Industries

Retail sales reached a 4-year high of over $615B in December 2023 with yearly retail sales growing 4.6%. At the same time, lenders are tightening credit and businesses within the retail sector are showing signs of stress with higher late-stage delinquency rates and falling commercial credit scores. We see retailers seeking commercial credit less often, new originations slowing and lower lines over the past several months. As retail sales continue to rise so does the proportion of online retail sales. Online sales peaked during the COVID-19 pandemic and fell slightly once the lockdowns were lifted. Online retail sales remain approximately 56% higher than pre-pandemic levels and are trending up and may soon exceed 2020 levels. Growth in online retail sales has led to growth in retail returns. Retail returns peaked in 2022 at over $800MM and over 16% of total retail sales. Prior to 2021, retail returns as a percentage of retail sales averaged 8.9%, since 2021 that rate has grown to 14.6%. As returns increase so do fraudulent returns. Retailers have implemented strategies and solutions to address retail returns which resulted in a decrease in return dollars between 2022 and 2023 yet the percentage of returns that were fraudulent increased from 10.2% to 13.7% or over $100B. Increases in both legitimate and fraudulent returns are prompting retailers to identity solutions and operational strategies to slow growth across all returns. What I am watching: The U.S. economy expanded 3.3% in Q4 2023, and 2023 real GDP increased 2.5% over 2022. Strong consumer spending fueled the economy. Multiple sources are expecting The Federal Reserve to cut interest rates up to six times in 2024 with the rate cuts beginning in Q2 2024 and continuing into 2025. Lower interest rates likely means that consumer spending will continue at an elevated rate. As spending continues to increase, specifically in the retail sector, the need for commercial credit could continue to slow as cash-flows satisfy operational capital requirements. Cash on hand should begin to satisfy outstanding delinquencies, improving commercial credit scores resulting in improved access to commercial credit.

The labor market remains robust with low unemployment (3.8%) and 366K new jobs created in September. Job openings in the U.S. were 9.6MM as of the end of August, an increase of 690K or 5.8% since July. Retail sales in August had a month-over month increase for the fifth consecutive month. As we head into the holiday shopping season, despite headlines of large retailers struggling, the retail industry appears poised for success. It is likely that those retail businesses that survived the difficulties of the pandemic are the most financially sound and are driving the statistics. Over the past year, retailers are seeking less credit and taking on less debt than the previous few years. Despite inflation, consumers are still spending, and retailers are benefitting. Commercial delinquencies have been increasing over the past year. Delinquencies within the retail sector were trending above overall commercial delinquencies until just a few months ago when retailers exhibited lower rates than overall. These are all positive signs heading into the holiday shopping season which tends to make or break a retailer’s year. The September labor report was stronger than expected. Unemployment remained low at 3.8% and 366K new jobs were created which was the highest amount since January. In addition, the jobs created in July and August were revised upward significantly. What I am watching: With the labor market still tight, it will be interesting to see if the retail sector will be able to staff accordingly to support the holiday crunch. If staffing is difficult, retail stores may struggle to keep up with demand. Now that the student loan moratorium has ended, it will be important to monitor the impact to consumer spend. The increased expense of the student loan monthly payments will likely leave individuals with less discretionary income to spend on retail purchases. In addition, business owners who have student loans will have less money to invest in their business

The Commercial Pulse report provides a bi-weekly directional update on small business credit. It delivers a quick read on macroeconomic conditions, high-level credit trends, score and attribute impacts, and other market-related activities.

Recent news of the SVB collapse highlights the vulnerability of small banks and their crucial role in serving local communities. Small and medium-sized financial institutions should prepare for additional interest rate hikes.

Bankruptcies and collections are on the rise since mid 2022. Pandemic-related relief and forgiveness suppressed collections for most of 2021 and the first half of 2022.

A recent credit study of a regional utility found significant numbers of small businesses with no credit profile despite a history of positive payments.

So far, the economy has been extremely resilient, with Q4 GDP coming in above expectations at 2.9%, inflation cooling, supply chain issues easing, and unemployment remaining low.

In this post we discuss reject inferencing and how it can help credit departments grow commercial accounts without taking on more risk.

Heading into the holiday season, we'll see if consumers continue to spend at high levels, or if higher prices, higher interest rates and lower savings create a drag on sales.