To understand just how hard it could be to recover from a COVID-19 recession, consider the case of Jim Harrer.
Last week, the owner of kickboxing gyms in Kent and Federal Way learned he’d qualified for a $107,000 loan under the Payroll Protection Program — one of the last to do so before the U.S. Small Business Administration announced that the $349 billion program was out of funds.
But like many other business owners who scrambled to get the loans, Harrer isn’t sure he’ll be able to use the money.
The loans, of up to 2.5 times a company’s monthly payroll, are meant to encourage businesses to retain or rehire staff while they wait for their state economies to reopen, which in Washington could start next month. If Harrer uses most of the loan to rehire his 15 furloughed employees within eight weeks (he can spend some on rent and other expenses) he won’t have to pay it back.
The problem? Harrer has no idea when gyms and other businesses that rely on dense, group-based activities will actually be allowed to open. He worries that it might not be until July or even later that he can welcome back members – which means by the time he’s ready to rehire staff, the loan won’t be forgivable.
In that case, Harrer says, he may just use the loan funds to “pay off the loan and pretend it never happened.”
Harrer isn’t the only one with mixed feelings about a government rescue strategy that is sending hundreds of billions of dollars to small businesses, including nearly $5 billion in Washington state.
The Marqueen Hotel, a stately, 59-unit property near downtown Seattle, also applied for a Payroll Protection Program loan to help recover from a roughly 80% loss in business.
But, like Harrer, hotel executives don’t know when they’ll be able to reopen or how quickly guests will return. That makes it difficult to know when to ramp up operations and how fast to rehire furloughed staff, says Matt Hagerman, senior vice president at Seattle-based Columbia Hospitality, which manages the Marqueen and other local hotels. The worry, says Hagerman, is that “you could ramp up and then have to ramp back down.”
What both Harrer and Hagerman are struggling with, policymakers and economists say, is the mismatch between the crisis the government is trying to fix and the tools it is trying to use.
Partly, it’s mismatch of scale. Early on, both Congress and the White House vastly underestimated how deeply COVID-19 would disrupt the economy.
The first relief package, enacted March 6, included just $7 billion for the Small Business Administration. “And what you’ve seen, week after week after week, is a replay of the scene from ‘Jaws,’ where the guy says, ‘We’re going to need a bigger boat,’” says U.S. Rep. Derek Kilmer, D-Gig Harbor, who has proposed changes to the loan program.
Congress did get a bigger boat. The $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES), enacted March 27, included $349 billion in forgivable loans for small business to encourage them to rehire laid-off workers or, better still, not lay them off in the first place.
But as all that money has been doled out, it has become clear that the challenges facing small business will require more than eight weeks of payroll to fix. Not only are government-ordered shutdowns likely to stretch out past eight weeks, but the recovery, when it eventually starts, won’t be like anything policy experts — or businesses — have ever seen.
Where most economic recoveries are fueled by revived consumer demand and business investment — which often can be accelerated by government stimulus — the pace of this recovery will be governed largely by the coronavirus.
That’s already clear in Gov. Jay Inslee’s “phased approach” to re-opening the state economy that will start with businesses “most essential to our economic and physical and financial health” before getting to less essential businesses.
Many businesses expect restrictions on how fully they will be able to operate. Restaurants and bars, for example, could be limited to partial capacity to ensure social distancing. And most must be prepared to close back down if COVID-19 cases surge.
Economist also warn that consumers may be slow to resume their free-spending ways. Beyond the cautiousness that consumers exhibit after any recession, says Seattle economist Dick Conway, there may be lingering anxieties about returning to public-facing businesses even after public health officials sound the all-clear.
“The virus is dictating” the rate of recovery, says Conway, who has closely observed the Puget Sound economy through four downturns. Though pleased by the scale of the government’s stimulus efforts, Conway worries these initial relief efforts don’t capture the complexity of a disease-driven downturn.
“I’m not sure people have a clear understanding of what [the stimulus money] is going to do, or, in the environment we have, whether it will be effective at all, for a while.”
One problem is the bailout’s one-size-fits-all approach. The emphasis on payroll protection made sense as a way to reduce layoffs. But it favors companies with large staffs, while doing relatively little for smaller operations with one or two employees.
The bailout also largely ignores that companies in different sectors will recover at different rates. Hotels, for example, must wait for the lifting of restrictions not only on their own operations, but also on activities they depend on — businesses conferences, travel and tourism, generally.
Many of the guests who stayed at the Super 8 hotel in SeaTac before the pandemic were there for a night before getting on a cruise ship in Seattle. If the cruise business isn’t reopened soon — and much of it clearly won’t be — “you can expect at least a year for business to come back completely,” said Sandy Minhas, the property manager.
By contrast, “essential” companies, like Tukwila-based Hartung Glass Industries, which sells mainly to building contractors, see the possibility of a quicker recovery. Because some construction projects may be able to restart as soon as restrictions are lifted, “we think there is going to be some pent-up demand,” says Nick Sciola, company president.
Sciola said Hartung qualified for a payroll loan, which will let the company prepare for that demand by retaining its roughly 500 employees, including some 300 in Washington state.
But Sciola readily acknowledges the uncertainties: He, too, doesn’t know exactly when demand will fully recover. “If we keep our employees employed the next eight weeks, that’s great,” Sciola says. “But what happens after eight weeks?”
That uncertainty is compounded by the question of loan forgiveness. By encouraging companies to retain their staff, the rule is also affecting their ability to match their comeback plans to actual business conditions. Under normal circumstances, companies looking at uncertain demand might open only at half-scale or might delay their reopening for weeks or even months. All might think twice about using federal aid that could turn into a loan — and loan payments.
The point, says Harrer, is that being in a pandemic doesn’t suspend the rules of business. If his gym can’t even start to welcome back members until July, he says, “is that a business that you … go borrow money to bring back?”
Congress is aware of many of these problems, says Kilmer. His own proposed fix, co-sponsored by U.S. Rep. Jaime Herrera Beutler, R-Battle Ground, would include provisions allowing businesses up to eight more weeks of Payroll Protection Program funding, and would extend the forgiveness deadline to 30 days after the lifting of the national state of emergency.
Harrer, Sciola and other business owners would welcome those changes.
But paying for those extra weeks, and replenishing the program for businesses that missed the first round, won’t be cheap — Kilmer wants another $900 billion — and it’s not clear when or if a deal can be done. Senate Majority Leader Mitch McConnell, for example, favors a $250 billion addition.
Some economists worry that, even if the program is generously funded, it may still miss some of the bigger challenges businesses face during the COVID-19 recession.
Jeff Shulman, a marketing professor at the University of Washington’s Foster School of Business, thinks government aid should also focus on replacing the businesses’ lost revenues or on the expenses, such as rent or mortgage payments, that can sink even a fully staffed company.
“A loan cannot change the fact the coronavirus has completely shut down their revenue source for an indefinite time,” says Shulman. “Under the current system, defaulting on rent or existing loans will make it all but impossible for many business owners to rebuild when this crisis has passed.”
Government small-business loans would be most effective, Shulman says, if they could be used to encourage companies to adapt to the post-crisis economic environment, which may require a company to sell new goods and services and “redeploy its labor force in creative ways.”
That’s a message some companies are already heeding.
Tamar Lowell, owner of Bainbridge Island-based Access Culinary Trips, which offers food-related excursions around the world, saw business crater beginning in February. She says an industry recovery could take 18 months. But because her business is small – only one employee; she and her husband don’t take salaries – they qualified for a PPP loan of barely $17,000, and were able to get only another $145,000 in a federal disaster loan.
That’s not enough to last until the industry recovers — but Lowell says it may be enough to help adapt her travel business to a post-COVID-19 world. That means more destinations —“we need to be as geographically diversified as possible because we do believe this thing’s going to keep popping up in different places,” she said. But it also means more domestic destinations and even a “pivot” to a model that brings the high-end culinary experience “into the home in a very robust way.”
Whatever else the pandemic will bring for small business in the long-term, Lowell says, for now it’s likely to mean “a lot more Americans staying closer to home.”