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US Small Businesses Face a Tough Road Ahead

June 29, 2020 By Mircea Vasiu

Traders often look at the U.S. economy through the eyes of the major corporations well-known for their products and services. However a clear understanding of the shape of the economy without considering small businesses is a big mistake.

In the United States, small businesses form a mighty economic sector, employing tens of millions of people. Unfortunately, in only four months, COVID-19 puts more than one-and-a-half million businesses at risk of permanent closing.

Sectors Most at Risk

Not all small business sectors have the same risk, but the pandemic impact is seen everywhere. The coronavirus health crisis had a large, negative effect on businesses in accommodation and food services, mining, oil and gas, educational services and arts, entertainment, and recreation.

Other sectors like utilities or construction dealt better with the crisis so far, their activity being impacted in a milder way.

Due to its importance for the United States economy, supporting the small businesses sector is critical to both the Federal Reserve of the United States (Fed) and the US Government. Permanent closure of small businesses will generate longer-lasting unemployment than temporary layoffs do.

Moreover, data from previous recessions shows that people that lost their jobs earned almost 20% lower at their new job, with women being significantly affected by the pressure in wages. Minorities, immigrants, and women are a big part of small businesses, forming the backbone of many communities. For example, 90% of Americans shop at a small business every month.

The real challenge ahead is how will small businesses position for the change in consumer behavior created by the coronavirus crisis? For example, small businesses in accommodations, food service and education services have a hard time due to physical distancing norms generated by the pandemic.

Of course, some businesses will not survive. A study ran by the Fed and concluded at the end of 2019 showed that only 35% of the small businesses in the United States were healthy. The rest were at risk of closure should a revenue shock hit – and it did.

As a capitalistic economy, the United States will adapt and move forward. However, the road out of the current economic crisis is easier with a strong small businesses sector, and now it needs all the possible help it can get.

The U.S. Government and the Fed so far did a good job providing financial relief to small businesses. The question is – for how long will they still need assistance?