U.S. Small Business Falls Off Sharply in June

If small business is the “engine” of the U.S. economy, it's leaking oil and running on only three cylinders according to Wednesday's release of a closely followed loan activity report.

Lending to small businesses fell in June to the lowest level since October 2011, continuing a slowdown in one of the leading-edge economic sectors and one with strong ties to job creation.

The Thomson Reuters/PayNet Small Business Lending Index fell to 98.5 in June, down from 103.8 the previous month. This represented the steepest decline for the index since January and the fifth monthly decline in the first half of 2012.

Thomson Reuters and PayNet said the index tends to lead U.S. GDP by two to five months.

U.S. real GDP rose at an annual 1.5 percent rate in the second quarter, its slowest growth rate in a year.

The small business report comes as the Fed meets for a second day on Wednesday to set interest rate policy and to determine if more monetary stimulus is needed. Most economists do not expect the Fed to announce any new initiatives until at least September, although many expect that the central bank may issue a weaker U.S. economic outlook and set the state for possible future action.

Small businesses continue to improve balance sheets and continue to be frugal in preparation of tougher times ahead, according to the report.

PayNet now projects business failures to rise 16 percent in 2013 – the biggest increase since 2007. Retail stores, restaurants and grocers may be at the most risk, with failures projected to rise 31 percent.