If prior experiences of job loss are a good indicator, Figure 2 also illustrates that as families begin to experience the financial impacts of COVID-19, they may begin to defer debt payments. These include mortgages, auto loans, credit cards, and perhaps most immediately, student loans. All debt payments are “irregular” to a point, but student loan debt appears to be among the first obligations families stop paying when they face financial distress, evidenced in the case of job loss (among unemployment insurance recipients, Figure 2) and after hurricanes (see Figure 3 in case study below). In general, student loan payments are much more volatile than auto and mortgage payments.
That said, we see that income dips, particularly deeper and longer drops, are also associated with mortgage delinquency. For borrowers who defaulted on their mortgage, income dips preceded default regardless of the homeowner’s income level, home equity, or mortgage payment burden.
During a pandemic, vehicles to manage this volatility may not be as available as they would be in other contexts. As Institute research has shown, some individuals turn to the Online Platform Economy to supplement their income when income from other sources dips. This is particularly true for men, who mostly turn to transportation platforms. Indeed, as mobility restrictions set in, demand for delivery services is surging as some are already reporting. In the short run, some individuals may opt for ridesharing as a safer alternative to public transit. But as the number of COVID-19 cases increases and communities shut down more completely, demand for, and supply of, rideshare is likely to fall, reducing its viability as a means of generating additional income.
III. Understanding the distinctive risks to small businesses.
Volatility impacts small businesses as well. As COVID-19 spreads, revenue volatility could cause more small businesses to shut down, particularly those with more limited cash liquidity and those in minority neighborhoods. The Institute’s research has shown that across the board, small businesses have volatile, irregular, and potentially unpredictable cash flows, (21 percent of firms across the 25 cities we studied). This is true especially for newer businesses. They also tend to operate with a limited cash buffer—typically enough to cover two to three weeks of outflows—and firms with limited cash liquidity are less likely to survive and grow. We have shown that among small businesses with irregular cash flows, 46 percent exit the small business sector within the first four years.
As mobility is restricted, consumers, both local and non-local visitors, are less likely to shop in person. Consequently, small businesses are likely to see a significant drop in revenue while commercial activity cedes. The uncertainty around the duration of these protective measures against the virus make a cash buffer even more important for small businesses facing potentially weeks of revenue loss that could impact their ability to operate. Businesses with more volatile revenues and expenses may specifically benefit from programs that make liquidity more accessible, like expanded grants and loans.
Moreover, small businesses in different sectors may experience the effect of COVID-19 differently due to it being a public health emergency. Our work on the financial impact of hurricanes (see Case Study below) showed that while construction and repair and maintenance firms recovered quickly after landfall, health care services and real estate firms were not as resilient. As COVID-19 continues to spread and change consumer behavior, it stands to reason that businesses in sectors like restaurants and retail may see the greatest loss in commercial activity and subsequently require the most support. Importantly, small businesses in majority-minority communities and communities with lower amounts of human and financial capital have materially lower levels of cash liquidity and small businesses operating on smaller profit margins. Policymakers responding to the impact of COVID-19 on small businesses might target responses to communities in which small businesses typically have the least cash liquidity.
Massive disruptions to travel and decreased mobility within communities could cause sharp drops in consumption, impacting small business demand and accelerating growth in online spending. As noted above, mobility restrictions can change consumer inclination to shop in person. Such restrictions are already taking shape as COVID-19 spreads to all fifty states. Many employers are shifting to work-from-home arrangements and travel bans are taking effect. People are increasingly limiting movement within their communities, as schools, universities, houses of worship, and other facilities shutter their doors amid public officials’ recommendations and orders. Limited mobility both across and within communities will have profound impacts on consumption patterns and small business revenues. There will be winners and losers from the shifts in consumption patterns but also likely a large net drop in aggregate consumption.
Impacts of restricted travel will result in steep declines in revenue for travel and hospitality industries and non-resident consumer spending within communities. Institute research has shown that non-resident local spend, i.e. spending from visitors, represents roughly 14 percent of local commerce in the fourteen cities we studied. This will fall sharply as travel is restricted, impacting the hospitality industry dramatically. This includes the leasing sector of the Online Platform Economy, which has grown substantially since 2013 and, as of October 2018, generated over $2,500 in monthly revenues for as many as 0.3 percent of families in cities such as New Orleans, LA and Austin, TX.
Local mobility restrictions may accelerate the shift to online spending, which, as Institute research has documented, has been growing rapidly and contributed to almost 80 percent of spending growth in 2017. This could exacerbate revenue losses to local small businesses in the short and medium run.
As an aside, it is worth noting that restricted local movement could precipitate greater welfare losses for lower-income and older consumers. Rapidly changing spending options and behaviors could impact segments of the population differentially, potentially resulting in greater welfare losses for lower-income and older individuals. This is for two reasons. First, we saw that high-income and younger consumers were driving growth in online spending (and spent the most dollars). Second, examining the distances between consumer residences and the establishments at which they shop, we found that lower-income individuals had larger distances to traverse to make their desired everyday purchases. These findings might suggest that lower-income families were more likely to visit a store in person and might bear more welfare loss than their higher-income counterparts when mobility is sharply reduced due to COVID-19, insofar as their options for maintaining consumption are more limited.
Case Study on Hurricanes Harvey and Irma
How a week-long restriction in mobility halts the economy and creates winners and losers in spending.
In many ways, Hurricanes Harvey and Irma are instructive case studies of the economic impacts of a near-complete shutdown of a community for even just one week. We examined the impacts on families, small businesses, and local commerce in Houston and Miami.
We found that families’ checking account inflows, including income and inbound transfers, temporarily dropped by over 20 percent, or roughly $400, in the week of hurricane landfall among both Houston and Miami residents. Checking account outflows, including spending, debt payments, and outbound transfers, dropped by more than 65 percent around the day of landfall and by more than 30 percent, or roughly $500, in the week of landfall (Figure 3).