Before I get to our main topic, I should note that the Commerce Department’s first estimate of 1Q GDP came out yesterday at -4.8% (annual rate). That was slightly worse than the pre-report consensus of -4.0% and was the largest quarterly decline since 2008. While -4.8% is bad, most forecasters expect 2Q GDP to plunge by 30%-40% due to the economic shutdown. I’ll have more to say on this just ahead. Now, let’s move on to our main topic today.
In the April 14 issue of my Forecasts & Trends E-Letter, I predicted that millions of small US businesses might never reopen. Why did I make such a prediction? Because at that time, only 20% of small businesses who applied for the $2.2 trillion in stimulus loans had received any funding.
And over half (51%) of small businesses recently reported they only had enough resources to hang on for 1-3 months. We’re now beyond one month and well into month #2. It’s no wonder we’re already seeing a wave of bankruptcy filings, and it’s only going to get worse as data for April and May come in.
The number of Chapter 11 filings rose 18% in March alone from a year earlier, a dramatic swing from the 20% decrease in February, according to the American Bankruptcy Institute, a trade organization for professionals involved in bankruptcy proceedings.
The numbers don’t break out filings by company size, but given that the vast majority of US companies are small to mid-size, it is clear smaller companies are struggling the most.
The federal government has already approved or given out more than 2 million loans and grants to small businesses totaling nearly $360 billion, and another $310 billion is on the way to one of the programs. Yet we still don’t know how much of the money in the $2.2 trillion CARES Act has actually been received by small businesses.
Congress just approved another nearly $500 billion in yet the latest new small business stimulus package, but that money may not make it to small businesses for another week or more. The Associated Press reported earlier this week that Chapter 11 bankruptcy filings have accelerated even more so far in April, and we should expect a significantly higher increase than in March.
Even those owners receiving emergency loans and grants aren’t sure that help will be enough. The most vulnerable companies include the millions of restaurants and retailers that shut down more than a month ago.
Some restaurants have managed to bring in a bit of revenue by serving meals for takeout and delivery, but even they are struggling financially. Small and independent retailers, including those with online stores, are similarly at high risk of failure.
Unfortunately, I have to stand by my prediction earlier this month that millions of small businesses will never reopen. If that is true, and it seems all but certain now, we have yet to see the worst of this severe recession.
You might be thinking that with several states reopening their economies and lifting stay-at-home restrictions, we might be able to avoid millions of small business bankruptcies and permanent closures. However, most states which are reopening are doing so only in phases.
Texas, for example is partially reopening tomorrow, May 1. But while Governor Abbott cleared a wide swath of Texas retailers to reopen, he restricted their volume of customers to only 25% of what they were running prior to the corona crisis unfolding. Something similar is likely in other states considering reopening.
The big discussion among Texas retailers considering reopening is whether they can survive on only 25% of their previous sales volume. There is also their fear that they could be sued by any customers who might contract the virus while patronizing the retailers’ establishments. Ditto for their employees if one of them gets the virus due to contact with customers.
It’s impossible to know what will happen when business reopens in Texas, but I can tell based on what I see and hear, many retailers here will not be reopening tomorrow due to these and other concerns. Likewise, it also looks like many Texas consumers are not comfortable visiting the state’s retailers yet either. I expect something similar to this in other states looking to reopen just ahead.
There is no doubt this is going to be bad… really bad for the economy! The Congressional Budget Office now predicts the economy could plunge by 40% in the 2Q (annual rate). Call it a recession or depression, whatever you like, but we’ve never seen anything like this unfold so fast!
And then there’s the stock markets. Stocks have rebounded strongly on the prospects that the economy will be reopening soon and consumers will respond in a big way. As noted above, the reopening is going to take quite a while, and I have doubts about how consumers will respond.
While I hope the equity rebound continues, I don’t see why it will. We have not seen the worst of the bad news, by a longshot. If there are millions of small business bankruptcies in the next couple of months, as appears very likely, I will not be surprised if we see new lows in stocks just ahead. Let’s hope not… but be prepared.
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