The condition of small and medium-size firms implies a potential inflection point in the nascent economic rebound following the near shutdown of the economy last spring. Without further reform and support of the signature Paycheck Protection Program—which provided a vital lifeline to those firms during the worst of the pandemic—there will be an increase in bankruptcies, followed by another round of job losses, this time tilted toward the permanent elimination of jobs that support the bulk of the American middle and working classes.
With many of these businesses still struggling to survive, almost all of the PPP loans made to small and midsize firms will have to be forgiven to prevent a much larger round of permanent job losses. Since the onset of the crisis, we have made the case that roughly one quarter of the jobs lost during the initial part of the pandemic would be permanent. Recent data surveying small and middle market firms indicates that forecast may be somewhat optimistic. Moreover, the risk tolerance of the U.S. Treasury is going to have to increase in order for businesses to better utilize not only a replenished PPP, but also the $600 billion sitting on account at an underutilized Main Street Lending Program.
Further aid needed
Much of the focus around the current policy impasse around a potential fifth round of fiscal aid has been on the status of the unemployed and the roughly $15 billion per week they stopped receiving on July 31. That is understandable, given the 28 million individuals on some form of unemployment insurance through mid-August, the millions more who have exhausted their state and pandemic emergency assistance, and the median duration of unemployment standing at 15 weeks. Yet the condition of the small and middle market firms that comprise the majority of the real economy is such that they will almost certainly need further aid and significant policy liberalization of the PPP and MSLP going forward.
Recent data culled from our proprietary RSM US Middle Market Business Index and the National Federation of Independent Business point to an increase in bankruptcies and unemployment later this year that will cause the aforementioned labor market dynamics to shift in a negative fashion and feature permanent job losses.