The market wants to see quick recession, with the depth of the GDP contraction limited by fiscal and monetary stimulus. One huge key to that equation: keeping small businesses on life support before too many of them close their doors.
The Coronavirus has caused the U.S. economy to essentially shut down, as consumers and employees stay home to avoid getting sick. No matter how fast the economy could have been growing, this causes a recession. Some economists and strategists are looking for a contraction of 10% to 20% in GDP for the next few quarters.
Monetary and fiscal stimulus can support people, businesses and corporations while there are no revenues for some time, before more is needed. And low interest rates and added cash can prepare the economy for a “v-shaped” recovery, rather than a u-shaped one.
But the market is afraid — the S&P 500 is down 24% year-to-date — of what is an unprecedented crisis. This recession will last as long as the virus stays in the air.
So for now, the government, or lender of last resort, has to support the economy for as long as the virus lasts.
One huge portion of the economy is small businesses, and they are some of the most vulnerable parties to falling revenues and falling credit. They are running out of cash, as they pay operating expenses and bring in minimal revenues. And they can’t get easy access to capital.
If they have to lay employees off, consumer spend — 70% of U.S GDP — will fall even harder than it likely already is.
And small businesses — and standard definitions say those are shops with no more than 500 employees — account for roughly 44% of total U.S. GDP, according to the Office of Advocacy.
With roughly 98% of all companies in the U.S. at 100 employees or smaller, according to research from Principal Financial Group, 40 million workers are at risk of losing their jobs. That’s roughly 12% of the U.S. population, although not all people would be laid off. Already, 3.2 million people in the past week or so filed jobless claims.
The market needs small businesses to thrive in order for consumer spend to do the same.
Congress just passed the $2 trillion stimulus bill, which will include $350 billion of funding to small businesses. Some of that will be loan with provisions saying businesses must retain employees, in which case some of the debt is forgiven. But experts are worried that, with only one to two months of cash on hand, small businesses won’t get cash fast enough.
Fiscal policy needs to be focused on where the greatest damage is occurring—to businesses of all sizes but especially small and medium-sized enterprises,” wrote JPMorgan’s co-head of the Asset Management
Investment Committee, Bob Michele in recent note. "SMEs are expected to run out of operating cash in one to two months. It will only be a matter of time before they are forced to lay off employees.
Danielle DiMartino Booth, Founder of Quill Intelligence and former adviser to the President of the Dallas Fed told TheStreet that time frame for small businesses is “very typical” in times of crisis.
Amy Friedrich, President of U.S. Insurance Solutions at Principal Financial Group told TheStreet, “if hey can’t make their way through April, they’ll just shut their doors.”
And Friedrich is concerned that many of the 100 employee or less businesses will not even use al resources or capital available to them because they won’t be able to navigate rules and details in the bill, as they do not have human resources, government relations or legal departments.
As for the title $350 billion, "If I had confidence that small business would know how to use it, I would tell you it’s meaningful,” Friedich said. "I worry that only the more sophisticated small business — 200-500 employees — they’re going to have some capability. my guess is that small business owners — they’ll see technical language and they’ll think it doesn't apply to them.”
Booth is hoping the Small Business Administration or another part of the federal government will have the capacity to communicate with small businesses.
Stocks are still pricing in a recession, which we have likely just stepped into. Stocks could cascade downward from here of stimulus measures aren’t adequate. Meanwhile, the virus rages on in the U.S, keeping retailers’ doors like Lulu Lemon’s (LULU) - Get Report shut.