economy Markets

End Of The Road: America’s Small Businesses Close For Good In New Lockdowns

“Mr. Muscari, with the business closed and its 30 employees jobless, has nothing left but his house and his car”, The New York Times writes, documenting the plight of a 38-year-old restaurateur in Lubbock, Texas, who, despite taking a Paycheck Protection Program loan, has now decided to close Nick’s Sports Grill and Lounge for good in the wake of the state’s new lockdown.

He owes the bank $80,000 in connection with a loan taken out three years ago when he bought out his partners. According to what he told the Times, he also “expects his landlord to try to sue him for the eight years’ worth of rent he is contracted to pay on his defunct restaurant’s space”.

Muscari isn’t alone. As governors and local officials reinstate measures aimed at curtailing COVID-19 in locales where the virus is spreading virtually unchecked, small business owners are once again facing an existential crisis.

On Monday, California Governor Gavin Newsom closed all indoor operations for restaurants, wineries, movie theaters, and a handful of other businesses. Bars are ordered to cease all operations, he said, resorting to all-caps for emphasis.

Newsom’s announcement was the latest sign that America’s inability to flatten the virus curve is poised to force new, possibly stringent lockdowns, with economic ramifications that could begin to show up in the aggregate, nationwide data beginning next month.

In May and early June, the notion that the economic impact of the COVID-19 crisis could be conceptualized as akin to any other natural disaster (a hurricane, for example) gathered adherents, the president among them. The medical community remained generally wary of that characterization, as did a number of Fed officials, some of whom warned the economy could face a series of rolling lockdowns as new outbreaks sprang up across the country.

“Barring some health care miracle, it seems like we’re going to have various phases of rolling flare ups”, Neel Kashkari told CBS’s “Face the Nation” in April. “Different parts of the economy turning back on, turning back off again”, he continued, cautioning that “this could be a long, hard road we have ahead of us”.

Those fears are slowly being realized, with the obligatory caveat that mortality rates are still tolerable — to the extent deaths are ever tolerable.

It’s too early to speculate on whether the US will eventually be forced to close down most of the country again in a bid to avert a complete public health disaster, but it’s already too late for many small businesses.

“Of all business closures on Yelp since March 1, 41% are permanent closures”, the company said, in an economic impact report dated late last month. “Our data shows the largest spikes of permanent closures occurred in March, followed by May and June, indicating that the businesses that were already struggling had to permanently close right away and the businesses that were trying to hold on, but unable to weather the storm, were forced to shutter in recent months”, the report continues.

That is hardly surprising. Remember, only one in five “healthy” small businesses reported having enough cash on hand to survive two months without taking actions including layoffs and downsizing, a Fed study conducted during Q3 and Q4 of 2019 showed.

In his annual letter to shareholders, Jamie Dimon said that according to JPMorgan Chase Institute research, 50% of America’s small businesses had less than 15 cash buffer days. That, Dimon noted, “reinforc[es] why small businesses are being heavily disrupted by the current crisis and will feel the effects for a significant period of time, even as more capital from the recent federal stimulus program reaches them”.

JPMorgan reports earnings on Tuesday.

According to a poll conducted in April by the Society for Human Resource Management, more than half of America’s small businesses were set to exhaust their capacity to keep going by the end of October.

A new study by the group, released on June 22, showed that a majority of small businesses expected to recover to pre-COVID profitability in six months or less. As SHRM notes in the study, that is “significantly faster” than the economy as a whole. “Economists forecast that some metro areas won’t return to pre-COVID employment levels until 2024”, the accompanying color reads.

While almost one in three businesses told SHRM they’ve found new ways of delivering services, and one in five said they’ve asked employees to learn new skills to support changes tied to the post-pandemic operating environment, 84% said they “still face significant challenges”.

Remember, these enterprises aren’t generally capable of coping with dramatic changes in consumer behavior or serious disruptions to their operations. In many cases, they have almost no cash buffer, have only limited access to revolving credit lines, and cannot tap large pools of capital.

“Many small businesses are financially fragile”, a team of researchers wrote, in an NBER working paper published in April. The study, which polled nearly 6,000 small businesses, found that the median business had at least $10,000 in monthly expenses but less than that in available cash. In other words, the median small business could not fund itself for a month with cash on hand.

“Fifty percent of respondents believe that the crisis will last at least until the middle of June, suggesting that many businesses expect this to extend well beyond their current cash”, the same study found. 20% thought the crisis would be over by May.

Again, that was in April. It’s now mid-July. The crisis is spiraling. And governors are reinstating lockdowns. You can draw your own conclusions.

Yelp’s data shows that of the restaurants which have closed since March 1, 53% of the closures are marked permanent on the site.

You’re reminded that small businesses are the lifeblood of the US economy.

“The importance of small businesses to our nation cannot be overstated”, the Fed said last year. “Small employer firms, those with 1–499 employees, account for 47.5% of the private-sector workforce”.

In the same article from the Times mentioned here at the outset, Emily Flitter profiles another Texas business owner, Mick Larkin, who runs (or used to run) a karaoke bar. Disheartened by governor Greg Abbott’s decision to reimpose restrictions as the state’s virus caseload surged, Larkin decided to call it quits. “I just can’t keep doing this”, he told Flitter.

Apparently, he and his business partner threw out more than $1,000 worth of perishable goods, personal protective equipment, and, according to the Times, a full frozen margarita machine and “175 plastic syringes with booze-infused Jell-O”.


 

 

3 comments on “End Of The Road: America’s Small Businesses Close For Good In New Lockdowns

  1. Free Capital says:

    “Adherents” is an unusually long spelling of “fools”.

  2. A national tragedy of epic proportion. And getting worse by the day. The Donald will go down in infamy. (And Mitch can share the blame.)

  3. Prestwick AK says:

    More CA news from this afternoon for readers to note:

    LA, San Diego and now Stockton school districts have eliminated in-person classes for Fall.

    Governor is supporting these decisions, so more will likely follow (…why chance it now if you’re a district superintendent in Bay Area or Sacramento region?)

    For those households that have been able to maintain both jobs/incomes, this is a really big drag on productivity, morale, mobility, etc.

    Add this to the “headwinds” list, please.

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