Small-business conditions in the US worsened slightly against a backdrop of sustained job growth in May 2015, according to Dun & Bradstreet’s US Economic Health Tracker, released in June 2015. Overall, the latest results reflect an economy that is stronger than a year ago but could face headwinds in the near term.
Figures for May were down slightly compared with April as the Small Business Health Index (SBHI) fell by 0.4 points to reach 95.7 during the latest reporting period; this is the second straight monthly decline in the index.
The three-month moving average of the SBHI stands at 96.1, compared with its December 2014 peak of 98.7, indicating modest headwinds for small businesses over the next few months. On the plus side, businesses continued improvement in on-time bill and credit-card payments from a year ago. D&B had estimated 211,000 new nonfarm jobs would be added to US payrolls in May, but the labor market surprised on the upside with 280,000 net new jobs.
Overall, US business health took a turn for the worse in May, as measured by D&B’s Business Health Index. The index fell by 12 basis points to 52.7%. The index had seen two straight monthly increases in March and April, and D&B economists hoped this would turn into a longer-run trend.
Instead, the sizable drop in May takes the index back to its declining trend. Even so, the index remains above the 50% mark that separates overall balance sheet improvement from deterioration. But the resumption in the declining trend is definitely a cause for concern, particularly for small businesses, whose balance sheets are facing new headwinds in the near term.
In summary, the June Tracker reflects an economy that is stronger than a year ago, but only slightly. This sluggishness is likely due to slowness in the overall economy in Q1, low consumer spending, and the resurging dollar.
D&B’s Economic Health Tracker is one of the most important and popular tools the global business information company employs to check the pulse of the US economy and advise our customers. The index provides a monthly, multidimensional review of the health of the US economy. The D&B tracker is unique in its construction and application; it combines our microeconomic insight distilled from the millions of company records in our databases with our country insight and macroeconomic forecasts to generate a forward-looking snapshot that provides our customers a peek into the near-term future of the US economy, thereby helping them plan their business strategies more effectively.
The Tracker has three subcomponents, each of which provides valuable business insight. The first component is the Dun & Bradstreet Small Business Health Index (SBHI), which measures small-business health (relative to 2004, the base year) as reflected in company payment patterns, failure rates, and utilization on credit.
Given this extensive coverage, the SBHI provides an aggregated as well as disaggregated view of the performance of small businesses. Disaggregated into major industry groups, the SBHI provides greater insight about the growth patterns of small businesses within each group. It helps identify the flourishing sectors and geographies, as well as the areas of strain where substantial innovation and planning may be necessary.
What makes the SBHI invaluable to us and our customers is that it is a leading indicator. During the Great Recession, the index had started its downturn approximately three quarters before any other macroeconomic indicator. It also signaled the recovery process significantly early, not only for the overall economy, but within granular segments as well.
This is also why D&B relies heavily on the SBHI to produce the second subcomponent of the Tracker, D&B’s US Jobs Health, which combines SBHI data with Bureau of Labor Statistics (BLS) figures to forecast monthly nonfarm payroll employment.
The third component of the Tracker is the D&B US Business Health Index (BHI), which is a broad measure of the balance-sheet health of US corporations. The BHI is computed using an equally weighted average of D&B’s Viability Score, Delinquency Predictor, and Total Loss Predictor, and reports a normalized score of between 100% and 0%.
A score of 100% signals that the aggregate of all active and open companies in the US are recording very low levels of financial risks, while a reading of 0% indicates that they are recording very high levels of risk.
A score of 50% is the dividing line of the population between low and high levels of risk. The higher the BHI, the less likely it is that an exogenous event will negatively impact US companies and send them into a tailwind, and vice versa. Similar to the SBHI, the BHI is also a leading indicator capable of predicting impending turning points in the financial health of companies.
Bodhi Ganguli is a Senior Economist on D&B’s Global Data, Insight & Analytics team. Based in Short Hills, NJ, Bodhi covers sub-Saharan Africa as a contributor to D&B Macro Market/Country Insight Products. He is also a member of D&B’s US Economic Advisory Panel. He received his Ph.D. in economics from Rutgers University and his bachelor’s degree in economics from Presidency College, India.