Small Business Lending Suggests U.S. GDP Upside Surprise

If the U.S. economy was expanding shouldn't we expect to see small businesses taking on more risk? Well that is exactly what is taking place. The volume of new commercial loans and leases to small businesses has been increasing consistently for the last 15 months. Yet very few people are bothering to take any notice as they appear stuck in the headlights of fear created by the euro debt crisis.

The Thomson Reuters/PayNet Small Business Lending Index (SBLI) measures the volume of new commercial loans and leases to small businesses. It is released at the end of each month. Small businesses respond to changes in economic conditions more rapidly than larger businesses. Accordingly, the SBLI is a reliable leading indicator of the economy and generally leads GDP reports by anywhere from 2-5 months. The index is trending higher which suggests that the U.S. economy is growing and that GDP is likely to surprise on the upside over the coming months.

The behavior of small businesses provides unique insight as to the inner workings of the economy as the resumption of lending to these businesses is more often than not a sign of economic growth.

Decisions to invest in the business and expand can be made by small business owners in a single day. This is very different from large business which are usually very slow to move with complex analyses and planning taking place for extended periods of time before any decision is reached. Similarly, at the start of a recession, small businesses usually become delinquent on loans before their larger counterparts simply because smaller firms generally lack the economic reserves of larger businesses which serve as a buffer and hence mitigate the impact of the economic slowdown.

So small business loan originations are a good indicator of where the economy is today. And right here and now small business loans are rising! Be careful not to be stuck in the headlights of fear created by the euro debt crisis. Remember a bull market creeps up on you when you least expect it!

Disclosure: I am long DIA.