COVID-19’s toll on US business? An extra 200,000 closures

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The economic toll from the COVID-19 pandemic has been tough to measure, but new estimates from the Federal Reserve suggest it wasn’t as bad as feared for smaller businesses.

The pandemic resulted in the permanent closure of roughly 200,000 U.S. establishments above historical levels during the first year of the viral outbreak, according to a study released Thursday by economists at the Fed. In recent years, about 600,000 establishments have permanently closed per year, or about 8.5%, according to the study.

US BUSINESSES NEAR BORDER STRUGGLE WITH BOUNDARIES' CLOSURE

Individual companies account for about two-thirds—or roughly 130,000—of the extra closures if historical patterns hold, according to the Fed economists, who examined businesses with employees. Other closed establishments are units of major companies—say, a Gap or Pizza Hut—that closed some locations while remaining in businesses.

Barber shops, nail salons and other providers of personal services appear to be hardest hit, according to the Fed study, accounting for more than 100,000 establishment closures beyond historically normal levels between March 2020 and February 2021.

Many small businesses continue to struggle to stay afloat, but the new estimate suggests that U.S. business failures have been fewer than some economists expected. One earlier study estimated that more than 400,000 small businesses had closed in the first three months of the pandemic.

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"Actual exit is likely to have been lower than widespread expectations from early in the pandemic," the Fed researchers said in their report.

The new estimates are preliminary. In addition, some businesses that have hung on could eventually collapse under the weight of back rent, unpaid loans and other expenses.

The Fed estimates don’t include the roughly 26 million U.S. businesses without employees. Business failures traditionally have been highest among the smallest firms, those with fewer than five employees.

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The study doesn’t explain why small business failures have been lower than anticipated, but some economists point to extensive government aid, including the Paycheck Protection Program, which provided $525 billion in forgivable loans to small businesses last year, and reopened in January with an additional $284 billion in funding.

"The PPP allowed small businesses to ride things out," said Scott Stern, a management professor at the Massachusetts Institute of Technology’s Sloan School of Management who studies business formation. "Not only are things less bad than we thought, but they are less bad by an order of magnitude."

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