As states slowly open their economies, markets are watching key economic data in the hope the U.S. will see a bounce back from the devastating economic (and health) toll that COVID-19 has inflicted across America. The results will also signal how successful policy has been in keeping businesses alive, and whether several incentives embedded in certain policies have maintained the link between businesses and the workers they laid off intact.

The Paycheck Protection Program (PPP), part of the Coronavirus Aid, Relief, and Economic Security (CARES) package, was meant to, first, provide economic relief to small businesses affected by COVID-19 and, second, incentivize them to keep their workers on payroll.

Assuming that the virus that spread across the U.S. is contained in the second quarter, as S&P Global Ratings assumes, the PPP was built to provide liquidity to help small businesses survive despite the lost revenues during the lockdown. It also provided an incentive of loan forgiveness to encourage employers to keep their employees on the books. The Treasury said that "loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities," as long as 75% of the forgiven amount is spent on payroll and the business either keeps or quickly rehires the presumably "temporarily" unemployed by June 30. A nagging concern is whether the 80% (over 18 million people) considered to be "temporarily unemployed" will turn permanent, just as their extended benefits expire. (A few more million lost jobs will likely be added with the May Bureau of Labor Statistics' [BLS] report.) Given that small businesses employed 59.9 million workers in 2016 (47.3% of the U.S total), the success of PPP will have far-reaching consequences for not only the pocketbooks of these workers, but also for the recovery overall.

The government took swift action to address the financial holes businesses faced when economic activity came to a sudden stop. Whether the PPP will successfully meet its goal to tether businesses to their workers remains unclear. Looking at both state and industry data, as well as government jobs data since COVID-19 arrived in the U.S., it appears that the first round of PPP loans missed its mark. S&P Global Economics found that loans from PPP 1 did not make it to the states (and industries) with the most need, in terms of jobless claims.

However, it looks like, after hearing some concerns, Congress and the SBA adjusted the PPP 2 program. With smaller loans, on average, than PPP 1, the second round could get into more pockets.

Our assessment is based on limited loan data (through May 8) from the Small Business Association (SBA). PPP 2 has only doled out $188.9 billion, or 61% of its total funds, and no loan approval information was yet available by industry. Given limited financial data on the small businesses awarded a loan, our analysis focused on the jobs initiative of the PPP program. The industry and state data are aggregates, with no details on the businesses approved for the loans--the size of the workforce and balance sheet, for example. We also recognize that a business's pre-virus financial health "starting point" should be considered when determining decisions to lay off workers. Still, this preliminary analysis may provide some framework when gauging next steps in policy decisions as the U.S. economy begins to slowly recover and businesses open their doors.

While governors open their states hoping for a strong rebound, a state's recovery ultimately depends on whether Americans believe that COVID-19 is really contained and they feel comfortable enough to leave their homes and spend.

Assuming businesses survive the lockdown, their decision to rehire workers will likely depend on Americans' willingness to spend. Businesses may test the waters on consumer demand before they decide to rehire workers, and, if they do, how many workers they could afford to bring back on the books. Businesses may ultimately decide that the loan forgiveness "carrot" may not be enough to cover the costs required to rehire their workers.

Policymakers will have their work cut out for them, with recent jobs data indicating the degree of the damage inflicted on workers across the U.S. There have already been 21.4 million jobs lost since the COVID-19 recession started (March through April). An additional 10 million more workers have already applied for insurance benefits since the April jobs report, meaning that the devastating jobs numbers in the BLS April report will only get worse in May--another 6 million jobs will likely be lost in that BLS report.

The First Round Of PPP: Industry Impact

The size of the loans approved in PPP 1 were large considering that 98% of small business have fewer than 20 workers or no workers on its payrolls (see table 2 in the Appendix). The average loan size for PPP 1 was $206,000, with 1.66 million loans approved. With approximately 30 million small businesses in the U.S., this was not enough to meet significant small business demand.

Based on the count of loans approved, 74% of loans were for $150,000 and under, and 17% of overall loan dollars were for loans in this range (no detail was given on smaller size loans). In contrast, less than 1.57% of the total number of loans were for amounts larger than $2 million. However, those businesses getting more than $2 million received 27.8% of the loan money in the PPP 1. This likely limited the program's ability to reach the many small businesses in need.

We define industries less directly affected by social distancing to include most goods-producing industries and some services industries. Generally, service industries are most affected by social distancing measures (see the footnote in table 1). We found that 59% of the total loans approved in dollars for PPP 1 went to industries less affected by social distancing (see table 1). While these industries faced significant job losses--accounting for 6.3 million jobs lost in April (31%)--industries more closely impaired by social distancing saw losses that were much higher. (Even those industries less directly impacted by social distancing still suffer secondary losses, which factored into their decisions to lay off workers.)

Goods-producing industries captured 28% of the dollar loans authorized by PPP 1. The energy industry is a special case, given the quarantine-driven drop in prices. Though the direct impact on jobs for small businesses in the sector, so far, has been modest, it captured 1% of total loans and lost "only" 46,000 jobs. Services we consider to be moderately affected by social distancing, such as information services and financial industries, captured around 31% of the first program's loan dollars. Goods-producing industries accounted for only 2.3 million (11.5%) of the 20.5 million jobs lost in April. Service industries we consider moderately affected by social distancing accounted for 5.3 million (25.6%) of the total jobs lost in April.

In contrast, service industries we consider significantly hurt by social distancing accounted for an unprecedented 14.1 million jobs lost in April (69% of the 20.5 million) but received just 41% of the first program's total loans approved. Of those industries more significantly affected by social distancing measures, leisure and hospitality and retail stand out as suffering the most job losses, with 9.8 million jobs, or 48% of the total, lost in April. However, they only received 19% of the first program's total loans approved.

Table 1

Accommodations and food services, in particular, lost 6.3 million jobs (30.9% of the total jobs lost) in April but received just 8.9% of the first program's total loans approved (see chart 1). Retail and health care and social assistance each lost around 2.1 million jobs (over 10% of total jobs lost) but received 8.6% and 11.7%, respectively, of the first program's total approved loans. In contrast, construction and professional and technical services lost 975,000 and 509,000 jobs, respectively, but received 13.1% and 12.7% of the first program's total approved loans.

Chart 1

Chart 2

The breakdown of the small business employment structure, by industry, helps explain the variation in lost jobs from COVID-19. For example, jobs in small businesses captured 41.6% of 2016 overall private-sector jobs in the mining and logging industry (see chart 2, data in appendix). However, 81% of those mining businesses have no employees (categorized as "nonemployer firms" by the SBA 2019 Small Business Profile report), which helps explain why the job loss in the mining sector has been modest, so far. A small business owner can't lay off workers if they have no employees on the books. By way of contrast, small businesses represented 60.6% of overall private-sector jobs in the accommodation and food services industry, with 58% of those businesses having employees on their payrolls. Accommodation and food services represented the smallest share of small businesses with no employees on the books. Arts and entertainment and transportation and warehousing had the largest share of small businesses with no employees, 92% and 91%, respectively.

The First Round Of PPP: State Impact

State unemployment rates have soared since COVID-19 entered the scene. But the state unemployment rate, as can be seen in the Department of Labor's (DOL) Unemployment Insurance Weekly Claims May 14 report, varied significantly by state (see chart 3). For example, Nevada had one of the highest unemployment rates in the country, and was four times that of Florida.

Chart 3

We found that states with the highest continuing jobless claims from March through May 2 ended up seeing the smallest dollar amount of approved loans (see chart 4). Relative to the size of continuing claims, Nevada received just $6,710 per insured claimant, California received $6,916 per insured claimant, Oregon got $7,786, Rhode Island $9,340, and Michigan $9,969.

Eight of the 10 states that received the smallest dollar amount of loans had the 10 highest insured unemployment rates in the country. Like California, which, as of the DOL's May 21 report, is (fortunately) no longer in the top 10, as states open up, we will see the number shift in a positive direction.

On the other end, states with fewer continuing jobless claims received relatively larger dollar amounts of loans approved per insured claimant. South Dakota stands out as the largest beneficiary of dollar loan approvals relative to its continuing claims, with $57,220 per insured claimant. Other states that received outsized dollar amounts in loans relative to the number of continuing claims include Nebraska with $45,626 per claimant, Wyoming with $44,061, Florida with $41,589, and Utah with $39,822.

Four of the five states that received the largest dollar amount of loans per claimant had the lowest insured unemployment rates in the country. Seven of the 10 states that received the largest loan amount relative to claims had the lowest insured unemployment rates in the country.

Looking at PPP 1 by the size of the labor force, five of the 10 states that received the largest loan amount relative to overall labor force had the lowest insured unemployment rates in the country (see chart 6). Likewise, five of the 10 states that received the smallest loan amount relative to overall labor force had the highest insured unemployment rates in the country.

By the number of workers applying for initial jobless claims, the picture of PPP 1 still indicated that states with higher claims were receiving smaller loan amounts relative to states with lower levels of initial jobless claims (see chart 8).

In our assessment, seven of the 10 states that received the smallest loan amounts relative to overall initial claims were among the top 10 states with the highest insured unemployment rates in the country, and seven of the 10 states that received the largest loan amount relative to overall initial claims had the lowest rates.

The Second Round Of PPP: State Impact

Although data on PPP 2 is sparse so far, it appears that the second program has improved on the first. PPP 2 has already approved a lot more smaller loans than in the first round, and the approved loans appear to reach more businesses, with loans less concentrated in a few states when normalized by several job indicators. Moreover, states with the highest levels of unemployment have moved up the ladder, receiving a greater share of loans than in the first round.

The average size of a PPP 2 loan, at $73,000, was less than half the size of the average PPP 1 loan ($206,000). With smaller loans, on average, than PPP 1, the second round could get to more businesses that need it. The number of loans approved under $150,000 made up 91% of total loans approved in the second round, with the number of loans $50,000 or under accounting for 73.3% of the total count. By comparison, only 74% of total loans were under $150,000 in the first round. (The first round gave no breakdown of loan size under $150,000.)

The number of loans between $2 million and $5 million account for just 0.31% of the total number of loans approved in the second round--one-fifth the number (1.57%) in the first round. As a share of the total dollar amount, PPP 2 loans between $2 million and $5 million accounted for 19% of the total. In contrast, PPP 1 loans between $2 million and $5 million accounted for almost 27% of the total. The smaller average loan size means more loans could be made. Already, there have been 2,571,167 loans in PPP 2, compared with 1,661,367 loans in the first round. (This is based on the $188.9 billion PPP 2 loans approved through May 8, which is 61% of the total $310 billion authorized for approval.)

Comparing the amount of PPP 2 loans approved to each state relative to its total number of continuing jobless claims, the second program also seems to have helped level the playing field, reducing the spread in loan amounts between the largest amount and the smallest amount (see chart 5). States with the highest unemployment rates since COVID-19 no longer seem to have received the smallest share of the PPP pie.

Now, only three of the 10 states that received the smallest amount of loans were among the 10 states with the highest insured unemployment rates in the country: Pennsylvania, Rhode Island, and West Virginia (based on Department of Labor data for the week ending April 25). The seven states with the highest unemployment rate in the country, which lagged in the first round of PPP, have also received a bigger slice of the loans that have been approved so far in the second round. The states with the highest insured unemployment rates in the country--Nevada, California, and Michigan--are closer to the middle of the pack in terms of approved loans per insured claimant.

However, states with fewer continuing jobless claims still received relatively larger dollar amounts of loans approved per insured claimant. Three of the five states that received the largest dollar amounts relative to claims also were among the five states with the lowest insured unemployment rates in the country. Five of the 10 states that received the largest dollar amounts relative to claims were among the 10 states with the lowest insured unemployment rates in the country.

By the size of the labor force, five of the 10 states that received the largest loan amount relative to overall labor force were among the 10 with the lowest insured unemployment rates in the country (see chart 7). None of the 10 states that received the smallest loan amount relative to its overall labor force were among the 10 states with the highest insured unemployment rates.

When controlled by the number of workers applying for initial jobless claims, the PPP 2 picture is even brighter (see chart 9). It indicates that those states suffering higher levels of initial jobless claims were no longer at the bottom, in terms of loan size, relative to what they received in the first PPP round. Only two of the 10 states that received the smallest loan amount relative to overall initial claims were among the 10 states with the highest insured unemployment rates. In addition, states with very low levels of initial jobless claims didn't get the lion's share of loan approvals this time. In our assessment, only one of the 10 states with the lowest unemployment rates had received approval for one of the top 10 loan amounts.

Overall, the second round appears to be an improvement over the first round of PPP. Still, if one were to look at PPP 1 and PPP 2 in the aggregate, the overall benefits have gone disproportionately to states with fewer jobless claims.

Table 2

Chart 4

Chart 5

Chart 6

Chart 7

Chart 8

Chart 9

Small Businesses Are At Risk Of Closing

Several surveys have shown the significant stress on small businesses, indicating that millions of small businesses will be at great risk of closing permanently. Approximately 30 million small businesses are in the U.S. But many may not survive after COVID-19 leaves the stage.

According to a survey by Main Street America, "The Impact of COVID-19 on Small Business," nearly 7.5 million small businesses may be forced to close over the next five months, with 3.5 million more at risk of closure in the next two months. The Chamber of Commerce/Met Life April 3 small business survey also said that 24% of the 1,700 small businesses reviewed expect that they will be permanently closed in one to two months if the disruptions continue. Outside economic research indicates that entrepreneurs tend to be overoptimistic about their prospects--so actual business survival rates may be even worse.

Chart 10

Chart 11

According to the National Bureau of Economic Research (NBER) working paper "How Are Small Businesses Adjusting to COVID-19? Early Evidence from a Survey," many small businesses are "financially fragile," with expenses over $10,000 per month for the median firm and only enough cash on hand to last for two weeks. They found that if the crisis lasts four months instead of one month, only 47% of businesses expect to be open in December compared to 72% under the shorter duration.

The NBER survey also found that 50% of respondents believe that the crisis will last at least until the middle of June, suggesting that many businesses expect this to extend well beyond their current cash. That gives ample reason why funding through CARES is vital. However, according to the Chamber/MetLife report, for those who said that they did apply for PPP funds or tried to apply (about 32%), only one-third (9%) received loans (see chart 11).

Business Survival Is Key

Currently there is limited data on how many small businesses were forced to permanently close. However, numerous small business surveys indicate that the survival of many remains a significant challenge, to them and their staff.

The unemployment rate soared to another record of 14.75% in April. The household survey reported that 16.2 million unemployed workers said that they were temporarily laid off (the BLS definition is that those workers expect to return within six months or have a specific recall date), bringing the overall number of temporarily unemployed to just over 18 million. That brings the total of temporarily unemployed to about 80% the overall number unemployed.

There are concerns about survey misclassifications--the BLS noted that an unusually large number of workers were recorded as employed but absent from work due to "other reasons," which may not have been the case. The jobless rate would have jumped by almost 5 percentage points, closer to 20%, if those workers were labeled as temporarily unemployed.

The BLS establishment survey was equally as devastating, with an estimated 20.5 million jobs lost in April. The figure vaulted over the "meager" job losses of the Great Recession and brought overall payrolls down to levels not seen since February 2011 at 13.5% in March. It was, at least, "better" than our expectation of 26 million jobs lost for the month. Unfortunately, since over 12 million more workers have applied for unemployment benefits since the BLS April survey, the May report will also likely see jobs losses well into the millions.

While businesses would undoubtedly want to make the commitment to rehire workers and get the reward of loan forgiveness, the success of this program depends on several factors: how many businesses that reached out for government financial aid actually got it; whether the aid, if they did get it, was enough; and whether the time stipulations in the PPP loan contract were flexible enough, giving the economy time to see COVID-19 fears subside, and with that, a boost in economic demand.

In addition, will customers, confident that the virus has been contained, flock to stores, with revenues soon picking up once the doors open wide? Even if prospective shoppers risk the streets, it's unclear if these customers (many of whom were laid off) will have money to spend after the pandemic hurt their financial health (and possibly devastated their physical health). Consumers may want to continue to hold back on discretionary purchases until they get the call back from their boss. These factors will determine the pace of economic recovery once the virus is contained, which is almost as tricky thing to project as the path of COVID-19.

The "sudden-stop" recession has reached historic levels in terms of economic impact. Along with the human toll of COVID-19, the speed and depth of the hit to the economy have been unprecedented, reflected most in job losses and small business closures. Few areas or industries have been spared. The government has moved quickly and taken significant steps to turn the economic tide, and we applaud their swift and decisive actions.

However, not all of these actions have achieved the desired result, and some, such as PPP, remain a work progress. There is still work to be done, and part of this is to improve the targeting of these efforts and delivery of these funds. While we are looking forward to the time when more "Help Wanted" signs appear, more help for small businesses is needed.

Appendix

Table 3