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Weathering a downturn: Some lessons learned

If the Great Recession taught government leaders and their economists one thing, it’s the critical role that small business plays in a thriving national economy.

Keeping the small businesses solvent during a catastrophic downturn — such as the one caused by the coronavirus pandemic — is far more important than trying to prop them back up in the wake of the storm, according to Amit Batabyal, a professor of economics at Rochester Institute of Technology.

“The key lesson from the Great Recession of 2008 and 2009 is the role of the Federal Reserve being a lender of last resort,” Batabyal said.

Amit Batabyal

Amit Batabyal

“When there’s a recession, lending freezes up,” he explained. “But firms, regardless of size, must be able to borrow. The Federal Reserve must promote liquidity and tell banks, ‘Whatever it takes, we will promote liquidity.’

“Ben Bernanke (chair of the Federal Reserve from 2006 to 2014) was slow to realize the severity of the problem. Jay Powell (the current chair) is acting aggressively, as he should.”

The same is true for employment. When people are laid off or furloughed during a crisis, irreparable damage has already been done — to the economy as well as the psyche, Batabyal said.

That’s why the forgivable loans provided in the CARES Act were wise, he said.

“Once a person is unemployed, a whole cycle of events follows,” Batabyal explained. “Social esteem suffers, the sense of self-worth declines and relationships flounder, whether it’s with a spouse or children or parents.

“That’s why it’s extremely important to do whatever is possible to protect jobs. A whole host of problems would not arise if people had kept their jobs.”

One such problem is the overall impact unemployment has on health care and mental well-being.

“If you lose your job, you generally lose your health insurance, which creates extreme anxiety,” Batabyal said. “You’re afraid to go to the hospital, you’re afraid of catastrophic medical problems. It creates terrible anxiety at an already stressful time.”

Which is why Batabyal says employment should not be a prerequisite for having health care coverage.

“If we learn anything from this, it should be decoupling health care from employment status,” he said. “It’s bad enough when a person loses a job; you don’t want them to completely lose their minds because of a fear of hospital bills.”

Paid sick leave is also a necessity, he said.

“If people are sick, they must choose between a paycheck and their health status. Well, as long as he or she can walk and ride the subway, they’re going to choose work and then potentially expose more people to their illness.

“This is another massive failure in the United States. It’s counterproductive to the welfare of society.”

George Conboy

George Conboy

But at the same time, small business owners and individuals can’t rely on government bailouts to lead them to prosperity. For one thing, bailouts rarely are as efficient as they could be, according to George Conboy, chairman at Brighton Securities.

“A lot of these stimulus programs are incredibly wasteful and horribly inefficient,” he said. “They were designed by politicians, most of whom have very little idea about how to run a business.”

Simply put, Conboy said, too little of the money gets where it needs to go.

“Say you’re putting oil in your car,” he said. “You remove the cap, put a funnel where the oil goes, put the neck of that quart of oil near the funnel and you pour.

“Now, what if, instead of putting it near the hole, you hold it up three feet and poured from there? It would probably splash all over, drain down the side of the engine and run down your driveway. A quarter or a half of that quart of oil might get into the engine. That’s what these government programs are like. A quarter or a half of the money will get to where it will do some good.”

Thus, small-business owners must be proactive during this crisis. Take a look at every expense. Can you cut something without damaging the product?

“Always look at the biggest numbers first,” Conboy said. “It doesn’t mean you can change them, but start with the big numbers.”

He also believes it’s imperative for a business owner to be proactive, especially with creditors. The COVID-19 crisis impacted everyone, so a landlord or vendor quite likely is already anticipating potential late payments. They also need your business next month and next year, so they may be willing to work with you.

“Talk to your creditors, talk to your landlord or landlords,” Conboy said. “If you think you’ll be a day late or will be short, talk to your landlord first. Don’t forget, you’re also their customer and they want you to be their customer after this is over.”

Perhaps just as important: make sure your customers know you appreciate them, he said. Go out of your way to deliver product or keep them apprised of what you foresee when the pandemic ends.

They’re looking for ways to fill needs in the interim and may discover solutions they didn’t know existed. You need to be sure they don’t make those new-found solutions permanent.

“Whether you’re a bank, a brokerage firm or Wegmans or Tops, think of ways to stay in front of the client, in front of the customer,” Conboy said. “Clients are all adapting to what’s happening and finding new ways to get the things they need. As a business, you want to make sure your customers don’t stay with the avenues they’ve sought and found during the problem.”

Business owners also shouldn’t expect the economic impact payments (those $1,200, $2,400 or family amount checks from the CARES Act) to actually impact their bottom line.

Joe Rowley

Joe Rowley

“Any money given to individuals will be spent on bills,” said Joe Rowley, senior advisor at SVN Commercial Real Estate Advisors. “Many have lost employment or have reduced hours, so it will be offset by a loss of income, not considered additional income. If the individuals are in a position where they do not need the additional money at the moment, they are more likely to save than spend to contribute to the economic recovery.”

Some whose livelihood is dependent on commercial real estate, especially hospitality, retail and co-work space, should be prepared for a downturn.

“The most impacted product types will be the resort/hotel, entertainment and retail, especially restaurants, but we do expect pricing to trend downward in nearly every product type except possibly health care,” Rowley said. “The co-working office space could be substantially impacted. Most leases are month to month. Many of these renters are now working from home, probably where they came from (to begin with).”

It’s possible, he said, those renting co-work space might realize they are just as efficient working from home, especially since fears of COVID-19 may leave people wary of social interaction.

“The open office concept could be frowned upon with spread of the virus due to close working conditions,” Rowley said.

Should businesses be unable to navigate viability in the aftermath of the pandemic, Rowley said it’s unlikely that commercial space will sit vacant. The strong will inherit the meek. Investors with money will pounce.

“There could be a merger/acquisition spree as this downturn exposes those companies previously working with thin margins,” Rowley said. “There is substantial interest from investors flush with cash, ready to act quickly on commercial real estate, whether it is distressed or not. We do expect an increase in product availability the longer this impacts us.”

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