Small Business Expenses during COVID-19

As the COVID-19 pandemic continues to affect the physical and economic health of the U.S., policymakers continue to have an incomplete view of the financial response of the small business sector. In the early months of the pandemic, the typical small business saw substantial revenue and cash liquidity declines (Farrell, Wheat, and Mac, 2020a, 2020c); moreover, there were high observed rates of small business failures. (Bartik et al., 2020; Fairlie 2020a, 2020b). These observations are consistent with the view that revenues and cash liquidity are strongly related to small business survival (Farrell, Wheat, and Mac, 2020b). However, in subsequent months, cash balances saw substantial increases and remained at levels substantially higher than they were prior to the pandemic (Farrell, Wheat, and Mac 2020c, Census Bureau 2020).¹ Notably, these balance increases occurred while small business revenues remained at levels meaningfully below levels observed prior to the pandemic.²

The trajectory of cash balances and revenues since April raises an important question for policymakers about the extent to which small businesses continue to make payments to employees and other suppliers. In the early months of the pandemic, expenses fell sharply along with revenues (Farrell, Wheat, and Mac, 2020a). From mid-April to May, cash balances increased sharply, but with a timing that was consistent with the arrival of cash inflows from federal programs including, but not limited to, the Payroll Protection Program and other CARES Act programs (Farrell, Wheat, and Mac 2020c). Less clear is whether expense growth accelerated after these liquidity increases, or whether they continued to track the slow recovery of revenues. A more detailed understanding of the progression of expenses is critical to ongoing policy debates around the appropriate provision of cash liquidity to the sector, and the potential for further shutdowns and revenue losses in the future.

JPMC Institute data shows that while many small businesses had substantially increased cash liquidity over the summer months, expense growth did not materially outpace revenue growth through September. Figure 1 depicts weekly median balance, revenue, and expense growth for firms in our sample from the week ending March 3^rd until the week ending September 25^th. In these data, median balance growth dropped to -15 percent during the week ending April 10^th, reached its peak during the week ending August 21^st at 41 percent, and then gradually tapered to 35 percent by the week ending September 25^th. As noted in prior research, large increases in cash balances followed just after PPP applications resumed in late April, and the immediate subsequent growth in balances is likely attributable to receipt of PPP funds—it is unlikely that this increase resulted from small businesses generating savings by cutting expenses more than revenues (Farrell, Wheat, and Mac, 2020c). However, our most recent data show that median balances continued to climb for several months after that point. Specifically, the trajectory of balance growth from early May to late September may be driven both by operational and financing cash flows.

Notwithstanding higher levels of cash liquidity, Figure 1 also shows that typical small business expenses remained depressed, down 7 percent by the end of September, and closely tracking the slow recovery in revenues. Administrative data from payroll processors indicate similar declines in small business payroll in September, suggesting that small businesses have reduced payments to both employees and other suppliers.³  Notably, expenses may be beginning to climb more quickly than revenues. Between early May and early July, median revenue growth was often higher than median expense growth, consistent with the continued upward trajectory of balances, and small business financial responses after other disasters (Farrell and Wheat, 2018). In contrast, from early July until the end of September, median expense growth was often higher than revenue growth, consistent with flattening balance growth and the beginning of a decline in median balances.

The overall shape of expense trajectories was similar across cities, though the extent of expense growth and decline varied widely. Table 1 presents median expense growth for three weeks—the week with the largest overall decline in median cash balances in April, the week with peak median balance gains in August, and the last week in our data series in September—across 25 metro areas. In San Jose, Seattle, New York, and San Francisco, most small businesses had expenses at least 10 percent lower than they were 52 weeks earlier by the end of September. In contrast, in Sacramento and Atlanta, expenses had returned to levels observed 52 weeks prior.

Finally, our data illustrate that small businesses experienced this overall pattern of expense growth across a wide range of industries. Figure 2 shows median expenses growth for four industries: restaurants, personal services, retail, and health care services. At the onset of the pandemic, restaurants and personal services saw some of the most severe drops in revenue and balances, retail small businesses saw declines that were still large if less so, while health care services firms experienced a more modest decline (Farrell, Wheat, and Mac, 2020a). Over the summer, restaurants and personal services continued to see the largest decreases in expenses, with expenses still lower by 18 and 19 percent by the end of September, respectively. To the extent that these lower expenses reflect the relative inability of businesses in these industries to attract and serve customers over the summer months, their owners might be even more inclined to limit payments facing the challenges in upcoming winter months. Notably, by the end of September, expenses at health care service providers were only two percent lower than 52 weeks prior, and expenses at retail firms had returned to parity with expenses from the prior year.

Acknowledgements

We thank Anuradha Raghuram for her hard work and vital contributions to this research.

This effort would not have been possible without the critical support of our partners from the JPMorgan Chase Consumer & Community Bank and Corporate Technology Solutions teams of data experts, including Michael Aguilar, Kyung Cho-Miller, Anoop Deshpande, Andrew Goldberg, Melissa Goldman, Senthilkumar Gurusamy, Derek Jean-Baptiste, Brian Maddox, Albert Raymond, Anthony Ruiz, Subhankar Sarkar, Breann Zickafoose, and from our internal partners and JPMorgan Chase Institute team members including Haley Dorgan, Elizabeth Ellis, Alyssa Flaschner, Fiona Greig, Courtney Hacker, Chris Knouss, Sarah Kuehl, Sruthi Rao, Parita Shah, Tremayne Smith, Gena Stern, Nicholas Tremper, and Preeti Vaidya.

We would like to acknowledge Jamie Dimon, CEO of JPMorgan Chase & Co., for his vision and leadership in establishing the Institute and enabling the ongoing research agenda. Along with support from across the Firm—notably from Peter Scher, Max Neukirchen, Joyce Chang, Marianne Lake, Jennifer Piepszak, Lori Beer, Derek Waldron, and Judy Miller—the Institute has had the resources and support to pioneer a new approach to contribute to global economic analysis and insight.

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Fairlie, Robert W. 2020b. “The Impact of Covid-19 on Small Business Owners: The First Three Months after Social-Distancing Restrictions.” National Bureau of Economic Research Working Paper 27462.

Farrell, Diana, and Christopher Wheat. 2018. “Bend Don’t Break: Small Business Financial Resilience After Hurricanes Harvey and Irma.” JPMorgan Chase Institute.

Farrell, Diana, Chris Wheat, and Chi Mac. 2020a. “Small Business Financial Outcomes during the Onset of COVID-19.” JPMorgan Chase Institute.

Farrell, Diana, Chris Wheat, and Chi Mac. 2020b. “Small Business Owner Race, Liquidity, and Survival.” JPMorgan Chase Institute.

Farrell, Diana, Chris Wheat, and Chi Mac. 2020c. “Small Business Financial Outcomes during the COVID-19 Pandemic.” JPMorgan Chase Institute.

U.S. Census Bureau. 2020. Small Busienss Pulse Survey. https://portal.census.gov/pulse/data/