If American businesses can go without profits and purchasing inputs, their cash reserves should be enough to see them through the economic shock of social distancing measures – but if lockdowns continue after that, it’s anybody’s guess.
“The COVID-19 outbreak has brought the US economy to a screeching halt as most states have issued social distancing guidelines, leading many businesses to sharply curtail operations, if not close down entirely,” said Wells Fargo acting chief economist Jay H. Bryson. “If many parts of the country remain in a virtual state of lockdown for the foreseeable future, then many businesses will eventually run out of cash and they will be forced to close their doors for good.”
While businesses that were profitable prior to lockdowns have a decent chance of survival, owners may opt not to use their cash buffers if they believe the medium to long-term prospects of profitability look grim and instead close their business down in order to reinvest in other opportunities.
“If this potential scenario were to occur on a large scale, then the pace of the post-pandemic economic recovery could be adversely affected until the cash resources are successfully redeployed in other business opportunities,” Mr Bryson said.
Cash reserves are also not evenly distributed among businesses, with many relying on measures put in place by the Small Business Administration and the Federal Reserve. While those measures might protect some businesses, those that have already failed or will in the future won’t be resuming operations, with displaced workers likely to remain unemployed for some time.
“We look for the officially reported unemployment rate to skyrocket to more than 15 per cent in the near term and for it to remain higher than 6 per cent at the end of 2021,” Mr Bryson said. “These lending programs may be able to keep many businesses afloat for some time, but they do not ensure that the economy returns to its pre-pandemic state in a quick fashion.”
