Small businesses are pretty OK

Daily Data: More credit card debt, more interest? No problems.

In today’s dispatch:

• small businesses are carrying more credit card debt and paying more interest, but actually this seems pretty fine

• one financial instrument maybe on the way out? (highly speculative)

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Daily Data: Small businesses are pretty OK

Historically, when rates go up, it’s usually smaller, weaker businesses that suffer the most.

When credit contracts, it flies to the biggest, most vital organs, and leaves the peripheral bits to wither and die.

The thought was, then, that smaller businesses would be particularly hard hit by the Fed’s high rate regime.¹ But it hasn’t really played out that way (like much of what was expected by the Fed’s Tightening That Wasn’t).

I mean, it’s been true to some extent—Europe, emerging markets, and also small caps, have all withered relative to more vital organs, like Big Tech companies and the Almighty US consumer. Certainly, unprofitable or heavily financed companies, like PE- or VC-backed companies have struggled, relatively, as well.

But when it comes to “small businesses” generally, they seem to be doing pretty OK, and if they are under stress, it’s not showing up in BofA’s transaction data.

More credit card debt (but this seems fine)

When it comes to financial stress, there just doesn’t seem to be all that much.

It’s true that small businesses are carrying more credit card debt than before:

Smaller businesses are carrying more credit card debt

Small business credit card balances are now between 10-20% higher than before the pandemic.

But considering that inflation is ~20% over that same period, there’s certainly nothing alarming about 20% more credit card debt.

Likewise, debt to deposit ratios are a tad worse than before (except for the smallest of businesses):

Debt:Deposit ratios are moderately worse

Again, moderately more debt to deposits, is hardly something to get worked up about.

More interest payments (but this seems fine)

If you want to be pessimistic, you’d notice that interest payments are finally catching up to spending: