Recessions always change the economy. Even as jobs, income, and profits return and surpass the previous peak, the underlying structure of the economy is different than it was prior to the recession. In technical terms, something like GDP fails the unit root test even if activity and growth returns to it’s long-run trend, at least gauged by the naked eye.
Today, one big concern about the economy is the amount of permanent damage done during the social distancing and shutdown phase. We have already seen the leading edge of the impact in the data and it indicates severe labor force displacements. Hundreds of thousands of Oregonians have applied for unemployment insurance in just the past few weeks. Getting all of these Oregonians back to work will be a challenge once the public health crisis subsides, even under the best assumptions. It will be even harder to do if there are no firms to hire them back.
Running a business is extremely difficult. Roughly speaking about 1 in 5 new companies fail within their first year, while only around half make it to their fifth anniversary. When we layer on the impacts and drop in revenues today, we are seeing many more firms stretched financially, and likely an increase in firm closures in the months ahead. (Given start-up activity was already at or near historic lows, it will take time before new businesses are created to meet business and consumer demand.) This is why increased loans and grants to businesses were a big part of the recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Below we look at some recent research and insights on small businesses and the first available data on the initial round of Paycheck Protection Program (PPP) lending for small businesses.
First, while most businesses are profitable or at least solvent, they do rely on cashflow to operate. A sudden stop in revenue impacts financials differently than the typical recession would, or at least the challenges and problems arise overnight and realigning expenses with revenues must occur just as quick. A new survey and paper by Bartik et al (2020) find that while the vast majority of small businesses have savings and cash available, it will only tide them over for a month, maybe two (see chart). Few firms can survive without revenue for longer than that. A recent Brewers Association survey of craft breweries found a nearly identical pattern among their members.
So what can businesses do today to stay afloat? The chart below shows the different approaches and actions small businesses would take, according to a survey from the Federal Reserve. I’m not sure if it is encouraging or discouraging that about 1 in 6 small businesses say they would need to close or sell the business if they experienced two months of revenue loss. Either way it is clear that a lot of firms cannot survive a sustained reduction in revenues, understandably so.
What is encouraging are the new business lending programs included in the CARES act. Probably the most prominent being the Paycheck Protection Payment (PPP) administered by the Small Business Administration which provides about $350 billion in forgivable loans to small businesses.
Update 4/17: The SBA announced that as of Wednesday night the PPP is fully accounted for. Small businesses will need more support. As the police chief said in Jaws “you’re going to need a bigger boat.” The rest of the post is updated and edited, plus the chart is now includes the final data.
The PPP was administered on a first come, first serve basis. Overall nearly 1.7 million loans were approved, totally $343 million. Here in Oregon nearly 19,000 businesses were approved in time before the funding ran out – hopefully more is coming — with Oregon firms receiving a total of $3.8 billion. This means small businesses in Oregon accounted for 1.1% of all PPP loans nationwide. This is somewhat low, but broadly in line with Oregon’s share of U.S. small businesses (1.6%) and small business payroll (1.3%).
Looking across all states you can see how PPP loans largely match the patterns of small businesses themselves. That said, a majority of states are seeing somewhat larger shares, which are primarily coming at the expense of relatively lower volumes to California and New York, and somewhat lower to New Jersey and Washington. It’s interesting to note that these states are either the hardest hit by COVID-19 or experienced the impact and spread of the virus first. On twitter, economist Ernie Tedeschi had a few thoughts on why this may be.
Finally, to help put Oregon’s 18,700 PPP loans for $3.8 billion in some sort of perspective, the rough math shakes out as following. About 1 in 5 small businesses in Oregon have been approved for a PPP loan. These loans are designed for 75% of the loan amounts to cover payroll over an 8 week period. This means the $3.8 billion will fill a 30-40% hit to small business payrolls in Oregon over two months. Given some of the initial claims data and speculation on the level of job loss and unemployment increases, these numbers are at least in the same ballpark in the big picture. The open question is whether the individual firms and dollar amounts of the approved loans are lined up those who need it most, and whether PPP will truly tide these companies over.
All of that said, I think these initial findings represent good news. At least at first blush, the size of the CARES act appears to mostly fill the initial hole due to COVID-19. This also includes the household recovery rebates — being deposited now — which are a 1, maybe 2 month band aid for most Oregonians. Now, it doesn’t mean everyone or every firm will be made whole. There are a lot of things that fell through the cracks that policymakers are currently working on fixing. And of course the concerns lie with the duration of the public health crisis, the shape and strength of the subsequent recovery, and the ongoing need for financial assistance to struggling firms and households. But for now, the public policy response has been an encouraging first step. Time will tell whether it came fast enough to truly help small businesses.