In early April, we released a 2020 small business closure forecast. We've updated our forecast and the good news is we're more optimistic about small business survival rates than in our April forecast.
The bad news is the numbers are still grim with the base case indicating about 1 million (17%) of U.S. employer small businesses will close in 2020.
As the chart below shows (click to enlarge), the base case closure rate (50% probability) has decreased from 21% to 17% and the optimistic case (probability 25%) from 14% to 12%. Under the optimistic case, about 700,000 employer small business businesses would close in 2020.
As a point of comparison, in an average year about 8% of employer small businesses close. And in 2010, the peak of the last recession, 10% closed.
So even in our revised optimistic case, we're forecasting a 20% increase in closures compared to the Great Recession.
The key reasons for the more optimistic view are:
- After early hiccups and problems, the CARES Act has been more effective in supporting small businesses - and especially very small and micro-small businesses - than we forecast in our April base case.
- The country opened up faster than in our base case.
- The number of COVID-19 cases declined a bit more quickly than in our base case.
However, our pessimistic case (25% probability) closure rate is still very high at 32%, which equates to about 1.9 million small businesses.
The pessimistic case remains high - both in closures and probability of happening - because COVID-19 cases are rising in many parts of the country, leading to new business restrictions and reduced consumer confidence. This is putting another round of financial stress on already vulnerable small businesses.
Also, if we face a 2nd COVID wave in the fall, we could easily see broader and stricter business restrictions across the country. This would likely be the final straw for many small businesses already weakened by months of COVID related financial struggles.
So our pessimistic case remains very pessimistic. And if the virus continues to expand at current rates, the odds of our pessimistic cases happening would increase.
To say the economic outlook remains uncertain is, obviously, an understatement.
For more on the forecast scenarios and methodology, see our April 7th forecast article.
