Consequences of Failure

Update 481 • Consequences of Failure:
The Prospect of Months without Relief 

The CARES Act, passed in March, was a short-term antidote to head off the worst of the economic impact from COVID. Many of the programs were designed to sunset this calendar year, with the expectation that Congress would provide additional relief to follow as needed. 

Seven months later, that additional relief is nowhere to be found. Negotiations have started, stalled, and stopped too many times to count. Consequently or coincidentally, so has the economic recovery and, going forward, the consequences of this inaction will be severe. We take an in-depth look at what a future without another package looks like, below. 




This week, Harvard economists Lawrence Summers and David Cutler projected a $16 trillion hit to the US economy from the current downturn — four times that from the Great Recession. With every passing week, more people slide into long-term unemployment, and more small businesses close for good.

Below, we analyze the effects of the recession on workers, small businesses, and Wall Street, and what the lack of another package might mean for them.

Unemployment’s Trajectory 

In April, unemployment rates spiked, peaking at 14.7 percent. As of September, that number is 7.9 percent, about 12.6 million people. But this figure does not include those who are no longer looking for work (more than a million people left the labor force last month), those who left jobs to take care of children or loved ones, or the many who remain misclassified by the BLS. Last month, 29.2 million people claimed Unemployment Insurance (UI) benefits. More temporary layoffs will become permanent job losses. 

The United States also has 11 million fewer jobs in September than in February. Long-term unemployment and worker discouragement is set to rise rapidly in the coming months. In April, just under one million Americans fit into the long-term unemployed category. Now, Moody’s Analytics estimates this number will surpass five million in early 2021, but that number could double in a worst case scenario. 

So far, the economic impact has been felt disproportionately by low-income Americans. Pew Research finds that, since March, a quarter of adults have had trouble paying their bills, a third have dipped into savings or retirement accounts, and one sixth have borrowed money from friends or family or utilized a food bank.

With CARES Act II negotiations pushed off until at least after November’s election, such economic dynamics may be locked in for the foreseeable future. Since the 1980 recession, the labor market has taken longer and longer to recover following economic downturns. Employment levels cratered following state lockdown orders in March and April and have since recovered to some extent. But the pace of recovery is slowing down, and fiscal assistance is running out. 

Percent Change in Employment Relative to Business Cycle Peak By Business Cycle 

Source: The Hamilton Project (Brookings Institute);Bureau of Labor Statistics 

Small Businesses Living on the Edge

Just under half of all private sector workers are employed by small businesses with fewer than 50 employees. Small businesses tend to have small cash reserves, thin margins, and difficulty accessing capital. As a result, they are highly susceptible to prolonged market downturns.

The Paycheck Protection Program (PPP) was lauded as an example of Congress’ excellent COVID response but has amounted to little more than a bandage on a potentially mortal wound. Despite the $549 billion disbursed through the PPP, the National Bureau of Economic Research reports that the number of small business owners across the country has decreased by nearly a quarter since February.

At the same time, the number of businesses permanently closing is steadily increasing. Per Yelp’s most recent Economic Impact Report, 60 percent of business closures caused by the coronavirus are now permanent. 

Number of Business Marked “Closed” on Yelp That Were Open on March 1

Source: Yelp – Local Economic Impact Report

With the PPP expiring in August and additional small business relief unlikely until early 2021, consequences for small businesses across the country could be dire. According to the National Federation of Independent Businesses, half of business owners who received PPP will require additional financial support to remain solvent. A Goldman Sachs survey found that 30 percent of small business owners expect to exhaust their cash reserves by January. PPP funds supported around five million small businesses and helped maintain 51 million jobs. Without intervention, an additional 2.5 million small businesses may close, leading to a potential loss of 25 million more jobs. 

Wall Street: “What recession?”

As many workers face long-term unemployment and thousands of small businesses shutter, Wall Street has largely weathered the crisis. There has not been a wave of bank failures that some feared when markets seized in March. In fact, JP Morgan announced yesterday earning more than $9 billion in profit in Q3, more than they earned in Q3 2019. Even Citigroup, which had a relatively “bad” quarter, reported $3.2 billion in profit. The evidence of a “K-shaped” recovery could not be clearer.

Wall Street did not achieve this success on its own. Banks and corporations issuing debt were buoyed directly by the Fed’s aggressive liquidity measures and indirectly by the economic relief provided to individuals. And unlike some of the relief for individuals such as enhanced unemployment benefits that lapsed at the end of the summer, financial markets have continued to benefit from the Fed’s measures.The Fed plans to maintain its emergency facilities at least through the end of the year after deciding to extend them this summer. 

Yet the health of the financial sector going forward could still be contingent on additional fiscal relief. JP Morgan’s earnings numbers show that while the firm saw increased profits, its consumer business was down 9 percent compared to Q3 2019. Q3 still included one month of unemployed workers receiving the $600 a week federal benefits, but Q4 is on track to have none. 

JP Morgan CEO Jamie Dimon called for more fiscal stimulus to stave-off a double dip recession, which he said could strain the bank’s reserves. Dimon’s comments reflect the reality that even the bright spots of the economy could be imperiled in the coming months by Senate Republicans’ intransigence. 

Elections Have Consequences

With CARES Act II negotiations stalling, it may be January 2021 before workers and small business owners can count on any help from Washington, assuming Democrats retake the Senate and the White House. Many communities barely managed to claw back losses from the Great Recession, and it could take even longer to recover from the job losses and business closures caused by COVID. The failure of the Trump Administration to deliver critical resources to those in need during these times should be at the forefront of voters’ minds this election season.

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