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What Explains the Resilience of Small Business?

Michael R. Strain

(Bloomberg Opinion) -- One of the biggest surprises so far in the Pandemic Recession is that American small businesses are doing better than expected.

Take the evidence from the latest Small Business Pulse Survey from the U.S. Census Bureau, released on Thursday. The data show that businesses with fewer than 500 employees are seeing rapid improvement. The survey asks small businesses if in the last week they have had a change in their number of paid employees. On April 26, only 4.2% were expanding payrolls, while over one-quarter were shrinking them. By May 31, the curves were getting close to crossing — nearly 10% of businesses were expanding their workforces, and 13% were reducing them.

Small-business revenues are also showing surprisingly rapid improvement. According to the same Census survey, in late April 74% of businesses said they had experienced a drop in revenue in the previous week. Only six in 100 businesses saw their revenue increase in the previous week. But by the end of May, the share of small businesses that were suffering revenue losses fell to one-half. The share that had their revenue increase in the previous week stood at 16.8%.

Across businesses of all size, bankruptcies have not become more common since the beginning of the Pandemic Recession. According to the American Bankruptcy Institute, there were more commercial bankruptcy filings in January and February of this year, before the recession began, than in April and May. Total commercial filings were 28% lower this May than in the same month the year before. ABI reports that there were 43.7% fewer bankruptcies in the week ending June 7 than in the same week in 2019, including 9.9% fewer Chapter 11 filings, though those data are subject to revisions.

Of course, these indicators don’t tell the whole story. Bankruptcy filings, for example, are likely a lagging indicator, especially in a pandemic when filing is more difficult. The U.S. will likely see a large number of businesses close their doors in the months ahead.

In addition, we must temper our enthusiasm at the pace of improvement by keeping in mind the magnitude of the problem. These businesses are doing better faster than many would have thought, but they are climbing out of a deep hole and into an uncertain future.

Still, as with the labor market and several other indicators, the small-business sector is getting back on its feet faster than I had thought it would. Why is that?

There are surely many reasons. Part of the answer is the widespread use of temporary layoffs. In May, 15.3 million workers were on temporary layoff, compared with the 2.3 million people who lost their jobs permanently. Over the past half-century, the three recessions that relied most heavily on temporary layoffs — the downturns that began in 1973, 1980 and the 1981 “Volcker recession” — were also the three with the fastest labor market recoveries, both in an absolute sense and relative to consensus forecasts, according to economists at Goldman Sachs. Workers on temporary layoffs can move back into employment swiftly, beating expectations.

It would be surprising if the federal Paycheck Protection Program weren’t a large part of the answer, as well. Declarations last month that PPP had failed were silly, premature and driven by nothing more than anecdotes about undeserving borrowers and the admittedly rocky execution by the Treasury Department and Small Business Administration.

The program allows small businesses to take out a loan for up to 2.5 times average monthly payroll costs. The balance of the loan spent on payroll, rent, utilities and mortgage interest payments converts to a grant — i.e., is forgiven — provided the business spends a certain share of the loan on employee compensation and doesn’t dismiss workers.

As of June 6, a total of $511 billion had been lent to 4.5 million small businesses through PPP. These loans were not going exclusively to relatively large or well-connected companies, as media reports had led many to conclude. The average loan size was $113,000. Over 99.9% of the loans were for less than $2 million, and 79% of the total dollars lent through the program were part of loans of less than $2 million. As of the end of May, a stunning 71.2% of small businesses reported receiving financial assistance from PPP in the new Census Bureau survey.

The ultimate test of the program’s effectiveness will be if it mitigates small-business closures, puts downward pressure on the unemployment rate, and helps to preserve the productive capacity of the economy. It is too early to render anything close to a definitive judgment on the program, but it is positioned to be the most important measure Congress has taken to date to help the economy recover from the coronavirus pandemic. It is surely supporting payrolls this spring. Moody’s Analytics estimates that PPP has saved at least 16 million jobs, or 10% of the U.S. pre-pandemic workforce.

The question now is the pace of the economic recovery from the Pandemic Recession. According to the latest Census survey, in late April about three in 10 small businesses thought it would take more than six months before things returned to normal. By May 31, that number had increased to around four in 10.

Many businesses and industries will never return to normal. They will have to succeed in a new normal. Congress provided a bridge for small business, getting them to the other side of the shutdown. Now that they are there, they will still need support from public policy to navigate the partially reopened economy of this summer and fall. Congress, take note: Their journey through the pandemic is far from complete.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”

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