The State of the Small Business Economy in the Pandemic

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Testimony by Robert W. Fairlie, Professor of Economics, University of California, Santa Cruz, before the House of Representatives Committee on Small Business, February 4, 2021, titled The State of the Small Business Economy in the Pandemic. The testimony states that the number of active business owners in the United States fell by 3.3 million or 22 percent from February to April 2020, with a 41 percent drop for African-American businesses. It reports average sales losses of 17 percent in the second quarter of 2020 in California taxable sales data and describes findings on PPP and EIDL loans drawn from data on 15 million individual loans. It closes with four things that could help, followed by figures and tables.

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The State of the Small Business Economy in the Pandemic

U.S. House of Representatives Committee on Small Business

February 4, 2021

Testimony by:

Robert W. Fairlie
Professor of Economics
University of California, Santa Cruz
Thank you, Chair Velázquez, Ranking member Luetkemeyer, and members of the
Committee. It is an honor to testify before you on the state of the small business
economy. I am a Professor of Economics at the University of California, Santa Cruz and
have studied entrepreneurship, racial inequality and small business policy for over 25
years. I have been asked to discuss the findings from my research on the impacts of the
pandemic on small business owners.

Small businesses across the country are struggling. Minority-owned businesses are
especially struggling.

As you know, obtaining up-to-date and accurate information on the effects of the
pandemic on small business owners has been extremely difficult. I have spent the past
eight months compiling and analyzing data on how small businesses are faring during the
pandemic.

I have focused my research on three main questions. First, what happened to small
business owners? Did the pandemic disproportionately close minority-owned businesses?
Second, how much did small businesses lose in sales during the early stages of the
pandemic? What types of businesses were hit the hardest? Third, did the massive,
unprecedented levels of government relief for small businesses through the PPP and
EIDL programs get distributed evenly to minority communities?

Small Business Activity in the Pandemic
On March 19, 2020, the State of California imposed shelter-in-place restrictions with
New York State following the next day. By early April most states imposed social
distancing restrictions that closed “non-essential” businesses and added to consumer
health concerns in the emerging pandemic.

In my research, I found that the number of active business owners in the U.S. plummeted
by 3.3 million or 22 percent over the crucial two-month window from February to April
2020 (Figure 1).1 No other one-, two- or even 12-month window of time has ever shown
such a large change in business activity. For comparison, from the start to the end of the
Great Recession the number of active business owners dropped by only 5 percent.

African-American businesses were hit the hardest experiencing a 41 percent drop in
business activity (Figure 2). Latinx business owner activity fell by 32 percent, and Asian
business owner activity dropped by 26 percent. Unfavorable industry concentrations and
the smaller scale of businesses owned by minorities were partly responsible.

Extending the analysis into May and June small business activity partially rebounded in
both months. But, the disproportionate impacts from COVID-19 by race lingered.
African-Americans continued to experience the largest losses, with 26 percent of business
owners still not active in May and 19 percent not active in June. Job losses were also

1
Fairlie, Robert W. 2020. "The impact of COVID-19 on small business owners: The first three
months after social-distancing restrictions." Journal of Economics & Management Strategy,
29(4): 727-740.
much higher for minority workers.2 Black unemployment hit a peak of 17 percent and
Latinx unemployment hit a peak of 18 percent.

Although many of the closures in April, May and June turned out to be temporary, any
month of closure is problematic because it reflects lost income to the owner of the
business. The owner still has to pay rent, some employees and other expenses.

Sales Losses in the Pandemic
It has been especially difficult to figure out how much small businesses have lost in sales
and revenues in the pandemic. We suspect that losses have been great but data on actual
losses in sales are difficult to find.

Using taxable sales data from the California Department of Tax and Fee Administration,
we found average sales losses of 17 percent in the second quarter of 2020. Normal year-
over-year growth is in the range of 3-4 percent.3 Sales losses were largest in businesses
affected by mandatory lockdowns. For example, hotels lost 91 percent, restaurants lost 61
percent, and clothing stores lost 56 percent (Table 1).

The losses among so many different types of businesses are disconcerting, but perhaps
even more troubling are consumer trends away from in-person stores to shopping online.
At the same time in-store purchases were sharply declining online sales grew by 180
percent in the second quarter of 2020.

The large losses in sales in the second quarter of 2020 are worrisome for the longer-term
survival of small, local businesses throughout the country. Although larger stores and
chains with a strong online presence may survive, many small businesses will not have
the resources to weather a prolonged recovery. Recent Census Bureau surveys indicate
that only 15-20 percent of small businesses have enough cash on hand to cover 3 months
of operations.4

Financial Help to Small Businesses in the Pandemic
One of the stated goals in the CARES Act was to prioritize serving “underserved
markets” and businesses owned by “socially and economically disadvantaged
individuals.” Did the PPP and EIDL programs, which were key components of the
CARES Act, get distributed to minority communities providing much needed help to the
businesses, employees and residents of those communities?

2
Couch, Kenneth A., Robert Fairlie, and Huanan Xu. 2020. "Early evidence of the impacts of
COVID-19 on minority unemployment." Journal of Public Economics 192.
3
Fairlie, Robert, and Frank Fossen. 2021. “Sales Losses in the First Quarter of the COVID-19
Pandemic: Evidence from California Administrative Data,” NBER Working Paper No. 28414.
4
U.S. Census Bureau. 2020. “Small Business Pulse Survey,”
https://portal.census.gov/pulse/data/.

2
Using data on 15 million individual loans, we found that funding from these relief
programs both flowed to minority communities and away from minority communities.5 If
anything we found a slightly positive relationship between PPP loan receipt per business
and the minority share of the population. There is some evidence, however, that the first
round of funds was disproportionately distributed to non-minority communities and the
second round of funds was disproportionately distributed to minority communities. When
focusing on PPP loan amounts per employee, however, we find a negative relationship
with minority communities. In contrast, EIDL loans and advances, in both number and
amounts, were provided to minority communities.

Recent Reversal of Progress for Business Owners
In my continual work tracking how small businesses are doing in the recovery I recently
found some alarming trends. From April to October there was constant month-to-month
improvement in business activity, but in November and December that pattern reversed.
From October to December small business activity dropped by 6 percent (Figure 3).6 For
minority owners the drop was from 5-10 percent (Table 2).

Vulnerable Groups
The losses that I have described here are especially alarming for two vulnerable groups,
African-Americans and Latinx. Prior to the pandemic, business ownership as a share of
the population and average revenues per business were already low for both groups.7 But,
perhaps more importantly there is a huge wealth gap. Half of black families in the U.S.
have less than $10,000 in total wealth and half of Latinx families have less than $25,000
in total wealth. White levels of wealth are 7 to 18 times higher. Many minority business
owners will simply not have the financial resources to weather prolonged closures.

Four things that could help.
I would like to turn to discussing what could help us move forward.

1. First, consumers need to feel safe again. The number one priority for helping small
businesses is to get the vaccine out faster. People are anxious to get back to restaurants,
bars and shops. Pent-up demand should help kick start the small business recovery.

2. Second, more financial assistance is needed for small business owners especially
during the next few months. In particular, rent relief and protection could be crucial for
survival.

5
Fairlie, Robert, and Frank Fossen. 2021. “Did the $660 Billion Paycheck Protection Program
and $220 Billion Economic Injury Disaster Loan Program Get Disbursed to Minority
Communities in the Early Stages of COVID-19?” NBER Working Paper No. 28321.
6
See https://people.ucsc.edu/~rfairlie/current/.
7
Fairlie, Robert. "Racial Inequality in Business Ownership and Income" Oxford Review of
Economic Policy, 34(4): 597–614, 2018. Fairlie, Robert and Alicia Robb. Race and
Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in the United States,
Cambridge: MIT Press, 2008.

3
3. Third, we need to slow down the extensive shift to online shopping which was
happening prior to the pandemic. This trend is unlikely to stop. Small businesses need to
have more of an online presence. Aid in the form of web page assistance could be useful.
Search engines could prioritize local small businesses instead of online retailers and big
box stores.

4. Fourth, the federal government needs to collect more data on race in their relief efforts.
Demographic information was only partially and unevenly collected in the first two rounds
providing PPP funds, and there was much criticism for this omission. The information is
crucial for future research on equity issues. Additionally, collection of information on
applications for loans that were denied would useful.

In closing, we need to reverse the negative impacts of the pandemic on minority-owned
businesses. These losses are problematic for broader racial inequality because of the
importance of small businesses for local job creation, economic advancement, and
longer-term wealth gaps. Losses from the pandemic are also very costly to total U.S.
productivity as minority-owned businesses represent the fastest growing segment of the
business population. Finally, we will lose the vibrant downtowns with diverse restaurants
and shops that truly make America great.

Thank you for the opportunity to present the findings from my research on this topic. I
look forward to hearing your comments and questions.

4
Figure 1
Number of Active Business Owners in the United States (January 2000 - April 2020)

18,000,000

16,000,000

14,000,000

12,000,000

10,000,000

8,000,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

5
Figure 2: Losses in the Number of Active Business Owners before and after
COVID-19 Restrictions (February to April 2020)

African-American -41%

Latinx -32%

Asian -26%

White -17%

6
Figure 3
Number of Active Business Owners in the United States (Jan. 2019 - Dec. 2020)

18,000,000

16,000,000

14,000,000

12,000,000

10,000,000

8,000,000
2019 2019.25 2019.5 2019.75 2020 2020.25 2020.5 2020.75 2021

7
Table 1: California Taxable Sales Losses by Subsector Business Types

Percent Percent
Change Taxable Change Taxable
2019Q2 to Transactions 2019Q2 to Transactions
Business Type 2020Q2 Amount Business Type 2020Q2 Amount
Total All Outlets -17 152,362,296,481 Miscellaneous Store Retailers -17 4,418,659,674
Total Retail and Food Services -17 105,528,311,167 Florists -39 103,717,354
Office Supplies and Stationery Stores -22 642,964,260
Motor Vehicle and Parts Dealers -15 19,294,245,937 Gift, Novelty, and Souvenir Stores -58 197,790,991
New Car Dealers -16 13,661,226,032 Used Merchandise Stores -44 144,130,178
Used Car Dealers -27 2,017,580,937 Other Miscellaneous Store Retailers -8 3,330,056,891
Other Motor Vehicle Dealers 11 1,546,237,177 Nonstore Retailers 181 13,273,550,077
Automotive Parts, Access. and Tires -3 2,069,201,791 Food Services and Drinking Places -47 11,991,170,465
Furniture and Home Furn. Stores -18 2,625,229,637 Special Food Services -76 292,967,418
Furniture Stores -28 1,532,455,251 Drinking Places (Alcoholic Beverages) -86 65,185,094
Home Furnishings Stores 3 1,092,774,386 Full-Service Restaurants -61 4,454,731,382
Electronics and Appliance Stores -14 3,663,719,124 Limited-Service Eating Places -25 7,178,286,571
Building Material and Garden Equipment and 12
Supplies 12,248,068,380 Total All Other Outlets -19 46,833,985,314
Building Material and Supplies Dealers 13 11,064,090,950 Agriculture, Forestry, Fishing and Hunting 40 325,549,091
Lawn and Garden Equipment and Supplies Stores7 1,183,977,430 Mining, Quarrying, and Oil and Gas Extraction -29 139,003,233
Food and Beverage Stores 2 7,584,295,812 Utilities 0 364,305,709
Supermarkets and Other Grocery Stores 5 5,209,119,995 Construction -17 2,305,307,376
Convenience Stores -12 841,092,239 Manufacturing -13 11,005,456,107
Specialty Food Stores -40 202,729,466 Wholesale Trade -17 18,392,665,466
Beer, Wine, and Liquor Stores 10 1,331,354,112 Transportation and Warehousing -40 408,491,412
Health and Personal Care Stores -11 3,414,123,225 Information -9 1,960,180,852
Pharmacies and Drug Stores 7 2,024,226,564 Finance and Insurance -6 340,123,180
Other Health and Personal Care Stores -28 1,389,896,661 Real Estate and Rental and Leasing -19 5,872,138,743
Gasoline Stations -47 7,737,896,946 Professional, Scientific, and Technical Services 0 1,893,493,925
Clothing and Clothing Access. Stores -54 4,744,372,982 Management of Companies and Enterprises -18 6,432,654
Clothing Stores -56 3,640,766,921 Administrative and Support and Waste Man. and Rem.Services597,633,328
-39
Shoe Stores -38 648,398,066 Educational Services -47 163,539,655
Jewelry, Luggage, and Leather Goods Stores -61 455,207,995 Health Care and Social Assistance -15 286,043,742
Sporting Goods, Hobby, Mus. Inst., Books -20 2,010,965,666 Arts, Entertainment, and Recreation -83 188,119,522
Sporting Goods Stores 0 1,257,390,598 Accommodation -92 94,715,762
Hobby, Toy and Musical Instrument Stores -30 553,514,156 Other Services (except Public Administration) -31 2,145,100,206
Book Stores and News Dealers -55 200,060,912 Public Administration -11 103,363,587
General Merchandise Stores -10 12,522,013,242 Others 59 242,321,764

8
Table 2: Change in Number of Active Business Owners in the United States (Minority Groups)

African-American Latinx Asian
Relative to: Relative to: Relative to:
Month in Reg. Month in Reg. Month in Reg.
Number Feb. 2020 Prev. Yr. Adjusted Number Feb. 2020 Prev. Yr. Adjusted Number Feb. 2020 Prev. Yr. Adjusted
Feb. 2020 1,079,116 0% 2% 0% 2,070,896 0% 5% 0% 888,528 0% -1% 0%
Mar. 2020 1,074,478 0% 13% -6% 1,936,739 -6% -3% -4% 936,072 5% 4% 6%
Apr. 2020 637,769 -41% -38% -52% 1,412,925 -32% -28% -32% 657,896 -26% -36% -29%
May 2020 798,668 -26% -23% -35% 1,668,254 -19% -14% -20% 700,393 -21% -24% -24%
June 2020 872,717 -19% -24% -28% 1,855,026 -10% -4% -8% 798,811 -10% -14% -10%
July 2020 974,093 -10% -18% -18% 1,851,702 -11% 0% -10% 809,922 -9% -5% -7%
Aug. 2020 1,084,869 1% -2% -5% 2,009,642 -3% 2% -3% 794,433 -11% -11% -9%
Sept. 2020 1,103,761 2% -6% -6% 2,093,925 1% 0% 0% 741,249 -17% -12% -20%
Oct. 2020 1,153,326 7% -3% -4% 2,130,408 3% 1% -1% 758,205 -15% -5% -17%
Nov. 2020 1,115,874 3% 0% -5% 2,169,500 5% -1% -2% 692,402 -22% -16% -27%
Dec. 2020 1,046,956 -3% -10% -12% 2,004,637 -3% -1% -7% 713,485 -20% -20% -23%
Notes: (1) Estimates are continuation from those reported in Fairlie, Robert. 2020. “The Impact of COVID-19 on Small Business Owners: The
First Three Months after Social-Distancing Restrictions" Journal of Economics and Management Strategy . (2) Reg. Adjusted estimates are
based on regression analysis accounting for trends and seasonality (monthly).

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