Oregon Office of Economic Analysis

The key economic concern today is one of permanent damage. How many firms close and how many permanent layoffs occur? While much of the damage has been temporary to date, it’s that underlying traditional recessionary dynamic that will go a long way to determining how long the recovery takes. And in past severe recession in Oregon, like the early 1980s and the Great Recession, we saw both an increase in closures and a drop in new businesses forming. This prolonged the recovery process as it takes time to replace firms and rebuild the network of employees and supply chains in the broader economy.

Unfortunately we lack good, timely data on firm closures. It takes months to realize that a business is not reporting payroll, paying taxes, renewing business licenses and the like. What little information we do have shows closures are rising, but not yet considerably so. One reason may be that we are still early in this cycle, and firms do not close overnight when sales drop. They burn through reserves, maybe take out a loan, and then if those fail to tide the company over, then they close for good. Additionally, Oregon companies received $7 billion loans/grants from the Paycheck Protection Program and while that money is long gone, it was also $7 billion of temporary cushion.

What good, timely data we do have is about new businesses forming. This is one of the key metrics our office is following over on the COVID-19 tracking page. Here we see encouraging news to date. There has been no real drop-off in start-up activity in 2020. It may well happen as the cycle drags on, again it’s still early. But so far the data points toward a rise of business closures but no real decline in new business formation. While not good, this would still be better than those past severe recession, and be less of an drag in recovery.

The rest of this post comes from our office’s June 2020 forecast document, where we discuss some of the implications of firm closures and the broader issues at play. The slides at the end are a full update of these broader issues related to entrepreneurship, start-ups, closures, venture capital and the like. This is something we last really dug into on the blog more than 5 years ago. The update is largely based upon newly released, and revamped Census data on business dynamics.

Finally, the economy was already struggling with lower rates of productivity in recent decades. While an imperfect relationship, productivity gains are a key driver of employee wages and a rising standard of living. Many economists point toward the low rate of entrepreneurship as one key reason for low productivity growth. After all, new products and services are usually brought to market by young companies who seize the opportunity to improve efficiencies and generate profits.

COVID-19 may further entrench these trends. A byproduct here would be that the large businesses that have already won out in today’s economy may further strengthen their positions. Big companies generally have better access to capital markets to raise money to survive, while small firms rely upon the owner’s own worth, and programs like the PPP. Furthermore, benefits that workers generally want, particularly during a pandemic, such as health care, paid time off, the ability to work from home or remotely, and the like, are much more common among large firms than small. When combined overall, these issues may potentially paint a dark picture for small businesses, start-up activity, productivity, and ultimately for workers and job growth.