The latest Quarterly Credit Outlook from PayNet, the leading provider of small business credit data and analysis, shows Main Street closing Q3 2018 with moderated lending and a slight uptick in risk. The Thomson Reuters / PayNet Small Business Lending Index (SBLI) seasonally adjusted originations decreased 12% from 150.5 in August 2018 to 132.0 in September 2018. Year-over-year, the index is up 2%, marking its 12th consecutive increase over the prior year. The rolling three-month index at 142.5 is down 3% compared to August 2018, but is 11% above year-ago levels.

“The streak of eight consecutive months of double-digit year-over-year increases finally ended in September, but the market for small business lending remains strong,” said PayNet, Inc., President William Phelan. “While rapid investment growth can jumpstart the economy, Main Street America will likely benefit from a brief period of consolidation in order to absorb recent expansion efforts. We expect to see the current small business investment cycle continue to expand at a more sustainable rate, and as such we don’t view recent data as evidence of a coming sea change.”

While the SBLI dipped to its lowest level this year at the end of Q3, broad-based investment remains in place across the majority of industry sectors — including Transportation & Warehousing (+21.7% Y/Y), which reached an all-time high. However, Accommodation & Food Services (-11.3% Y/Y) posted its seventh consecutive decline, and Information (-8.2% Y/Y) fell to its lowest level since October 2011. At a state level, lending activity in September fell in eight of the 10 largest states compared to the prior month. However, on a year-over-year basis, lending rose across the board for the seventh straight month, with Texas (+13.2% Y/Y) and Michigan (+9.9% Y/Y) experiencing record highs in September, while Illinois (+10.7% Y/Y) and Florida (+10.5% Y/Y) also posting strong double-digit gains. Notably, PayNet data indicate that lending index remains in the top 20% of all historical readings in most large states.

The Thomson Reuters/PayNet Small Business Delinquency Index (SBDI) showing loans 31-90 days past due increased 3.4 basis points to 1.43% in September 2018 and is now up 8.3 basis points on the year. Compared to year-ago levels, delinquencies increased in all major industries except Transportation (-31bp Y/Y), which posted its 13th consecutive double-digit year-over-year decline. However, despite recent increases, delinquency levels remain more than 200 basis points below historic highs across all major industries. At the state level, most large states saw delinquencies rise on an annual basis, with double-digit increases occurring in Georgia (+16bp Y/Y), Ohio (+15bp Y/Y), Florida (+14bp Y/Y), and California (+10bp Y/Y). Conversely, delinquencies in Pennsylvania are now 36 basis points below year-ago levels, and the current delinquency rate of 1.19% is near an all-time low.

Compared to August, the Thomson Reuters/PayNet Small Business Default Index (SBDFI) fell two basis points to 1.81% in September, its lowest level in two years. Year-over-year, the SBDFI fell five basis points, marking its ninth straight annual decrease. On the year, defaults rose in nearly half of the major industries. Despite a 16bp monthly drop, Information (+101bp Y/Y) experienced the largest year-over-year increase in default levels. Though some market-watchers anticipate that business conditions will worsen for U.S. farmers and manufacturers due to tariffs, defaults continue to improve in Agriculture (-11bp Y/Y) and Manufacturing (-16bp Y/Y). Regionally, year-over-year default growth was a mixed bag, with half of states experiencing increases and half seeing declines. However, default levels remain in the bottom 50% of all historical readings in all ten of the largest states.

“The goldilocks condition of rapid investment with low risk appears to be changing as we see the largest increase in credit risk over the past two years,” added Phelan. “The good news is that we expect the lending cycle to continue to expand, but on the flip side, risk levels appear to be rising. As such, lenders should remain vigilant in their assessment of risks and rewards in preparation for a shift that — although subtle now — will have long-term implications and put upward pressure on the cost of credit.”