Early Reports Show Deep and Immediate Effects of COVID-19 on Small Business

By Elisabeth Newcomb, Regulatory Economist

The economic effects of COVID-19 have been historic, though effects on small businesses are yet to be reflected in traditional public small business data sources. Small business economic data is typically published by federal statistical agencies with a lag of months or years. In the meantime, the Office of Advocacy is monitoring current small business research and economic impacts through available employment data and novel high-frequency data sources.

The earliest economic shocks of the COVID-19 pandemic were dramatic, and small businesses were among those first affected. A new fact sheet from Advocacy shows a 27.5 percent decline year over year in business applications for Employer Identification Numbers  in the five weeks following March 13. The fact sheet also shows a surge in unemployment insurance claims over the same period. A study from the Federal Reserve Board found that the leisure and hospitality sector experienced a decrease of over 30 percent in paid employment,[1] and that firms of all sizes had substantial reductions in paid employment.[2] Using small business hourly time card data, researchers from the University of Chicago found that 40 percent of the firms in their data had zero recorded hours of work by the end of March.[3] The largest declines in hours were in the beauty and personal care sector and the leisure and entertainment sector.

Though Advocacy documented positive economic conditions for small businesses prior to the pandemic, several studies indicate that small businesses are highly vulnerable to the economic shock of COVID-19. Researchers at the National Bureau of Economic Research found that about three-quarters of the small businesses they surveyed only have enough cash to cover two months of operations at most.[4] Before the arrival of COVID-19, the Federal Reserve Bank of New York found that only one in five financially healthy small businesses could weather a two-month revenue loss and continue regular operations.[5] A 2016 study by J.P. Morgan Chase Institute analyzed business accounts and found that half of small businesses have only enough cash to cover one month of outflows at most.[6]

Gaps in small business data, including real time data on business closures and average monthly business expenses, make it difficult to see the path ahead for small businesses. However, more economic researchers are now focusing their energies on small business as an important barometer of the health of the economy. Government and non-government institutions are fielding surveys on small business impacts that will yield more timely data, including a new weekly survey by the Census Bureau. Through this crisis, Advocacy continues to track and provide insights into the challenges of small businesses.

[1] Paid employment includes both permanent and temporary layoffs.

[2] Tomaz Cajner, Leland Crane, Ryan Decker, Adrian Hamins-Puertolas, and Christopher Kurz. “Tracking Labor Market Developments during the COVID-19 Pandemic: A Preliminary Assessment.” Finance and Economics Discussion Series 2020-30. April 15, 2020.  

[3] Alexander Bartik, Marianne Bertrand, Feng Lin, Jesse Rothstein, and Matt Unrath. “Labor Market Impacts of COVID-19 on Businesses: Update with Homebase Data Through April 8.” Mimeo. 2020.

[4] Alexander Bartik, Marianne Bertrand, Zoe Cullen, Edward Glaeser, Michael Luca, and Christopher Stanton. “How Are Small Businesses Adjusting to COVID-19? Early Evidence From a Survey.” NBER Working Paper No. 26989, April 2020.

[5] Federal Reserve Bank of New York. “Can Small Firms Weather the Economic Effects of COVID-19?” April 2020.

[6] Farrell, Diana and Chris Wheat. “Cash is King: Flows, Balances, and Buffer Days.” J.P. Morgan Chase & Co. Institute, September 2016.

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