Business owners remain spooked by the events of the past four years, and are assuming less risk, he said. “We would have expected more risk-taking, more expansion, more investment. Instead, we’re seeing a plodding expansion,” he noted.
The Index is a monthly outlook based on real-time data, measuring loan activity across 23 sectors, including construction, transportation, agriculture and healthcare.
Phelan pointed to a decrease in manufacturing and an increase in the service sector as one reason there are fewer large capital investments from businesses. “There’s less demand to invest in capital projects in the service sector," he said. “Companies are investing in productivity enhancements, like software and technology. But they’re not hiring; they are holding cash on their balance sheets.”
Still, he expects to see continued increases in lending over the next several quarters. Defaults and delinquencies are low, a sign that business owners could be ready to assume more risk.
Because small businesses can react more quickly to changes in the marketplace than larger companies, said Phelan, the index can be a good predictor of what will happen with the overall economy.
“Small business leads the economy by two to five months,” he said. We saw the index fall dramatically in early 2007, before things fell apart later in the year,” he said. Phelan said he sees, based on small business activity, at least “four more quarters of the wind at our back, as long as we don’t get any shocks outside the system.”
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