The Fate of Small Businesses Could Determine the Shape of Our Recovery
“What this crisis has brought to the forefront is that this isn’t an academic debate anymore whatsoever. How do we pay for it? We print the damn money.” – Paul McCulley, economist and former managing director of investment management firm PIMCO
What shape is our crisis?
As we debate the size of the decline in economic activity and the speed of the recovery on the other side, there is a lot of talk about shapes going on in economic circles (get it?). Will it be a rapid V-shaped recovery? The more gradual U-shaped rebound? The dreaded L-shaped version?
Forecasts for gross domestic product growth are particularly difficult to conceptualize. The difference in the second quarter's most optimistic forecast of negative 15% from Wells Fargo and the most pessimistic one from Nomura at negative 42% is the size of Argentina’s economy. And it doesn’t help that we remain stuck with this awful convention of talking about GDP growth percentages as quarter-over-quarter annualized numbers.
Who came up with this? Who thought it was a good idea?
We thought translating these percentage growth estimates into actual GDP levels may be more intuitive.
As you can see in the chart, it took 15 quarters for real GDP to get back to its previous peak after the Great Recession. And we complained about a slow recovery the whole time. We don’t know the size of the hole we will be digging out of this time, but it’s safe to say it will be larger. But the factors impacting the speed of the recovery are drastically different this time around. This is a different crisis.
All agree that epidemiology remains the most important consideration. It is our opinion that a recovery based on widespread health testing and herd immunity will be a disappointing recovery. The kind of economic growth that drives a V-shaped recovery requires Confidence (yes, that’s a capital C). And how many of us will go out and spend and invest at previous levels with the threat of flareups and local hot spots still there? Yes, we could open up the shops tomorrow, but how many people will go? The indications from China suggest that the answer is not many . The driver of a full-fledged, ripping recovery has to be a widely available vaccine. It seems that the question of a vaccine is a “when” question, not an “if” question, which is encouraging.
However, we should note that we are not virus experts. Our time is better spent looking at data that we can get our heads around, on what is happening to the economy and the policy responses to it. Luckily, there is plenty of that to go around, and the volume is only going to increase as we begin to get information about how the $2 trillion CARES Act is getting out into the economy.
The Small Business Administration recently published details on who had taken out Payroll Protection Program loans as of April 13. The program, which launched on April 3, was fully drawn down by Thursday of last week. For those keeping score at home, it lasted 13 days. So let’s dive in and see where the money went.
The chart below shows PPP loan uptake by industry. These funds went to a broad range of companies.
The industries most impacted by the crisis, like accommodation and food services, arts, entertainment and recreation and retail trade have all effectively been required to close to remain in compliance with social distancing policies. You will see them scattered throughout the distribution above, but you will only see one in the top five industries to receive the loans, and that one is No. 5 on the list. Of course, this is not begrudging the larger uptake by construction, professional services and manufacturing firms, who are very likely under severe pressure as well. But it also means a high likelihood that many firms in the more directly impacted industries didn’t receive these loans before the funding ran out.
From another vantage point, we look at PPP loan uptake as a share of small business payroll per industry. The maximum loan for any firm is 2.5 months of payroll, shown here as a line just under 21% of annual payroll. Here, at least, we see accommodation and food services near the top at 20% of annual payroll, but, recall , the sector also had a looser definition of “small business” in the CARES Act. Retail trade as well ranks better, as receiving 16% of annual payroll in PPP loans.
The question remains: Will this be enough? Is covering 20% or less of annual payroll enough when Glassdoor research reports travel and tourism job openings have declined 73% from March 9, arts and entertainment 46%, retail 21%, food services 18%?
Data showing loans by state also show a pretty uneven distribution. Of the 10 states with the most coronavirus cases per capita, only Pennsylvania was in the top 25 for PPP uptake as share of capacity, and only just. This reiterates that those hit the hardest likely had a difficult time securing loans.
Finally, the combination of data on state loan sizes and number allocated allows us to back into the size of firms receiving loans versus those that did not. Again, this seemed to favor the larger small businesses with more resources, as those getting loans were on average 4.5 times the size of those that did not.
The long and the short of this analysis seems to confirm a suspicion that we and others shared: The firms most likely to get these loans are not necessarily the firms that needed them the most, but the firms with the best advisers and resources available. A new Federal Reserve paperpublished over the weekend confirmed our suspicions.
“The median small business shows little movement in either active or paid employment between mid-February and late March, suggesting minimal layoffs among surviving businesses,” the authors wrote, “but underlying this median result is considerable distributional variation: a bit less than half of surviving businesses experienced nontrivial employment declines, and a few businesses experienced dramatic declines approaching 80 percent.”
In the current crisis, and after inspecting PPP distribution, we worry more about the tail than the median.
The same day the PPP program closed, the Fed announced its PPP loan purchase program is up and operational. The Fed will be purchasing these loans from banks, which likely encouraged them to make loans more speedily to begin with. But it also seems a subtle nudge to policymakers to up the program. As larger firms have gotten help already, subsequent PPP loans could make their way to smaller and more impacted firms.
We are spending so much time on this as the flow of money ultimately will determine the share of firms that make it through to 2021, and therefore the share of employees who get rehired, the share of payments which continue through the system, the share of GDP capacity kept intact and so forth. As another 5.2 million applied for unemployment insurance in the week ending April 11, these numbers are too large to play politics. We hearken back to Paul McCulley’s quote above.
Early April data releases, mostly surveys so far, are confirming the historic decline suggested by jobless claims and GDP forecasts. But something is unique: In spite of households and firms saying today is god-awful, worse than the crisis, expectations for the future are not so bad. Many surveys have indices that measure current conditions separate from future expectations, and the interplay between the two can be fascinating. The spread between current and future conditions in the University of Michigan Consumer Sentiment and the Empire Fed Manufacturing surveys seem to show that everyone expects things to improve in a way that we don’t usually see in the very early stages of a recession. It wasn't until 2010 that similar trends between current and future conditions were observed during the last crisis. That is our advantage this time: things can improve very quickly, assuming nothing breaks in between.
The Week Ahead …
This week features few economic data releases, but weekly jobless claims remains the essential figure to watch. Google trends for "how to file unemployment" continue to slow and currently stand at roughly half of the peak, equating to a still shocking 4 million-4.5 million in claims per week.
Pressure remains high on Congress to enact some kind of Phase 4 stimulus package, with seemingly universal agreement over expanding the small business loan program. Others are calling for more help to households.
Original article from CoStar