The Economy

Small Business Borrowing Index Hits New High

The improvement in the index may indicate the labor market is tightening, which could encourage the Fed to raise interest rates.
Matthew HellerAugust 6, 2015
Small Business Borrowing Index Hits New High

A benchmark of borrowing by U.S. small businesses hit a new record in June, providing possible ammunition for an interest-rate increase, Reuters reports.

U.S. Federal Reserve officials have been weighing what would be the right time to lift short-term borrowing costs from near zero, where they have been for 6-1/2 years. Last week, the central bank said it would need to see “some further improvement in the labor market.”

The Thomson Reuters/PayNet Small Business Lending Index rose to 143.3 in June from an upwardly revised May reading of 131.

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The increase is “a signal of some fundamental, underlying strength in private companies that is really not being registered anywhere else,” PayNet founder Bill Phelan said. “Job openings are going to be harder to fill. … [Companies] will have to raise compensation to attract workers.”

The small-business borrowing index has historically tracked ahead of gross domestic product growth by two to five months, and is a good predictor of capital spending and job growth, Phelan said.

The increase in borrowing by small businesses also does not appear to have come at the expense of their financial health. The delinquency rate on loans more than 30 days past due fell in June to 1.49% percent, accroding to separate data from PayNet.

For most of the recession, record numbers of small businesses were on the “credit sidelines,” seeing no good reason to borrow. But according to a recent survey by the National Federation of Independent Business, the credit appetite of owners may be increasing. Thirty-one percent of all firms reported borrowing on a regular basis in June, up 2 points.

But the NFIB’s small-business optimism index took a surprisingly sharp turn for the worse in June, falling 4.1 to 94.1.