U.S. small business borrowing rose in May

FILE PHOTO: A U.S. five dollar note is seen in this illustration photo June 1, 2017. REUTERS/Thomas White/Illustration/File Photo

(Reuters) - Borrowing by small U.S. firms hit its highest level in nearly a year, data showed on Thursday, suggesting businesses are ramping up investments to meet customer demand.

The Thomson Reuters/PayNet Small Business Lending Index for May rose to 137, its highest since June 2016, from an upwardly revised April reading of 125.4.

The increase was driven by an 11 percent year-on-year rise in borrowing by businesses in arts and entertainment. Transportation and healthcare companies slashed borrowing, however, by 14 percent and 13 percent respectively.

The rise in the index “is not enough to say ‘we’re off to the races,’” said Bill Phelan, PayNet’s chief executive and founder. But at least “we’re not going into contraction mode,” he added.

Movements in the index typically correspond with changes in gross domestic product growth a quarter or two ahead. The U.S. economy grew at a 1.4 percent annual pace in the first quarter, and the Atlanta Fed projects second-quarter expansion at 3 percent.

A separate barometer of small companies’ financial health suggested companies are finding it easier to pay off old loans. The share of loans more than 30 days past due was 1.69 percent in May, down from a month earlier, PayNet data showed.

Small business borrowing is a key barometer of growth because those companies tend to do much of the hiring that drives economic gains.

PayNet collects real-time loan information such as originations and delinquencies from more than 325 leading U.S. lenders.

Reporting by Ann Saphir; Editing by Meredith Mazzilli