FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
May 19, 2020

IN THIS ISSUE:

1. Overview – Economic News Remains Mostly Negative

2. April Jobs Report – Glass Half Full or Half Empty?

3. Several Million Small Businesses Likely to Disappear

4. Small Businesses Employed Over Half of US Workers, Not Now

5. We Will Get Through This, We Are Americans, We Always Do

Overview – Economic News Remains Mostly Negative

As you are probably well aware, most of the economic news of late continues to be negative. I don’t like commenting on negative news, but it is what it is. Sure, I could cherry-pick the few minor economic reports that are mildly positive, but we all know the major reports continue to be negative, some historically so. I would be remiss not to report them.

Today, we’ll look in more detail at the unemployment report for April, which was much more negative than the headline jobless rate suggested. Over 36 million jobs – more than 22% of the entire workforce – have been lost in the last two months alone. And after this week’s jobless claims report on Thursday, it will likely show that one-in-four (25%) of working Americans have lost their job in the last two months. If so, that will match or exceed the Great Depression.

As I have warned in recent weeks, millions of US small businesses are likely to go bankrupt or permanently close in the next couple of months. As reported last week by Harvard University and others, over 2% of small businesses have already closed their doors for good. And that number is surely way too low, since many small business owners don’t realize yet that they will never reopen.

These are just two of the important developments we’ll discuss today.

April Jobs Report – Glass Half Full or Half Empty?

As we all know, the April jobs report was terrible, but then again it was no surprise. The Labor Department reported that 20.5 million Americans lost their jobs last month alone. And that number leaps to over 36.5 million if we include jobs lost in March and the first week of May. The numbers will only get worse when we see more of the data for May.

The official unemployment rate soared from 4.4% in March to 14.7% for April. While that number was less than the pre-report consensus for a spike to 16%, it is sure to go higher for May and probably June as well. In fact, the Labor Department admitted as much by saying that new unemployment claims are coming in far too fast for them to keep up and warned that the report will be revised upward going forward.

In fact, the unemployment rate is already well above the 14.7% reported earlier this month. More and more forecasters are convinced the real unemployment rate is already at or above 20%. A growing number believe it could surpass the nearly 25% reached in the Great Depression. Some believe it could go even higher. We’ll have to see, but that is entirely possible. Take a look at where the US jobless rate has been since the Depression.

While the government didn’t keep detailed unemployment data until the mid-1940s, researchers believe the jobless rate spiked to 24.9% at its peak in the Depression in 1933, as you can see above. Could we be headed there again? No one knows for sure, but we certainly can’t rule it out with millions filing for new unemployment benefits every week. I’ll keep you posted, as always.

Several Million Small Businesses Likely to Disappear

Regular readers know I have been predicting that several million small businesses will disappear in the weeks and months ahead as many declare bankruptcy and others simply decide not to reopen. Still others that do reopen will find they can’t survive serving only 25% to 50% of their former capacity, as is required by their state authorities.

The initial carnage reports are just starting to surface. A new study released last week by researchers at Harvard, the University of Illinois and the University of Chicago concluded that at least 2% of small US businesses are already gone, according to a survey conducted May 9 to 11. This study says over 100,000 small businesses are already gone – meaning they will never reopen. And this is just the tip of the iceberg.

The carnage has been even higher in the restaurant industry, where 3% of restaurant operators have already gone out of business for good, according to the National Restaurant Association.

Tearful, heartfelt announcements about small-business closures are increasingly popping up on websites and Facebook pages around the country. Analysts warn this is only the beginning of the worst wave of small-business bankruptcies and closures since the Great Depression.

It’s simply not possible for small businesses to survive with no income for weeks followed by reopening at half capacity or less, many owners say. In Texas, for example, the Governor recently allowed certain non-essential businesses to reopen at 25% of their former capacity initially and this week increased it to 50% for most. But even that may not enough for many small businesses to survive. Many are simply choosing to close forever, rather than incurring even greater losses. 

The result is likely to further shift the balance of power – and jobs – toward big businesses that have a better chance of surviving the uncertain year ahead by drawing down their large cash reserves or borrowing money. Emergency actions by the Federal Reserve, backed by the Treasury, have made borrowing money almost free for large companies.

James Hammond, chief executive of New Generation Research, which tracks bankruptcy trends, warns: “We are going to see a level of bankruptcy activity that nobody in business has seen in their lifetime. This will hit everyone, but it will be harder for small businesses since they don’t have a lot of spare cash.”

As I reported in late April, a large survey of small US business found that over half (51%) said they could survive only 1-3 months of shutdown before having to go out of business. We’re now two months into the shutdown. The numbers on small business bankruptcies and permanent closures will skyrocket in the weeks ahead.

Small Businesses Employed Over Half of US Workers, Not Now

In the 1980s and 1990s, small businesses employed over half of American workers, but that dynamic has shifted lower over time. By 2017, only 47% of private-sector employees were at small businesses, and the pandemic appears to be reducing that even more.

In April, smaller firms had substantially more layoffs than larger ones, according to payroll processor ADP, an early warning sign. Losing small businesses often creates a ripple effect in communities, especially smaller towns where little shops and restaurants remain the lifeblood of Main Street.

You will recall that Congress approved more than $700 billion in relief for small businesses, mostly in the form of the “Paycheck Protection Program” (PPP) via forgivable loans and grants. The money comes from the Small Business Administration, although business owners apply for it through their local bank.

Yet the PPP as originally rolled out required businesses to spend 75% of the loan proceeds on payroll for their employees. Furthermore, the money had to be spent in two months in order to be forgiven, and the clock started ticking as soon as the money was received. However, many businesses were shut down indefinitely and their employees laid off or furloughed, so many businesses reportedly sent the money back or withdrew their loan applications.

Many large companies which didn’t need the PPP money but qualified for it through loopholes in the application guidelines also sent the money back this month due to increasing scrutiny. As is often the case, the PPP was yet another government assistance program that was not well thought out.

Meanwhile, the US Chamber of Commerce is urging Congress to come up with a special “bridge loan program” to help restaurants, movie theaters, hair salons and other retailers that may not be able to reopen at full capacity anytime soon. It’s not certain where this stimulus program stands now, but it may be another knee-jerk program that was rushed into being.

And now the Democrats want to approve $3 trillion more in emergency stimulus, which could send the federal deficit to $7+ trillion in a single year. Yikes!

I could go on with reasons and examples why millions of small US businesses are likely going bankrupt and/or close their doors permanently just ahead, but I think you get the picture. Again, I sincerely hope I am wrong about this, but I don’t see how we avoid it.

We Will Get Through This, We Are Americans, We Always Do

As negative as the economic news has been in recent weeks, I have no doubt we will come through this challenging period and remain the strongest country on the planet. Clearly, we are facing some of the most serious economic challenges our generation has ever seen.

Things may get a lot worse than many of us imagine in the weeks and months just ahead, especially if I’m right that millions of US small and larger businesses go bankrupt or close permanently. Today, we just don’t know how bad it will get.

But however bad it gets, we will get through it and emerge even stronger on the other side. It may take a while, but I am confident of that.

Wishing you strength and good health,

Gary D. Halbert

SPECIAL ARTICLES

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