US Federal Reserve Sees Small Businesses Disaster

US Federal Reserve Sees Small Businesses Disaster

Some types of businesses may not be able to survive in the post-pandemic world even after the American economy recovers from the coronavirus, the US Federal Reserve said Wednesday.

Defeating COVID-19 is the key factor in restoring the world’s largest economy, but some of the damage may persist especially if consumers remain reluctant to return to normal activities, Fed officials said in the minutes of the policy meeting held late last month.

Officials “expressed concerns that a large number of small businesses may not be able to endure a shock that had long-lasting financial effects.”

And they worried that “even after social-distancing requirements were eased, some business models may no longer be economically viable,” especially if consumers decide to “avoid participating in particular forms of economic activity.”

With over 90,000 deaths from the virus and data showing more than 30 million jobs destroyed at least temporarily, the central bankers said the US economy will see an “unprecedented” decline in the second quarter as the unemployment rate rises to the highest in the post-World War II period.

Fed Chair Jerome Powell said this week that GDP could “easily” contract 20-30 percent, while unemployment could spike to 25 percent.

Restaurants, theaters and sporting venues are particularly vulnerable since they count on packing in large crowds — exactly the kind of behavior many people will want to avoid especially if economic reopening leads to another flare up in coronavirus cases.

The Fed officials said “in addition to weighing heavily on economic activity in the near term, the economic effects of the pandemic created an extraordinary amount of uncertainty and considerable risks to economic activity in the medium term.”

They raised concerns that “temporary layoffs could become permanent,” and that “the possibility of secondary outbreaks of the virus may cause businesses for some time to be reluctant to engage in new projects, rehire workers, or make new capital expenditures,” according to the minutes of the April 28-29 meeting.

Programs rushed out by the Fed and Congress, including expanded unemployment insurance and the Paycheck Protection Program, which provides forgivable loans to small businesses, seemed to be cushioning the blow, “Participants acknowledged that even greater fiscal support may be necessary if the economic downturn persists.”

Congress approved $3 trillion in relief measures, but another $3 trillion package approved by the Democratic-led House of Representatives faces opposition from Republicans worried about the cost of the programs.

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S. Jack Heffernan Ph.D. Funds Manager at HEFFX holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.

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