touch the stuff anymore," or if they've been forced not to use it anymore through some sort of delinquency or charge-off process. We have seen steady declines in line with steady declines in the number of businesses entering the dataset.
I do also want to mention though that economic growth is part of the story here as well. As the economy grows, there's more money, more wealth, businesses have greater access to that, and they're better able to pay their bills as not only they have better access to that increased economic activity but their customers do as well. Slow and steady economic growth, I think, is really at the heart of what we're seeing here with the trend in business delinquencies.
Gary Stockton: Okay, excellent. Okay. Let's talk a little bit about credit utilization because it grew but it grew at a slower rate year over year. What do you attribute that slow growth in utilization to?
Derrek McCrank: Part of, I think, what makes the second quarter look slow in comparison to the first is that the increase that we saw in the first quarter was very large, and there was bound to be a little bit of a payback stemming from that in the second quarter. I think businesses were gearing up for their summer season, and then it declines over the summer as they're utilizing the credit that they've drawn on. Hopefully, heading into the third and fourth quarters, we'll see utilization continue to expand hopefully a little faster, but the pace we're seeing now is still reasonable, especially when you look at the first half of the year as a whole.
Gary Stockton: Yeah. Of course, we've had in the third quarter, yeah, we're in the third quarter, we've had this situation in Texas, which I know Moody's and Experian is going to be watching very closely. Obviously it's going to have an impact in that region, but what else could maybe happen as a result of something like that?
Derrek McCrank: I think there are going to be two phases of what's going to happen as a result of this tragedy that we've seen in Texas and Louisiana in the last week. The first phase is going to be felt in the third quarter, obviously. There's going to be pullback not just in small business, though I think especially in the small business area, but there is going to be pullback that we see in that region, and it's going to hit the third quarter. The utilization in the third quarter will probably grow slowly again. Hopefully it will grow in the third quarter.
I think as we enter the second phase, which is the recovery phase from this tragedy, that we'll see increased activity in the area, again, particularly for small businesses. Relating to the credit aspect of that, the SBA announced that they're preparing billions of dollars in new disaster loans, which they're going to be giving out in that area. I think as far as credit goes, we'll see growth partially from that and aided by that, but businesses, they'll need working capital in order to get their businesses up and running again not only from damages but lost revenue during this time. I do think we'll see an expansion after an initial contraction phase.
Gary Stockton: I heard a fascinating stat the other day. This was on Marketplace where they said that according to FEMA, following a natural disaster, 40% of the businesses that were closed due to the disaster never reopen, and up to a year later, up to 25% of businesses close. Do you think we're going to see that type of thing happen in the Texas area? I'm sure there's a lot of businesses that are just flooded out that were maybe borderline on their financial stability. This could be like the final nail in the coffin for some of those folks.
Derrek McCrank: We'll certainly see some of that. I don't have the data in front of me to accept or refute FEMA's figures, but I will say that from tragedy can come new life. We will see businesses dying out, but we'll also see businesses born as a result of what's happened. As people get the entrepreneurial spirit, especially in the Houston area which is a very robust area in terms of economic activity, we'll see new businesses and new jobs being created certainly in the construction industry to rebuild what Hurricane Harvey destroyed, but we'll also see new opportunities in manufacturing and the mining, particularly oil and gas areas. In some regards, the hurricane wasn't as bad as it would be predicted. I don't want to give the impression that it wasn't a tragedy, it was, but we expected much worse in terms of damage to oil and gas infrastructure than we saw. There won't be as much damage in that sector, but we could still see new growth as a result of what happened.
Gary Stockton: In the Northeast, about a year after Sandy, we saw some really positive things happening in that region, particularly for construction employment. They really did pick themselves up by their bootstraps and get back to business. Texas, you just don't mess with Texas. They're going to be back stronger than ever.
Derrek McCrank: Yup, Texas will be back.
Gary Stockton: Let's talk about another state because in the Main Street Report you did a summary of the top five/bottom five, and Georgia, it looks like they're a bit of a success story there. What's going on with Georgia?
Derrek McCrank: Yeah. Really, all the Southeast we saw very impressive performance in the second quarter, especially when compared to a year ago. Part of that, in my opinion, is a population growth story. We actually just last week put out a paper relating population growth to inflation in the areas. We note that population growth causes inflation, as you would imagine, and in turn that inflation can spur the creation of new businesses. As people see an opportunity to undercut competitors and prices, as they see more money coming into the pockets of businesses and individuals who they think that they could compete with, they're more likely to establish businesses and spur more activity in an area. I think that really is a huge part of what's happening in the Southeast.
Gary Stockton: Yeah, I agree. Okay. Also in Q2, we saw a decline in construction delinquency. Is housing driving that? If so, what regions are particularly strong at the moment for construction?
Derrek McCrank: I do think it is housing that's driving a lot of that. If you look at the latest housing data, we haven't seen housing in total expanding maybe even at the level we would expect, but we've seen a shift from a multi-family housing construction into more single-family housing construction. If you think about it, more small businesses are involved in single-family construction than in multi-family construction which requires more employees, more labor, more capital. Those smaller firms are in many cases better positioned to marketshare.
Gary Stockton: Okay, excellent. Sorry there, I was getting something else. There was a noise outside. I apologize for that.
Derrek McCrank: No worries.
Gary Stockton: Live video, what can you do, right?
Derrek McCrank: Yeah.
Gary Stockton: Okay.
Derrek McCrank: Those smaller firms are better positioned to capture that single-family market share. Particularly for small business credit, we've seen that Nevada and Florida are two of the biggest states that have had housing turnarounds. As those states have seen housing prices recover, they've seen more building activity and construction activity, and that's really helped those small firms to better capitalize themselves and manage their businesses and money better.
Gary Stockton: Yeah, okay. We've still got strength in the economy. We've got obviously some things that concern folks concerning the debt limit. There's some things in the distance out there, but for now it sounds like small businesses are just getting on with the business of doing business, right?
Derrek McCrank: Yup, that's the best way to sum it up. Small businesses will keep doing what they're doing, and expanding, and growing, and they will carry on.
Gary Stockton: September 14, I think we're going to get deeper into this discussion. We've got the Quarterly Business Credit Review. That's a week from Thursday. Yourself and Christian DeRitis, going to be joined by Gavin Harding from Experian. We're going to be taking another deeper look at Q2 trends and seeing what's going on with small business. I'm looking forward to speaking to you again. I think I'm going to have to end the call. I've actually got a gardener outside my window right now with a leaf blower, if you could believe that timing.
Derrek McCrank: All right. Thank you, Gary. I enjoyed talking with you, and I look forward to the webinar.
Gary Stockton: Okay. I apologize for the audio, folks. We're going to have to end that there. Please click the link in the description if you haven't registered already for the Quarterly Business Credit Review. We'll see you a week from Thursday. Thank you, Derrek, for taking time out to talk some highlights with us.
Derrek McCrank: Thanks for talking, Gary.