Small business: a canary in the American economic coal mine


If you’re looking to predict the shape of the economic recovery in the United States – be it V, W, L or even K – don’t look at the markets. Take a look at the small and medium-sized businesses that account for 50 percent of the country’s employment. They are the best economic indicator in America right now. They are also in trouble.

More than 70% of them have received emergency benefits since the start of the pandemic. But these benefits end this month, even though the typical small business has only enough cash to cover two weeks of costs instead of any income. At the same time, the Paycheck Protection Program, or PPP, will return to pre-Covid-19 levels by the end of July. This means that unemployment benefits will be reduced to around 40% of what they are currently, with a major impact on consumer spending.

Assuming there is no other stimulus or budget support, this combination will lead to a new wave of small business bankruptcies. I fear that some of my favorite local establishments are among them. Down the street is a wonderful cinema-restaurant-bar called the Nitehawk, which closed in March. He has since attempted to raise funds to support his staff through the sale of online gift certificates (to be exchanged in the optimistic future) and crowdfunding. When I checked a few days ago, their $ 40,000 goal was still $ 13,000 short. This may be because the area also funds many other local establishments, from bistros to nail salons. Signage outside the Nitehawk reads, “Go to the other side.” But will we do it?

Some recent figures make me pessimistic. A study carried out last week by JPMorgan Chase on 1.3 million SMEs shows that their cash balances fell by almost 13% before the start of the revival of the law on care.

By mid-April, revenues from personal service businesses – typically a single entrepreneur working, for example, as a locksmith, hairstylist, or pet sitter – were down 80%. These companies are disproportionately owned by minority entrepreneurs, another reason why the pandemic is increasing inequality. In mid-June, almost half of US small business owners said they did not expect to return to normal operations in the next six months, according to a Credit Suisse survey.

These companies – from health clubs to restaurants and retailers – employ about half of the US workforce. These are not “strategic” or “high-growth” companies that policy makers and economists generally seek to encourage. But their pain “is a big problem for the macro economy,” as Deutsche Bank Securities chief economist Torsten Slok told me – not least because they provide far more jobs than the S&P 500 companies, which account for only 10 percent of the US nonfarm total. wages.

Many of these large companies are doing quite well, especially technology companies, which represent an increasingly large share of corporate wealth than before the pandemic. Their stock prices are skyrocketing. But the markets have nothing to do with reality at the moment. The liquidity released by the US Federal Reserve has killed price discovery by supporting every imaginable asset. Hertz’s share price went up even though he declared bankruptcy. Between the central bankers and the teenage speculators on Robinhood, does anyone really believe that the markets are currently providing an accurate assessment of the economy?

This type of disconnection can take some time. As economic historian Charles Kindleberger pointed out in his book on Busts and Financial Booms, markets can go wrong for a long time before correcting. How else can we explain the asset prices that are currently assuming a recovery in V, even though we seem to be witnessing a second wave of infections in several American states? The IMF also warned that the global economy was facing an even deeper slowdown than the Great Depression-like slump it had already expected.

You don’t have to analyze public health statistics or wacky analyst reports to get a sense of the real economy in America. Just go down Main Street. The many small businesses that have closed represent two-thirds of the 20 million jobs lost since the pandemic. Some old hotspots, like New York, reopen with caution. But most small business revenue forecasts are not close to normal.

A second wave of illnesses would certainly trigger a new wave of layoffs and insolvencies. According to the New York Fed, only one in five small businesses can survive a loss of income for two months. Many small businesses even reduce their rehiring when they reopen. For the most affected areas, things may never return to normal. The Credit Suisse survey found that 17% of hotels and restaurants believe their revenues will never return to pre-Covid-19 levels.

The ripple effects from all of this will be huge. Many small businesses are physical, not virtual. They are not designed for locking. They do not have access to world capital. They are rooted in the communities they serve.
Their fortunes are not flattered by the liquidity of the central bank. Any investor who really wants to take the economic pulse of America has only to speak to the owner of his local cafe, beauty salon or cinema. They will have a very different reading from that of Wall Street.

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