Michelle W Bowman: The economic outlook and prospects for
small business
Speech (via webcast) by Ms Michelle W Bowman, Member of the Board of Governors of
the Federal Reserve System, at the Economic Club of Oklahoma, Oklahoma City, 22 March
2021.
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Thank you, Doug, and thank you to the members of the Economic Club of Oklahoma for the
opportunity to speak about a subject of vital interest to all of us-the outlook for the U.S. economy
in 2021. Our nation has made considerable progress since COVID-19 hit the economy with great
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force a year ago, but we still have further to go, and risks remain.
As we all know, starting in late February or March of last year, widespread economic and social
lockdowns and other effects of the COVID-19 pandemic caused the swiftest and deepest
contraction in employment and economic activity since the Great Depression. Money markets,
the Treasury market, and other parts of the financial system seized up, and there were fears of
another severe financial crisis. The Federal Reserve stepped in quickly to assist, reviving several
lending facilities used in the previous crisis and creating several new facilities. We also cut
shortterm interest rates to near zero and began purchasing large quantities of Treasury and agency
securities to help sustain the flow of credit to households and businesses. Congress and the
Administration also worked together to provide effective and timely support. Calm was restored in
financial markets, and employment and output began growing in May, but it was a very deep hole
to fill. Rapid progress over the summer gave way to slower growth over the past winter as
COVID-19 infection rates surged. But in recent weeks, with steep declines in virus-related
hospitalizations and deaths, the outlook has brightened. Job creation had stalled over the winter
months but picked up in February, with an increase of around 380,000 jobs. The pace of
vaccinations has accelerated, COVID-related restrictions on economic activity are beginning to
ease, and the latest round of stimulus is boosting consumer spending.
Despite the news of the spread of more-contagious COVID-19 variants, efforts to increase
vaccine shipments and recently announced plans for distribution to the broader public are
encouraging and, if successful, give me some confidence that our economic performance will
continue to improve quickly over the remainder of the year.
My outlook for the economy is broadly in line with the median of projections of other members of
the Federal Open Market Committee (FOMC), published following our meeting last week. Most of
my FOMC colleagues expect the economy to grow between 5.8 percent and 6.6 percent in 2021,
and the median projection is that the unemployment rate will fall to 4.5 percent by the end of the
year. My own expectation is for strong growth and a rebound in the labor force participation rate
once the economy fully reopens. This would include schools resuming fulltime in-person
learning, which would enable parents who reduced their hours or left the workforce to oversee
virtual education and childcare to return to fulltime work.
As of February, the level of payroll employment is still 9-1/2 million below the pre-pandemic peak
and more than 11 million below where it would have been based on the trend before the
pandemic. I believe that job creation will continue, but I still see considerable uncertainty about
the strength of that improvement and how long it may take to reach the Federal Reserve's
maximum-employment goal. I am also concerned that the extended period of economic
restrictions will contribute to further business closures. Severe restrictions on mobility and
commerce were implemented in many areas to control the spread of the virus, but they came at
a very high economic cost. There is some evidence, which I will discuss in a moment, that small
businesses fared better in states with less-stringent restrictions. While the headline
unemployment rate has continued to fall, the number of people who report being unemployed for
more than six months has continued to rise, suggesting a risk of scarring-meaning that some
individuals could see an erosion of their skills and their connections to the labor market.
Although economic activity in the travel, leisure, and hospitality sectors has continued to lag the
recovery, there have been some bright spots elsewhere. Two that are particularly important for
Oklahoma are agriculture and energy. Commodity prices for some crops have increased
dramatically in the past few months, particularly soybeans and corn, reflecting higher export
demand and some limits on global supply. Increased prices are providing better cash flow and
improved credit terms for farmers. Agricultural manufacturers and other suppliers are reporting
order backlogs through the summer months, and there are some reports of firmer or increased
prices for farmland.
Meanwhile, the recent surge in oil prices has returned West Texas Intermediate back up near the
levels of early 2020, when it began to fall sharply. The rebound in prices reflects the improved
outlook for the global economy given significant progress toward widespread vaccinations in
many countries. This recovery has not had a dramatic effect yet on businesses engaged in or
supporting oil and gas extraction, but there are signs of a turnaround. So far this year, retail
gasoline prices have been rising sharply, and the North American rig count is now the highest it
has been since last April.
But in contrast to the broadening improvements in many sectors of the economy, an area I
continue to be concerned about is the outlook for U.S. businesses, particularly small businesses,
which have borne the brunt of the effects of the pandemic. We are now more than a year into the
pandemic, and many small businesses are continuing to struggle in their efforts to remain open.
Recently, the Bureau of Labor Statistics (BLS) released counts of business closures for the
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second quarter of last year, when most face-to-face businesses were largely shuttered. In that
quarter, the closure rate for establishments showed a sharp increase to 9 percent, compared
with an average of about 5 percent during 2019.
As part of the fiscal stimulus package passed in June last year, the Paycheck Protection
Program (PPP) and other government supports helped many businesses withstand the
extended period of inactivity over the spring and summer. Many of the shuttered businesses
were at least partially reopened in the second half of last year. But as virus cases surged toward
the end of 2020, many state and local governments reimposed restrictions on business activity,
and others postponed plans to lift their existing restrictions.
Even today, more than a year later, some sectors, like restaurants, leisure, and tourism, are
continuing to face major effects from pandemic-related social distancing, forced closures, and
capacity limits. These restrictions may have been helpful in containing the pandemic, but they
appear to have disproportionately impeded small firms' ability to maintain their operations and
revenue sources, leading to substantial cash flow pressures. Small businesses will be helped in
the near term with a new round of PPP lending, which included adjustments to terms that will
make forgiveness of these loans less onerous than before. Even with this, financial pressures on
many small businesses remain acute, and I am concerned that a growing number of small
businesses have already been closed permanently or are on the verge of failure.
The BLS data are not yet available beyond the second quarter of last year, so, from that source,
it's difficult to assess the full extent to which the COVID-19 pandemic resulted in permanent
business closures. But research by the Board's staff using nontraditional data sources finds that,
in 2020, business exits were especially elevated among small firms and particularly in industries
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most sensitive to social distancing. The authors found that the permanent exit rate of
restaurants in 2020 was about 50 percent higher than average historical rates.
On a related note, I would emphasize that, up to this point, the national data on business loan
delinquencies and bankruptcy filings have not been especially concerning. That said, small
businesses are often unincorporated, and many go under without declaring bankruptcy or
defaulting on loans. In fact, many small business owners rely on credit cards or home equity
loans for financing, so their failure to make timely payments would not be reflected in data on
business loan delinquencies.
Elsewhere, evidence of small business finance fragility is shown in Federal Reserve survey data.
In the latest reading from the Small Business Credit Survey conducted in October 2020, 80
percent of firms reported seeing a decline in revenue over last year, and two-thirds of those
reported declines of at least 25 percent. Since then, there have been indications that things have
gotten worse. For example, in February, survey data from the National Federation of Independent
Business indicate that a net majority of small businesses reported declines in earnings over the
past three months, and a net majority expect their sales to worsen over the next three months.
These economic data align with conversations that I have had with bankers across the country,
which consistently point to the emerging credit challenges among small and medium-sized
businesses as a major source of concern. Bankers note that the substantial support from the
Paycheck Protection Program and other fiscal policies have postponed, but not eliminated, these
financial pressures. The bankers I speak with have also noted that, while monetary policy has
successfully delivered favorable borrowing conditions, many firms are reluctant to take on debt or
additional borrowing because of the highly uncertain business climate. Recent data from the
from the Fed's Senior Loan Officer Opinion Survey on Bank Lending Practices tell a similar story:
The January edition of that survey showed a majority of banks reporting weaker demand for
commercial and industrial loans to firms of all sizes.
The sharp, and largely voluntary, pullback in consumer spending that followed the onset of the
pandemic was undoubtedly a major trigger for the financial struggles that businesses are now
facing. But in addition, there is evidence that the economic restrictions imposed by many state
and local governments have played a role in the deteriorating health of small businesses. Using
data from the Small Business Pulse Survey conducted by the Census Bureau, the Board's staff
found that, in states with tighter restrictions on business activity, small firms were more likely to
report large declines in their business operations. Firms in relatively restrictive states were also
more likely to report that they expect to operate at reduced capacity for an extended period, and
they were more likely to expect to need financial assistance in the next six months. While
obviously not conclusive, the visible relationship between state-level economic restrictions and
small business damage is both striking and concerning.
You may be tempted to ask why I am so focused on small businesses. For one, it is because the
roughly 32 million small businesses in the United States comprise an important source of job
growth in the macroeconomy, and they have an outsized impact on their local communities.
Over the past decade, small businesses created 10.5 million net new jobs, accounting for
roughly two-thirds of overall net new job creation. This, as I see it, is why the potential for a wave
of small business failures is one of the main risks to my expectation that our economy will make
further substantial progress toward our goal of full employment. Moreover, from my vantage point
as a former community banker, I see other potential negative consequences: Because small
businesses often form the backbone of the communities where they are located, their
disappearance could have profound and long-lasting community-level effects as well.
As I look further down the road, there are some tentative signs that the pickup in overall
economic activity will eventually bring an improvement in conditions for small businesses. For
example, the latest responses to the same Small Business Pulse Survey I mentioned earlier now
indicate that expectations of small business failures-which were quite high during most of 2020
-have dropped noticeably and are now tracking below the average rate of failures observed over
the five years preceding the pandemic.
I spoke earlier about employment, and I will now turn to the price-stability side of the Fed's
mandated goals for monetary policy. In recent months, we have seen consumer price inflation
moving up, and I anticipate that the 12-month rates in the next few months will very likely track
above our 2 percent benchmark as the unusual softness in prices that we saw in April and May
last year drops out of the calculation. The marked rise in food prices over the past 12 months
has also pushed up the headline measures of price inflation. For many other categories of
consumer goods, high order backlogs and tight supplies of key production inputs-like lumber
and semiconductors-as well as logjams at the nation's ports and a shortage of truck drivers are
likely to push up prices over the next several months. But I expect that these pricing pressures
will be temporary, easing over the course of this year as supply bottlenecks are gradually
resolved.
Beyond this year, some observers have expressed concern that a rapid recovery in aggregate
demand amid substantial fiscal support and accommodative monetary policy could lead to
undesirably high inflation. While I expect that the stronger economy will push up inflation
somewhat, let me explain why I do not expect pricing pressures to be excessive and why I
believe the Federal Reserve is likely to continue supporting the economy for some time through
accommodative monetary policy.
Here I will point to what has in the past seemed to be a relationship between inflation and
unemployment, known as the Phillips curve. Over the past several decades, despite large
swings in unemployment, inflation has been extremely stable. As an example, up to the beginning
of the pandemic, when the economy was growing and unemployment was at a 50 year low of 3.5
percent, inflation was still very low and stable. Economists often attribute this so-called flat
Phillips curve to the fact that individuals' inflation expectations are well anchored and unlikely to
respond to short-term pricing movements. Survey data on long-run inflation expectations tend to
back up this idea. They have been remarkably stable over the past decade, and, although they
declined moderately during the middle of last year, most measures have edged up again in
recent months and now stand roughly at the levels observed during the pre-pandemic period.
With all of that said, given our lack of historical experience with both this level of substantial fiscal
stimulus and highly accommodative monetary policy, my outlook for inflation is fairly uncertain.
When making monetary policy decisions, we would be concerned about a significant increase in
inflation above our 2 percent goal that was sustained for some time. But as my Fed colleagues
and I have said many times, monetary policy is not on a preset course. I will continue to monitor
economic developments carefully, and, if my outlook for inflation were to change materially, my
assessment of the appropriate stance of monetary policy would change as well.
I will wrap up by noting that the economy has made great progress since last spring, and I am
optimistic that will continue in 2021, but we still have significant ground to make up and new
strains of COVID-19 could slow progress in containing the pandemic. Last year's sharp
contraction in economic activity was like nothing we had seen before, and we are still assessing
its impact. One unresolved question, in my mind, is how resilient small businesses will prove to
be after the extended period of reduced activity.
What does all of this mean for the outlook for monetary policy? As we indicated in the policy
statement released last week, my FOMC colleagues and I expect to maintain an accommodative
stance of monetary policy until employment and inflation achieve levels consistent with our
maximum employment and inflation goals. At this point, the economy is still a long way from
those goals. We are making progress, but I think it will take some time for us to get there.
annual establishment death rate has been around 8.5 percent.
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See Leland Crane, Ryan Decker, Aaron Flaaen, Adrian Hamins-Puertolas, and Christopher Kurz
(2020), "Business Exit during the COVID-19 Pandemic: Non-Traditional Measures in Historical
Context," Finance and Economics Discussion Series 2020-089 (Washington: Board of Governors, October).