The Economic Pandemic is Phase 2 of COVID-19, Prepare for it
I don’t recall a time like this in my lifetime. This exogenous shock is hitting everyone at once, around the globe. It's not just one region, or trickling in over months, or affecting just one industrial segment. Just about everyone has had to change something about their behavior, or adjust to their customers, supply chain, or workforce. China, and subsequently Italy, and countries one at a time are taking drastic actions to flatten the curve and minimize the stress they put on their health systems.
Now city by city across America has begun a similar series of shutdowns. Our school system closed for the next two weeks and possibly longer. Apple announced store closures. Employees at companies of all shapes and sizes are being told to work from home when they can. With spring breaks around the corner, trips are now being cancelled, conferences going remote or cancelled, and sports seasons and events are being delayed or postponed. As a gesture of good will, and social responsibility, many of the largest corporations are making public proclamations about how they’ll keep paying people and taking care of their workforce.
All I can keep thinking about are all the smaller businesses that don’t get the media coverage of Microsoft, or Delta airlines. What are they doing? How can they make it through this when everyone around them is going through the same stress? How well prepared are they? I’m certain they don’t have the capital cushions to survive too big a shock. If a few businesses in a community need time or help through a tough period, I’m sure lenders are able to creatively finance them through the hurdle. What happens if a large number of small business clients all ask at once? Is that likely to happen? I’ve been digging around and trying to pull stats and data on the subject and what I’m finding is staggering. We might be in that period of the tsunami where the waves pull way out and we have no idea what’s about to rush forward and hit the shore.
So here goes. I hope I’m wrong, and have made some foolish miscalculations and rash assessments. I welcome the counterpoints. But, as I start digging for the facts, here are a few to start off the viewpoint:
45% of our GDP comes from small businesses which represent 99% of all firms in the US Having led companies that serve the small business, and leading a thinly capitalized company myself, I know how challenging running a small company can be. I know that most do not have a lot of cash on the best of days and are cautious with expenses and investments in general, working through precarious working capital constraints. There’s a number of stats I pulled from a JP morgan report which surveyed over 600K small businesses. A concept called “Days Cash Buffer,” illustrated below, which gives a sense of how many days a business can cover their expense needs with the cash on hand.
Definition: Cash Buffer
The study shows the precarious position at least half of small businesses are in with respect to working capital. While this is not a new thing, and small businesses rise and fall every day, it's been VERY RARE that a single shock has occurred that affects a large number of small businesses ALL AT ONCE! The median small business, across industries, has 27 days cash buffer to float their expenses. Granted this can fluctuate if expenses are tied to revenues that are no longer occurring but those will largely offset one another.
Cash Buffer by Industry
Imagine the revenue impact for each of these businesses as cities slow and close down over the next 15, 30, 60 days or longer. We’re just entering a reactionary phase with this pandemic and there isn’t really a precedent for how long we’re going to be in this holding pattern. Each of these small businesses have rent obligations, accounts payable, and 70% of them have some form of debt. I can’t even imagine the challenges they are faced with right now in meeting those obligations while taking care of their employees, customers and community. How will lenders and landlords act based on their compliance obligations, their shareholder expectations and the long term consequences to their portfolios, customers and their communities? Will they too be making life or death decisions with each of their clients like doctors in Italy have had to do with their patients? This feels like an impending crisis of significant proportion on multiple levels of the economy.
According to a data set published by JP Morgan, 48% of Americans are employed by small businesses and 31% of Americans can’t withstand an emergency - such as a 10 day hospitalization for Covid 19 - given their current income. Now imagine what happens if they lose that income. I don’t need to go much further describing the fallout associated with small business cuts, closures, and economic stress up and down that supply chain.
For those individuals, similar to small business owners, the effect of missed payments to mortgages, cars, student loans, and the monthly operating expenses will cause a great deal of economic and psychological pain. There is talk of providing cash immediately to individuals in order to help them make it through this tumultuous period. But for how many months? And if their employers are ultimately gone, this crisis could last far beyond the next 60 days and well into the remainder of the year and beyond.
Lenders and lessors are going to be left with the toughest decisions and actions at the center of this ecosystem, in between the employers and their employees. If they don’t squeeze their clients, then their clients may live longer, and employ longer. It sounds like a form of trickle down economics and I hate that I am coming to this conclusion myself. But i’m not sure what the alternatives are. It's going to be rocky and turbulent for a long time to come unless we as business owners large, small, and on the side, figure out how to come together to take care of our communities in the transition.
PLEASE NOTE: I’m not an economist. I’m not a professor. I’m not a journalist. Just an observer, and a member of my community, trying to figure out how to get ahead of this and figure out where I can help.
Sources:
https://www.jpmorganchase.com/corporate/institute/document/jpmc-institute-small-business-report-exec-summary.pdf
https://www.jpmorganchase.com/corporate/institute/small-business-economic.htm
https://www.marketwatch.com/story/half-of-americans-are-just-one-paycheck-away-from-financial-disaster-2019-05-16 quoting NORC study from University of Chicago