Small Business Labs

U.S. Census Pulse Survey Shows Small Businesses Still Struggling

The U.S. Census Small Business Pulse Survey for the week of June 14th to June 20th shows small businesses continue to struggle.  

43% of the small businesses surveyed reported a decrease in revenue from the prior week while only 21% reported an increase. Also, 11% reported decreases in their number of employees while 10% reported increasing employment.

This despite many states ending their lockdowns and opening up their economies.

And the outlook for the future remains cloudy.  As the chart below (click to enlarge) from the Economic Innovation Group's analysis of the survey data shows, the percentage of small businesses expecting the return to normal operations to take longer than six months increased by 3 points over the prior week, reaching a near high of 41%.

Our guess is the data will turn down again next week due to the rising number of COVID-19 cases across the country.

For more on the pulse survey, see the Economic Innovation Group's Taking the Pulse of America's Small Business Sector: June 26th.  It does an excellent job of covering the survey, so we see no need to do so ourselves.

Academic Study Measures the Pandemic's Impact on Small Businesses

The Effects of the Coronavirus on Hours of Work in Small Businesses, from Yale's Tobin Center for Economic Policy, shows the pandemic's dramatic and ongoing impact on small businesses. 

The study uses data from Homebase, which provides scheduling and time tracking tools for small businesses, to measure the change in overall hours worked by small business employees.

As the study chart below shows (click to enlarge), average hours worked in U.S. small businesses plummeted by 60% in March when the lockdowns began. 

Hours worked since then have recovered, but as of early June were still 35.9% below pre-pandemic levels.

Not surprisingly, the largest drops in hours worked were in firms in the leisure and entertainment, beauty and personal care, and bars and restaurant industries. Also, the Tri-State New York region, which was the center of the early pandemic, was hit harder than the country overall.

This study is another example of cloud-based, digital data being used instead of traditional survey methods - something we are doing with increasing frequency.

We're not suggesting that traditional methods (surveys, interviews, focus groups, etc.) will disappear.

But there are many advantages to using digital data - the speed of use, the breadth and depth of the data, accuracy, etc. - make digital data extremely attractive for many research applications.

Facebook Announces Facebook Shops

This week Facebook announced Facebook Shops, which it describes as "a mobile-first shopping experience where businesses can easily create an online store on Facebook and Instagram . . ."

Businesses will be able to create a Facebook Shop for free and upload their catalog, product pictures, and details like prices, delivery terms, etc.  Customers can then browse and order products.

Some store examples are illustrated below.

Facebook is going to charge a small fee for each sale, but they say their primary revenue model for Stores is advertising.  

Facebook is working with commerce partners like Shopify, BigCommerce, ChannelAdvisor, and others so small businesses can integrate their current backend and logistical systems with the Stores application.

Facebook had already ventured into the commerce arena with Marketplace, which mostly is a Craigslist competitor.  Shops is, obviously, a move upmarket into the traditional small business space and into competition with eBay and Amazon.

Millions of small businesses actively use Facebook for marketing and advertising and we've often wondered why they didn't have a service like Stores. 

Now they do.  

U.S. Census Pulse Survey Finds Small Businesses Getting Slammed

The U.S. Census has created a Small Business Pulse survey to track and measure how small businesses are faring during the COVID-19 pandemic.

They released their first set of findings last week (the data was collected between April 26th and May 2nd) and, not surprisingly, they found small businesses are struggling.  

As the Census chart below (click to enlarge) shows, 51% of the small businesses surveyed reported that the pandemic was having a large negative effect on their business.  Another 39% reported it has had a moderate negative effect.

Only 2.5% reported the pandemic has had a positive effect on their business.  

The industries with the highest percentages of businesses reporting a large negative effect are:

• Accommodation and food services - 83%
• Arts, entertainment and recreation - 75%
• Educational services - 74%
• Healthcare and social assistance - 70%
• Retail trade - 53%
• Transportation and warehousing - 52%

The data also shows that 74.9% of small businesses applied for loans from the Payroll Protection Program (PPP).  However, only about half (38%) received funding from the program. 

Given how liberal the PPP qualification rules are, this is a surprisingly small approval percentage. This likely means the PPP will not be as effective as hoped.

The pulse survey is scheduled to run weekly through June, so the survey will be very useful in tracking how small businesses are doing over that time period.

The survey respondents are employer small businesses with 1-499 employees and at least $1000 in revenue.  

The Recession's Economic Damage is Widespread

Yesterday we covered a series of recent articles saying it will take 2-3 years for the economy to recover to pre-pandemic levels.

One reason for this view is almost all industries are being negatively impacted by the recession.

Illustrating this is the BLS's employment diffusion index.

This index is calculated by adding the percentage of industries with employment increasing plus one-half of the industries with unchanged employment. A score of 0 would mean all industries lost jobs and a score of 100 would mean all gained jobs. 

As the chart below from Marketplace's Here’s one way to tell how widespread April’s job losses were shows, April's diffusion index was a very low 4.8. 

This means almost every industry lost jobs in April.

Early in the pandemic, there was hope that economic damage would be limited to industries with high customer contact such as airlines, restaurants, retail, etc.

But as this index shows, almost all industries are getting hurt.

This means it will likely take at least a few quarters, and probably longer, for the economy to recover fully.

The 90% Economy

There's been a recent flurry of articles suggesting that the economic recovery will not be V-shaped or quick. 

Instead, the articles suggest it will likely take 2-3 years to fully recover from the pandemic induced recession. 

For example, The Economist's April 30th cover story is called The 90% Economy because they think it will take a long time for the economy to get back to 100%. 

Key quote:

Measures to control the virus while either keeping the economy running reasonably smoothly, as in South Korea, or reopening it, as in China, are associated with a GDP reduction in the region of 10%. That chimes with data which suggest that if Americans chose to avoid person-to-person proximity of the length of an arm or less, occupations worth approximately 10% of national output would become unviable.

The Financial Times article Life after lockdown: welcome to the empty-chair economy covers the same ground.  Key quote:

But in most places, it will be anything but business-as-usual. Instead, the next few months are going to feel like an empty-chair economy, with new shift patterns at factories, half-full buses and trains, staggered opening hours and unusually roomy restaurants ... The once hoped-for V-shaped economic recovery now looks more like — at best — a stretched U, even if financial markets, supported by massive central bank firepower, have been on a tear. 

And the New York Times article Why Economic Pain Could Persist Even After the Pandemic Is Contained points out"

In this downturn, there is the looming collapse of many small businesses; potential losses in the commercial real estate sectors; a crisis in the funding of state and local governments that will most likely take years to play out; and a collapse of energy prices that could slow capital investment.

Some sources are even more dire in their economic assessment. A recent study by economists at the University of Chicago suggests that 42 percent of recent layoffs will result in permanent job loss.

This would mean unemployment rates well above 10% could last for more than a year, which would meet most definitions of an economic depression.  

Whatever happens, it seems clear the recovery will not be as fast as originally hoped.  

We're in the process of updating our small business closure forecast from last month and will release the update in the near future.

But based on what we're seeing so far, we expect far more small business closures this year than occurred during the recession of 2008-2009. 

Site Covers How the Economy is being Impacted by the Pandemic by Industry

Vertical IQ is a leading provider of Industry Intelligence for those advising small- and medium-sized businesses such as bankers, accountants, and other SMB advisors.  

They've put together a set of industry by industry analyses covering the impact of the pandemic and related recession.  

The chart below shows their high-level industry sector coverage.

They also go into industry detail, as shown by Vertical IQ's chart below (click to enlarge).  This chart shows just a small subset of the hundreds of industries they cover.

Very useful for those interested in tracking how businesses are faring during the pandemic.

Tracking Our Unemployment Forecast Scenarios

On April 2nd we released a set of scenarios with estimates of how high the unemployment rate may go in 2020 due to the pandemic induced recession. 

As our chart below (click to enlarge) shows, already the current estimated unemployment rate (18%) has likely reached our optimistic case (18%).  

Last week's unemployment claims came in at 5.2 million, which brings the total unemployment claims over the past 4 weeks to 22 million. 

22 million is a bit over 13% of working Americans. Adding them to the 6+ million who were unemployed prior to the pandemic means about 17%-18% are likely currently unemployed. 

This is a low estimate because some people who lose their jobs choose not to apply for unemployment and others have been unable to because state unemployment systems are overloaded.  

Given many more will be laid off before hiring rebounds, our optimistic case is off the table.

Our base case (22% unemployment) is still in play but at this point, we wouldn't be surprised if it too turned out to be low. 

Our unemployment forecast was one of the higher ones when we released it on April 2nd.  And just 2 weeks later it appears it may be a bit low.  

Others are also quickly raising their unemployment forecasts.  JP Morgan, for example, bumped its unemployment forecast for April to 20% last week. They also lowered their Q2 GDP forecast from -25% to -40%.  Their earlier forecasts came out 2 weeks ago.

Since we're in uncharted economic waters, it's not surprising that quick, major forecast revisions are happening.  Due to a lack of historical precedents and data, the truth is everyone is just guessing at this point. 

As we pointed out in our article on our forecast scenarios, the official unemployment rate may not reflect the actual unemployment rate during the pandemic. 

Quartz's New research suggests the US unemployment rate is about to become useless goes into detail on why this will likely be the case.  

Small Business Closure Scenarios

Based on an industry by industry analysis (1), our base case estimate is 21% of U.S. employer small businesses will close in 2020 (2) (3).  This is about 1.2 million small businesses.  

In our optimistic case, 14% close and in our pessimistic case, 34% close.  

The table below (click to enlarge) shows the scenario data.  The scenarios are briefly described in note (4) below.  

By way of comparison, the SBA chart below shows small business closure and startup rates between 1990-2015.  

On average about 8% of small businesses closed each year between 1990 and 2015 and 10% closed at the height of the Great Recession in 2009.

So even in our optimistic scenario, small business closures are 40% higher than in the Great Recession.

Developing small business closure scenarios at this time is quite challenging.  There is a high degree of uncertainty associated with the COVID-19 pandemic and its impact on the economy.  It's also hard to judge how effective the CARES Act stimulus will be. 

Small businesses are also resilient and many have the ability to go dormant or near dormant and then recover once the economy gets better. This is why the small business closure rate only increased by 25% during the worst recession since the Great Depression.  

These factors and others are why the closure range across the 3 scenarios is large (14%-34%). 

The closure scenario assumptions (4) are the same as we used to develop our small business layoff forecasts, which were released last week.  

We're hoping we're wrong and even our optimistic scenario turns out to be too pessimistic.  

Notes:

(1) Our analysis looked at industry level historical closure rates (see the U.S. Census business dynamics databases) as well as a variety of sources on small business failures and financial stability (For example, J.P. Morgan Chase Institute's study Cash is King: Flows, Balances, and Buffer Days is a good source for cash balance data by industry). 

(2) employer small businesses are businesses that employ at least one traditional (W2) full or part-time employee and have fewer than 500 employees.

(3) Closures include any reason a small business ceases to exist (financial failure, business is sold, owner retires and closes the business, etc.), but the main reason small businesses close is financial stress. Business closures are tracked by U.S. Census; closures due to financial stress are not specifically tracked. 

(4) The scenarios are too long to fully cover in this article. Below is a brief description.

Base Case:  The pandemic eases by the end of June and the economy starts to re-open over the summer. Q2 GDP is -30%, Q3 +7% and Q4 +12%.  Consumer concerns about potential new outbreaks lead to a slow recovery for the travel, entertainment, restaurant, and related industries.  The impact of the small business provisions of the CARES Act is mixed. Larger SMBs have much greater success accessing the loans and grants than small SMBs and it takes several weeks for money to flow.  

Optimistic Case:  The pandemic eases in May and the economy starts to reopen in early summer.  Q2 GDP is -27%, Q3 +10% and Q4 +14%.  Consumers in the parts of the country spared from major COVID 19 outbreaks return to near normal patterns of behavior.  The CARES Act successfully supports SMBs of all sizes.  

Pessimistic Case:  The pandemic continues into July and the economy doesn't start to reopen until the fall. Q2 GDP is -34%, Q3 +5% and Q4 +12%. Parts of the country are still experiencing outbreaks over the summer and a 2nd wave of outbreaks occurs in the late fall. Consumer concerns about new outbreaks lead to a very slow recovery for the travel, restaurant and entertainment industries as well as other industries where social distancing is required.  The impact of the small business provisions of the CARES Act is mixed. Larger SMBs are able to access the loans and grants on a timely basis, but small SMBs struggle to do so. 

How Many Employees Will Small Business Layoff?

Based on an industry by industry analysis of small business employment, our base case estimate is employer small businesses will layoff about 21 million employees through July (1).

This is about 36% of those working for employer small businesses, which are SMBs with an owner/owners and at least one traditional (W2) full or part-time employee (2). 

Our high case layoff estimate is 27 million (about 46% of employees of employer small businesses) and our low case estimate is 17 million (about 29% of employees of employer small businesses).  

Under the base case estimate, the overall U.S. unemployment rate would likely increase to about 22% (3) (4).  

The high case's unemployment rate would reach 28% and the low case 18%.  

The chart below (click to enlarge) shows the data for the base and high cases.  We excluded the low case so the chart would be readable. 

The layoff percentages are Emergent Research (that's us) estimates. 

However, they are based on recent estimates done by economists at the St. Louis Federal Reserve on contact intensive occupations and unemployment risk by occupation. 

The implied overall U.S. unemployment rate estimates assume small businesses will lay off 60% of those laid off over the next 4 months. This is similar to the small business layoff share in the Great Recession of 2008-2009. 

Just under 10 million Americans filed for unemployment insurance over the past 2 weeks, which means the current unemployment rate is likely already in the 8%-10% range.

So forecasting the rate to double over the next 4 months doesn't seem unrealistic.

Other current forecasts of the overall U.S. unemployment rate range from 12% to 32%.  

The highly regarded labor economics at the Economic Policy Institute, for example, are currently forecasting the overall unemployment rate will reach 15% in July. 

Let's hope we're wrong and they're right - or even better, the EPI forecast turns out to be too high. 

Notes:

1.  We've produced 3 layoff scenarios because the employment impact of the pandemic induced recession is still very uncertain. And given the high level of uncertainty, the actual layoff numbers could easily fall outside the range presented in these scenarios. 

2.  Our lay off estimates includes both full and part-time employees of small businesses. It doesn't include contractors or independent workers.  

3. The BLS doesn't include people who are not actively looking for a job in the unemployment numbers.  This means the unemployment rate may stay artificially low because of the pandemic keeping people who have lost their jobs from looking for work.  Because of this, changes in the workforce participation rate may be a better measure of the recession's impact on employment.

4.  Overall unemployment estimates are 45 million for the high case, 35 million for the base case and 28 million in the low case.