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Fed Study Suggests COVID-19 Impact on Businesses May Be Less Severe Than Originally Feared

  • Federal Reserve study suggests that business closures directly attributed to the COVID-19 pandemic are not as severe as originally expected
  • Closures among small businesses were elevated, but in line with higher closure rates among newer, smaller firms
  • Report cautions that it is relying on non-traditional data and that the first official statistical reports on the issue won’t be released until this fall

Summary by Dirk Langeveld

A Federal Reserve report is suggesting that the impact of the COVID-19 on businesses may not be as severe as previously feared. However, the report also cautions that its conclusions are based on non-traditional data and that other factors may create additional uncertainties in the near future.

“Business Exit During COVID-19: Non-Traditional Measures in Historical Context” scrutinizes a variety of data (including retail and office vacancies, “going out of business” search results, paycheck issuance, and phone tracking data) to assess how businesses have been impacted by the pandemic. It suggests that an oft-cited estimate by Yelp and Womply that 400,000 businesses had been shuttered by July 2020 is an overestimate, and that approximately 200,000 business closures have been spurred by the pandemic rather than other factors – an increase of one-quarter to one-third over normal conditions.

The report notes how there are significant variations within business sectors, such as the leisure and hospitality sector seeing elevated restaurant closures but more stability in outdoor recreation businesses. Personal services such as barber shops and nail salons appear to have suffered the worst impact of the pandemic, with about 100,000 permanently closing. There were also increased closures among full-service restaurants, certain retailers, and auto repair businesses.

The smallest firms, or those with five or fewer employees, were most likely to fail during the pandemic, especially if they had been established in the year before the pandemic. However, the Fed notes that the failure rate of new, extremely small firms is above 30 percent in a typical year and over 10 percent even for well-established smaller businesses. The report cites a previous study noting how small business bankruptcies through August 2020 were significantly lower than the previous year.

Small businesses had elevated shutdown rates in April and May 2020, but by August the shutdown rates among all business sizes were lower than historical patterns. While closure expectations were higher in several sectors, they had eased since November and were lower than expected in several sectors. The report suggests that policy actions such as the Paycheck Protection Program likely aided this result, and that the economic blow of the pandemic may be softened if excessive closures don’t affect large firms or a greater number of small firms.

However, the report also cautions that the pandemic could still result in disruptions such as a loss of wealth among business owners and abrupt changes to local economies. It also says there are other factors such as the risks presented by more infectious COVID-19 variants or the delayed financial impact on business owners caused by matters such as deferred rent or accumulated debt.

The Fed also notes that the report is based on non-traditional data, and that the Bureau of Labor Statistics will not have firm numbers of business closures that occurred in mid-2020 until this fall. The Census Bureau report on this matter will likely not be public until 2023.

“Ultimately, we will not have certainty about business exit during 2020-2021 until the pandemic is behind us and high-quality official data are published,” the report states.

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