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CLU economists say short lockdown key to small business survival

By   /   Monday, April 13th, 2020  /   Comments Off on CLU economists say short lockdown key to small business survival

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A new report from the Center for Economic Research & Forecasting at California Lutheran University underscores the ferocity of the debate around re-opening the economy.

CERF forecasters Matthew Fienup and Dan Hamilton now project a stunning, nearly 20 percent drop in GDP and Great Depression levels of job losses, followed by a long, slow U-shaped recovery that does not give most small businesses a chance to survive.

The center’s so-called “baseline” scenario assumes the economy will be locked down through most of May in what it calls an “historic and life-changing event.” It is the duration of shelter-in-place orders, not the progress of the disease, CERF states, that accounts for the dire forecast. The forecast is scheduled for release on April 14 but an advance copy was reviewed by the Business Times.

In a more optimistic scenario, one that allows for at least a partial reopening of the economy around May 1, CERF still projects a more than 15 percent drop in GDP in the second quarter. But it also projects a sharp reversal of fortunes for the U.S. economy, with just 3.6 percent negative growth in the first quarter of 2021, followed by a 17 percent explosion in growth in the second and third quarters.

“We believe that a May 1 reopening of the economy would provide a fighting chance for American small businesses and their employees,” CERF wrote, adding that it will be difficult for policymakers to figure out the precise point to pivot away from public health issues and toward restoration of the economy.

The report cites research from JP Morgan Chase that suggests most small businesses would not be able to sustain a shutdown of more than 30 days without running out of cash or credit. Shelter in place orders that last six to eight weeks would be devastating, the report states.

The report says fiscal stimulus from the CARES Act may arrive too late to aid many small businesses and it says that Federal Reserve policy makers erred by using ultra low interest rates to fuel a stock market rally that was proven to be largely illusory when the coronavirus pandemic broke out.

The CERF forecast has the potential to influence policy makers as it is one of more than 40 forecasts used by the Wall Street Journal in its regular updates.

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