Analysis: Data show the crippling effects of the pandemic on small business

We know small businesses are getting hit hardest by the economic fallout from COVID-19. 

How bad is it? We’re still a little in the dark because so many of these small companies have simply vanished. They are not responding to surveys as they usually would from governments, chambers of commerce and trade associations.

But from the limited data we have and some good old fashioned inference, we know it’s bad. Real bad. 

A new study published by the National Bureau of Economic Research attempts to describe the impact. This study surveyed 5,800 small businesses around the country, asking business owners about closures, staffing and financial solvency. According to the survey, 43% of small businesses are temporarily closed. 

The typical company surveyed reduced employment by 40% since January. 

The median company in this survey also had less than one month cash on hand. During times of economic crisis, cash-flow — or the amount of liquid assets a company is bringing in on a monthly basis — can make or break a firm. Which means both companies that are currently closed but even those with reduced hours — and thus reduced revenue — are at risk of permanent closure.

The study asked companies what the likelihood would be that their company would remain open by December 2020, depending on how long the work-from-home order remains in place.

Those industries least likely to make it to December before shuttering for good are: restaurant/bar/catering, personal services, and tourism/lodging.

Small businesses are responsible for roughly half of U.S. employment, so tracking the growth or decline of small businesses allows us to weigh the potential impact on the economy. In the five weeks following the March 13 emergency order, there was a 27% drop in new business applications nationwide —  the largest decline on record. And a survey done by ADP shows that initial unemployment claims were highly concentrated among small businesses.

Here in Minnesota, although we are home to 17 Fortune 500 companies that employ tens of thousands here and around the globe, we also rely on a vibrant small business sector for our jobs and economic growth. In 2017, Minnesota was home to about 116,000 businesses with fewer than 500 employees, according to the U.S. Census Bureau. 

All told, they employed 1.26 million Minnesotans. That’s 41% of our total workforce. 

Here’s an example: As of the end of 2019, Minnesota had over 280,000 workers in the leisure and hospitality sector, or nearly 10% of the state workforce. As summer approaches, Minnesota’s tourism industry, which is home to many of these small businesses, is likely to feel the crushing absence of the familiar flow of tourists. 

What is the likelihood that the economy will open up in a month? four months? six months? According to the survey mentioned above, a majority of businesses don’t believe they will return to “business as usual” until July 1.

How Is Minnesota Weathering the Storm?

The CARES Act included $349 billion in forgivable loans for small businesses to help them survive. And when the money ran out, Congress pumped in another $310 billion. Minnesota companies received $9 billion during the first round. 

According to the Minnesota Department of Employment and Economic Development, or DEED, over 640,000 Minnesotans have filed for unemployment since March 16th.  

But there’s another issue at play in addition to people laid off and furloughed: People are dropping out of the labor pool altogether — meaning they’re giving up looking for work. Minnesota’s labor force dropped by a dramatic 1.5% in April, according to DEED. The labor force percentage, which now rests at 69.1%, includes those that are currently unemployed but are looking for work. 

Nearly 48,000 workers decided not to pursue unemployment or look for a job in March. This is a likely outcome for those nearing retirement, or for students, who would rather go to school than to compete in a failing market. If a strong labor force participation rate suggests workers are confident in the economic future, then a reduced  participation rate suggests the opposite. 

As of March, there were 3,073,100 Minnesotans participating in the labor force. If we take the number of unemployment claims since March as a percent of total workers, we get 20%. This means that since March 16th, roughly 20% of all Minnesotan workers have been laid off. 

What this means for the economy — and the true scope of the coming recession — remains to be seen. We know a lot of people are out of work, and that consumers are not spending money, except on essentials. But data concerning business closures is difficult to find because of the pandemic.   

For Minnesota, one way to project future business closures is by looking at the number of unemployed by sector, and then comparing that sector to the overall Minnesota economy. 

For example, over 50,000 Minnesota workers in food and beverage have been laid off, the most of any sector.  

Restaurants are the most numerous business entities in Minnesota, with over 8,700 unique businesses. This comes as no surprise, but the layoffs in the restaurant sector indicate that permanent closures are likely imminent.

The chart below shows the gross domestic product — which measures the value of goods and services — of different sectors of the Minnesota economy:

You’ll notice that retail, information and construction sectors are responsible for both lots of layoffs and a big portion of our economy. This implies that the significant numbers of unemployed are also coming from sectors of the economy which provide a large share of Minnesota’s overall economy. 

Conversely, finance and professional and business services are large contributors to Minnesota’s overall economy, but do not show up on the list of sectors with lots of unemployment. 

This is good news for workers in those sectors, but they were likely already in a good position pre-crisis. 

The more vulnerable sectors of the economy — like part time restaurant workers with little to no benefits — are being laid off like never before, putting financial stress on households that were already living paycheck to paycheck before this crisis. 

In other words: the have-nots will have even less.