Monthly Economic Review: September 2020

2020 September MER

It is not easy to systematically analyze economic activity and its impact on the composition of businesses during these unique times. A variety of data and statistics is compiled to examine the performance of industries, and the list has expanded during the pandemic to include both more frequent data and new data on specific business sectors of the economy. Some of that data focuses on small businesses.

The importance of small business to the U.S. economy has been the focus of economists and policymakers alike for decades. Federal Reserve Chairman Jerome Powell testified before the Senate Banking, Housing and Urban Affairs Committee in June that “these businesses are the heart of our economy and often embody the work of generations.” Small retailers regard that statement as self-evident.

The significance of small businesses to our nation’s economy cannot be overstated. Small businesses – defined by the Census Bureau as those with a single location and under 500 employees but with annual receipts of at least $1,000 – account for 48 percent of the private-sector workforce and are vital to the fabric of local communities. Importantly, 99 percent of retailers have fewer than 500 employees.

In mid-May, the Census Bureau launched a new and experimental Small Business Pulse Survey to provide weekly insights on how small companies are faring in the midst of the coronavirus pandemic. The survey measures core concepts central to small business operations such as employment, revenue and supply chain disruption.

During the initial nine-week period of the survey, respondents indicated pervasive difficulties with business operations and finances, including temporary closings, employment, revenues and cash on hand. And even though those difficulties have become less prevalent, business owners’ optimism has declined in terms of how long they think it will take their businesses to bounce back. Initially, 30 percent of respondents said it would take at least six months for their businesses to completely return to normal, and nearly 25 percent said it might be possible in two to three months. At the end of June, 44 percent expected a full recovery to take at least six months, while only 10 percent said it might be possible in two to three months.

The survey took a six-week summer hiatus, but new data was recently released covering the week ending August 15. As of that date, 48 percent expected a full recovery to be at least six months away and only 4.1 percent indicated it might be possible in two to three months. Only 8.5 percent said their businesses had already returned to normal levels of operation.

Just as a physician checks a patient‘s pulse to measure the rhythm and strength of the heartbeat, small business is an important indicator of the comparative health of the local and national economies. In addition to this new data from the Census Bureau, I like to use the Small Business Optimism Index from the National Federation of Independent Business to monitor economic conditions faced by small businesses. The survey provides perspective on domestic demand and aids in assessing hiring and wage trends in the broader economy.

The NFIB index regressed in July, dropping 1.8 points to 98.8 and ending a two-month streak of improvement from April’s low of 90.9. While the index stepped backward, it was roughly at the average for the survey’s 46-year history and higher than where many would have expected this spring. Nonetheless, the number of businesses expecting conditions to be better in six months declined 14 points to 25 percent. With the public health crisis expected to continue, small businesses are continuing to temper their expectations of future economic conditions.

Each month, the Blue Chip Economic Indicators report from Wolters Kluwer compiles and publishes forecasts for U.S. economic indicators from leading business economists and uses them to derive the Blue Chip consensus forecast. Economists in early August were asked which policies would be the most beneficial to the economy. The panel believed renewal of the extra $600 a week in unemployment benefits that was provided under the CARES Act this spring and expired at the end of July would do the most to support the recovery, while small business support was the next highest-ranked policy.

The coronavirus continues as a shock to America’s small employers and there have been few parallels among the 14 recessions since the Great Depression of the 1930s. Small businesses are the backbone of American ingenuity and impact local economies in cities and towns across the country, but responses to recent surveys highlight the fragility of many small business enterprises and the importance of the need for well-tailored economic policy. Former Federal Reserve Chairman Ben Bernanke emphasized the role of these companies during the last recession, saying “small businesses have played an important role in fueling past economic recoveries. We need to think carefully how in the current environment our nation can best provide small business and entrepreneurs with the support that they need to expand job opportunities.” Those words are as true today as they were in 2011.

Past issues

NRF chief economist says coronavirus 'continues as a shock' for small businesses
 
Data indicating small business owners are pessimistic about the coronavirus shows the need for economic stimulus.
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NRF chief economist says economic recovery is 'being tested daily'
 
Even though the economy is recovering, conflicting data makes it difficult to say how steady the comeback will be.
Read more
Monthly Economic Review: August 2020
 
Optimism about the economy and retail spending is being tested daily with the spread of the coronavirus.
Read more