K-Shaped Recovery – There are two different economies

K-Shaped Recovery

I always say that it’s hard to change people’s minds because each person interprets the world differently, highlighted by the fact that each person decides to consume information based on their believes and what makes them feel better. With the K-shaped recovery that we are facing as we try to get the economy back and running while we are still struggling with a health crisis this becomes even more apparent.

Thus, when we talk to small business owners who are facing the hardest challenge of their professional lives, and many of them have lost their businesses, particularly in the hospitality and F&B segments, they give us a picture of the bloodbath that has taken over Main Street.

And when we talk to employees of larger financial or technology companies or even small retailers that work in segments that have benefited from these crazy times, such as home improvement, they don’t understand (or don’t want to understand) that there is a real issue going on that could have a long-lasting impact on the population’s quality of life.
I won’t even get into the political discussion here, as it’s not the right place, but with the election right around the corner, people try to “manipulate” each piece of news they find that confirms their point of view and supports their candidate.

The K-shaped recovery is increasing inequality

This is an indisputable fact. When we look in detail at the unemployment rate and other economic indicators, we can see that those at the bottom of the social pyramid, who were just starting to reap some benefits of a lower unemployment rate in the last years, are the ones most impacted by lost jobs. Remember that the Services Sector accounts for 77% of the US economy, and as restaurants, hotels and retailers haven’t been able to operate at full capacity, many of these workers are struggling to find another income source.

At the other end of the spectrum, those who kept their jobs and had money to invest are increasing even more their wealth. Even considering that they got scared with a 30% drop in the stock market in March, both the S&P500 and Nasdaq indexes are positive for 2020, as Wall Street apparently lives in a different reality.

I understand that the investor’s perspective for stocks is always long-term and some companies actually were in perfect position to expand their market share in this scenario. Amazon stock value has increased 65% since January, and this makes sense, as it was able to handle higher demand from all those who had to stay at home and even today prefer the safety of receiving their purchases at their doorsteps.

But consider the fact that many Americans received a $1,200 direct deposit and they really didn’t need that extra cash. And as they were stuck in their homes, instead of spending this money in small businesses and injecting these funds back to the real-world economy, they decided to open a Robinhood account and invest in stocks. On the one hand, this is good as more people are increasing their savings for an economic downturn in the future or for their retirement, but on the other hand, wouldn’t this money be better spent increasing additional unemployment benefits until the end of the year for those who really need it and don’t have a job in this economy without a coronavirus vaccine?

All the money that the Fed pumped in the market to provide liquidity to large companies and investors is important, as we learned from 2008, and I really think that Fed Chair Powell did a great job in reacting quickly to stop bigger losses, but both the monetary and fiscal actions fell short of preventing this K-shaped recovery.

The harsh economic reality for small businesses

Small businesses are responsible for 44% of the US economic activity and have accounted for 64% of jobs created in the US in the past 2 decades. And many people learned this year that what they see in stories about technology startups, backed by huge investment funds, is not the reality for 95% of small businesses.

SMB’s don’t have large savings and the average cash reserve for these companies is 27 days. So, when you shut down the economy and people can’t leave their homes, it’s difficult for small business owners to find a way to survive.

Sure, many retailers expanded their online presence and found a new market. Many restaurants switched their model to delivery-only and kept their customer base. But all this means more costs or the need for less jobs, and when you multiply this by the number of entrepreneurs facing this reality, we end up with the highest unemployment rate we have seen since the 2008 economic recession.

According to Yelp, from March 1 to August 11, 155,000 small businesses have closed, and 91,000 closures are permanent, hence, 59% of small business owners couldn’t reopen even after the economy reopened. Think about a restaurant that operates with a low margin and can only use 40% of its space because of health regulations. It’s almost impossible to generate profit without extreme cost reduction. And for those businesses that can’t get help from their landlords in malls or large shopping plazas, then it’s better to just close your doors and try something else.

Race and economic opportunities

The situation is even worse for African American entrepreneurs. As black-owned small businesses have a harder time getting credit from traditional banking, 41% of them have closed permanently during the pandemic. The lack of funds combined with the lower purchasing power of their main audience makes it harder to stay afloat and creates a snowball effect in lower income communities that depend on these businesses for jobs and supplies.

The murder of George Floyd was a terrible and atrocious event. However, it allowed the Black Lives Matter movement to stand out for a greater share of the population, and brought awareness to something that should have been in a spotlight a long time ago: there is a huge racial factor to economic inequality, there is data to support this statement, and society must do something to start reducing this gap if it wants to solve the problem.

The unemployment rate for Blacks is 5% higher than for Whites and we have seen this for decades, regardless of an economic boom or recession. Now, that everybody (or most people) finally understands that there is a real issue, it’s time for action from the public and private sector to allow better access to education, job opportunities, credit and housing for the African American community, so we can switch from a K-shaped economic recovery to a plan that serves most of the population.

Booming sectors during an economic crisis

We’ve already mentioned how Amazon has dominated the market this year, but the e-commerce takeover is not the only big economic winner in this crazy year.

Sales for Home Depot increased 23% and profits were 25% higher during the 2nd quarter, as people are now working from their homes and spending more than 90% of the time inside. Therefore, they are investing to make their residences more comfortable and convenient for this new reality.

Zoom’s revenues increased 355% year-over-year as it even became a verb during this quarantine. Technologies and services focused on remote work and home entertainment became a new reality that will stay with us even after we have a vaccine. Companies realized that they could have productive employees from home and, at the same time, huge savings with commercial real estate and infrastructure costs. And workers learned that they could save hours of their life every week working from home. I’m not saying everyone will work 100% of the time from home, but those who can, will not spend more than 2 days a week in the office.

And this has a ripple effect that in a K-shaped recovery creates winners and losers. The winners are those involved in the real estate market, as home sales increased 25% in July with families moving from small apartments in large cities to larger houses in the suburbs, as work commute really isn’t a factor anymore. In addition, people are taking advantage of extremely low mortgage rates. The losers are landlords in big cities like Manhattan, where 15,000 apartments are available for rent in September and the vacancy rate has grown from 2% to 5%.

Moreover, small businesses that depend on the flow of workers for their daily meals, drinks, or impulse shopping, must find new revenue streams or reduce costs to succeed in this market.

What could help reduce the negative impacts of a K-shaped economy recovery?

And, yes, there is space for innovation. Small business owners must look at what some of their peers are doing and embrace new technologies that can’t be ignored anymore, like expanding their online presence, finding new ways to get their products to customers (delivery, curbside pickup) and investing on their social media channels to create a community of loyal consumers. This competitive analysis is crucial for any company of any size.

Another tip is using SMB data analytics solutions to support business and marketing strategies. This can be done leveraging the company’s own customer and sales information, as well as using economic indicator analysis for small business, which is a tool used by increasingly more companies.

I just hope, that in an election year, whoever wins can understand that a K-shape recovery creates an even more polarized country, and that actions that do not consider this factor will fail in solving this social and economic inequality problem that we are facing.

5 Comments

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