- While big-box stores are reveling in record profits, U.S. small businesses are floundering.
- One economist fears the small business crisis is a systemic threat to U.S. capitalism.
- Relief could come from an unexpected place: the housing market.
A tale of two economies. A classic case of the haves and the have nots. A K-shaped recovery. Use whatever terminology you want, but there’s no disputing that the pandemic has been a very different experience for those at the bottom and those at the top.
The U.S. Small Business Recovery Is ‘No Longer Underway’
That’s the case for individual consumers, but it’s no less true of American businesses. While big-box stores like Target and Home Depot are raking in profits so enormous they’d make Scrooge McDuck blush, small businesses are struggling just to survive.
And to an alarming degree, they’re failing.
More than a third of U.S. small businesses closed amid the pandemic and economic lockdown. The number of open businesses gradually rebounded between April and July, but Charles Schwab Chief Investment Strategist Liz Ann Sonders warns the recovery is “no longer underway.”
Data from the Opportunity Insights Economic Tracker indicates the recovery peaked on July 4, when the number of open small businesses was 7.7% lower than at the start of the year. By August 7, that gap had widened to 19.5%, equivalent to approximately 6.2 million businesses based on raw Small Business Administration statistics.
Not all of those shutdowns are permanent, but most businesses can’t survive for long without revenue. And as Paycheck Protection Program (PPP) funds run out, the rate of irreversible closures will accelerate.
That’s tragic for entrepreneurs, not to mention their employees, but that’s not where the devastation ends.
The effects ripple out to the broader community, where empty storefronts and rising unemployment leave landlords without income, create eyesores, and put pressure on property values.
State and local governments find themselves facing the one-two punch of reduced tax revenue and increased demand for social services.
Economist: Small Business Massacre Is a Threat to Capitalism
Economist Mohamed El-Erian argues this small business massacre presents a threat to the macroeconomy too. And he’s not just talking about its impact on GDP.
El-Erian told CNBC this week that he fears for the future of market-based capitalism itself. Watch his full remarks in the video below:
In a nut-shell, El-Erian argues that without a thriving small business community, the American public could sour on the tenets of capitalism, potentially creating a sociopolitical crisis.
Remember what small businesses do. They’re not just large employers, they also are the main way to have inclusive capitalism, an inclusive market-based system. And if you want capitalism to be sustained, you need buy-in from a lot of people. You cannot get buy-in if it’s all about large corporations.
While El-Erian believes the Federal Reserve needs to do more to support small businesses – not just the mega-corporations that populate the stock market – Bloomberg Opinion columnist Conor Sen believes relief could come from a surprising place: the housing market.
Why the Housing Market Could Save the Small Business Industry – And Maybe Even Capitalism
Sen wrote this week about another “paradox” the present economic crisis has created. While the “have nots” are getting hammered, the “haves” are – by some metrics – doing better than ever.
With the stock market piercing new heights this month and home values still rising vigorously despite the pandemic, the total net worth of American households may be at a record high. That’s a departure from past recessions, which have typically seen overall household wealth recover slowly over a matter of years.
Sen’s headline calls this balance-sheet strength “America’s Secret Weapon,” but he’s really most interested in home equity. Home values soared over the previous decade, and the housing market might be the one sector of the economy that’s enjoyed a truly V-shaped recovery.
With interest rates at record lows, prospective entrepreneurs have a unique opportunity to tap into their home equity. That means they can finance their ambitions – even if banks won’t give them a small business loan.
Sen says this could “kickstart a wave of small-business formation next year”:
Elevated levels of home equity could also kickstart a wave of small-business formation next year, perhaps offsetting some bankruptcies this year. It couldn’t do this after 2008, when households lacked that excess equity. Tapping home equity to start a business is likely easier and faster than getting a small business loan or raising money from friends and family.
Assuming home values remain stable, homeowners have quite a bit of equity to access.
According to CoreLogic’s latest Homeowner Equity Insights report, U.S. homeowners with mortgages accumulated $6.2 trillion in home equity between the first quarter of 2010 and the first quarter of 2020. That includes more than $590 billion in the last year alone.
Founders can tap into this wealth through cash-out refinancing or a home equity line of credit (HELOC).
Sen concludes that homeowners founding small businesses could help the economy to recover from the COVID-19 pandemic more quickly than it did from the financial crisis. And if Mohamed El-Erian’s warning is prudent, it could have an even weightier long-term impact.
It might just save American capitalism.