The Federal Reserve on Friday warned that struggling small businesses may need more government support even after employers received more than $500 billion in emergency loans.
In a semiannual report to Congress on monetary policy, the Fed said a wide variety of data reveal "an alarming picture of small business health during the Covid-19 crisis."
Surveys suggest that pessimism about business viability is prevalent, with a majority of small businesses seeing revenue losses and half not expecting to return to usual operations within the next six months, the Fed said. It noted that employment declines have been deeper among small businesses than among larger firms.
The Fed said three-fourths of small businesses with employees have applied for government assistance through the so-called Paycheck Protection Program, which Congress created in March to avert layoffs. The program allows businesses to apply for low-interest loans that can be converted into grants if they maintain payroll.
The takeup rate suggests the program "is extremely valuable and timely, and a large share of these applications have been approved," but the Fed said "some industries may face an ongoing need after the program expires." Congress is weighing in what form to keep the program alive in the coming months.
"The pandemic poses acute risks to the survival of many small businesses," the Fed said. "Their widespread failure would adversely alter the economic landscape of local communities and potentially slow the economic recovery and future labor productivity growth."
In the report, the Fed said the broader economic outlook is "extraordinarily uncertain." The central bank, which indicated this week it would keep interest rates near zero through 2022, pledged to use "its full range of tools to support the U.S. economy in this challenging time."
Surprise news last week that unemployment rate fell to 13.3 percent in May has complicated the economic outlook. The Fed in Friday's report said weekly data indicate that rehiring is under way and that payroll employment will likely move up again in June from what remains a low level. It said there are also signs that manufacturing rose in May, in part because of the ramp-up in automotive production.
The Fed warned of potential financial system risks from the downturn triggered by widespread social distancing requirements imposed in March. It said strains on household and business balance sheets from economic and financial shocks since then "will likely create persistent fragilities" and that "financial institutions may experience strains as a result."
"Despite increased resilience from the financial and regulatory reforms adopted since 2008, financial system vulnerabilities—most notably those associated with liquidity and maturity transformation in the nonbank financial sector—have amplified some of the economic effects of the pandemic," the Fed said. "Accordingly, financial-sector vulnerabilities are expected to be significant in the near term."
The central bank also gave special focus to disparities it was seeing in the huge wave of job losses since March.
Despite a recent uptick in job growth, the Fed said employment for lower-wage earners remains about 35 percent lower than in February — compared with five to 15 percent lower for higher-wage earners.
It said the decline in employment has been especially large for people age 16-24, people without a bachelor's degree and for Hispanics. Employment rates have also dropped somewhat more for women than men and for Asians and African-Americans compared to whites.
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June 13, 2020 at 12:24AM
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Fed sees need for more small business aid, citing 'acute risks' to survival - POLITICO
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