What will the post-COVID economy look like?

Typically, business related cases have made up 20%+/- of our cases. In the last year it has been approx. 50%+. Some of these calls have been people who are just looking for information about what happens if…? More than half have been “We’re done. What do we do now?” The mix has been more diverse than I saw coming. As expected, I have been hearing from restaurants, bars, hair salons… Many have received PPP loans, so they can pay their employees and their rent, but they have minimal income to pay all of their other normal operating expenses. If their business does not start generating substantial income, they won’t be able to stay open.

I have also heard from several business owners who have businesses I would not have anticipated. Many of them were “non-essential” so they had to close for 60 days. Even as they were allowed to reopen, many remain non-essential so people are just not buying their goods or services yet. My neighborhood Home Depot has been packed all through the stay at home order. I was contacted by a business owner who operates a specialty hardware store that sells primarily to do-it-yourselfers who want to spruce up their homes. Not many people are buying their inventory right now. I have been a regular customer at Half Price Books for years. I haven’t been in any of their stores for almost a year. I am getting my hair cut less often that I normally would.

What do all of the business owners have in common? They are truly small businesses. Under the original Payroll Protection Program “small” businesses are defined as 500 or less employees. The ones I am talking to are 50 or less and many are 15 or less. My law firm has six employees.  My concern is that these are the businesses that will not survive. Many are family enterprises so both spouses and maybe the kids work at the business, so what happens to all of them if the business fails?

To be fair, many large businesses are in trouble too. The airlines are all suffering. Hotels are empty or nearly so. Retail is not selling – JC Penney, Nieman Marcus, Stage Stores, Payless, Gymboree, J.Crew, and Sur la Table have all filed Chapter 11. Retail has been struggling for years and this crisis may be the death knell for some of these companies. Malls have been struggling for years because people go to malls less often. More malls will close, which will depress the value of other mall properties. I saw an interview with a CEO of a national restaurant chain who said his company will survive because a large chunk of his company’s sales have always been drive through and they have access to “billion dollar lines of credit.” (Lines – plural.)  He actually expressed concern for small family restaurants because they tend to be “sit down” restaurants rather than drive-throughs and they don’t have access to lines of credit. They can’t survive sales with at 25% – or even 50% – of normal.

I am seeing a lot of reporting about concerns for commercial real estate. As more people work remotely, companies are re-evaluating whether all of their employees need to physically be in the office, they may need less space. Facebook has announced that by 2030 they expect that 50% of its employees will work remotely. If more and more employees work remotely will businesses reduce their leased or owned real estate? If they do, will rental rates decline? Will commercial real estate values decline?

There has also been a lot of discussion about how fast the economy will recover. I tried to think of some event that might offer a clue. After 9/11 it took two and a half years for air travel to return to previous levels. 9/11 was a one day event. COVID-19 is an ongoing event. (I have no intention of going to an airport, or car rental agency, or …any time soon.) I looked at some unemployment numbers from previous recessions and the pattern has been “unemployment happens fast, re-employment happens slowly.” I think that the unemployment numbers are seriously misleading. The U.S. labor force is 165 million people. It doesn’t count the people who lost their jobs and haven’t been able to file unemployment claims because some state unemployment systems have been overwhelmed. It doesn’t count people in the “gig economy” who are not employees but independent contractors. It doesn’t count people who have given up looking for a job. In prior recessions some older people who were approaching retirement age couldn’t find new work so they gave up and retired. They are no longer “unemployed.”

This is also an international pandemic – it is not just impacting the U.S. – it is impacting all of “US” everywhere. If economies around the world don’t recover quickly there will be less international trade. Supply chains have slowed down. If auto manufactures are building less cars, they are buying less parts. (From Mexico and China.) 

The COVID -19 relief packages may help many small businesses survive the crisis but the long term consequences may overwhelm them.  Many small businesses received PPP loans, which helped keep them going in the short term and which they will not have to repay.  Many of these businesses also secured EIDL loans, which they do have to pay back over a long term at low interest rates.  Many small businesses operate at low profit margins, so this additional debt may compromise their ability to survive.

-Michael Baumer

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by Michael Baumer

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