Nine months into the era of pandemic economics, it is clear that small firms that provide services in transportation, leisure, hospitality, food and beverages are taking it on the chin.
Many workers who have been laid off are turning to self-employment.
According to the Opportunity Insights economic tracker, the number of small firms has fallen 24.1% from January and revenues for those firms has dropped 23.2% over that same period.
The combination of the impasse on another round of fiscal aid and the magnitude of the economic shock implies that many of those firms are simply never coming back.
It is not surprising that many workers who have been laid off are turning to self-employment, resulting in the largest increase in business formations over the past decade.
Entrepreneurial spirit
This go-it-alone spirit seems to be the impetus for an unexpected increase in business formation during this recession. While this will not likely prove to be a major catalyst for a quicker or broader recovery, it will spur activity in the next expansion or the expansion after next.
This is the entrepreneurial drive that underscores market economies. In our estimation, it will set the stage for further integration of advanced technology into the production of goods and provision of services that adds value to manufacturing, tech and life sciences, and will be the core of the next recovery and expansion.
The pace of business formation has far exceeded that of the Great Recession.
According to census data, nearly 1.6 million applications for business formation were filed in the second quarter. That’s about double the applications filed at the start of the year.
The Census Bureau’s weekly data indicates that business formations were growing by more than 80% compared to July 2019, and have decelerated to about 50% in recent weeks. Such a high level in the middle of a recession is out of character compared to business formations during the Great Recession in 2008-09.
We think that one reason why business formations remained weak in the aftermath of the financial crisis was the origin of the shock — the financial sector — and the significant loss of wealth that followed across the broad American middle class, which stimulated a multiyear period of deleveraging.
This economic shock, by contrast, originated in the health care sector of the real economy and has primarily been borne by renters and those who depend on person-to-person social and economic interaction in their jobs.
The census data stresses that not all businesses survive, and there is no argument there. But what is encouraging is that people are willing to take risks and put it all out there – whether or not they have nothing to lose.
Bankruptcies increase
At the same time, the rate of corporate bankruptcy is growing again, according Bloomberg’s index of corporations with liabilities of at least $50 million. Bankruptcies tend to lag the onset of recessions by several months, so it is likely that we have not yet observed the worst of the bankruptcy data.
As bankruptcies lag, policymakers and investors should anticipate the numbers to increase once we have data on the mom-and-pop establishments and the multitude of restaurants with no customers and months of rent in arrears. This will likely spur further risk taking on the part of former employees and suppliers who decide to go off on their own.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
