Wednesday, May 6, 2020

Where Have the Paycheck Protection Loans Gone So Far?

The Federal Reserve Bank of New York has put out some interesting data on part of the first round of the Great Money Pump, phase one of the Paycheck Protection Program money giveaway.

The data is somewhat surprising. The figure below suggests that some of the hardest hit areas with COVID-19 infections—such as New York, New Jersey, Michigan, and Pennsylvania—are getting fewer loans than some Mountain and Midwest states on a per-small-business basis. In New York, the epicenter of the coronavirus in the United States, less than 20 percent of small businesses have been approved to receive PPP loans. In contrast, more than 55 percent of small businesses in Nebraska are expecting PPP funding.

Also curious, the next chart shows that more affected industries, such as Retail Trade and Accommodation and Food Services, are receiving more PPP funding than industries that likely lost less revenues, such as Information, Finance and Insurance, and Educational Services. But, there are notable exceptions in the pattern.

One sector that has received disproportionately more PPP funding is Construction, even though it has been classified as “essential business” in many states, making it conceivably more immune to the social distancing measures enacted to contain COVID-19. Another sector that has possibly been less affected but has received a relatively large share of PPP loans is Professional, Scientific, and Technical Services. Small businesses in this sector are more likely to be able to continue operating online.

The Fed notes:
Accommodation and Food Services is one of the hardest hit sectors but is receiving less funding than four other industries. This is even more notable if we consider the estimated number of layoffs by small businesses in this sector. One potential explanation for the disparity is that small businesses in this sector may have applied for other loans, including the SBA’s Disaster Assistance Loans (in the areas declared disaster zones, such as New York State). A further explanation could be that the impact of COVID-19 on hotels and restaurants is larger than the eight-week payroll covered by the PPP; thus, owners of small businesses in this sector could lay off some of their employees despite potential funding through the PPP. A third explanation is that the average wage in this sector is lower than that of other sectors. Therefore, a similar-sized loan can cover more employees in this sector than, for example, in Professional, Scientific, and Technical Services.

The economic impact of COVID-19, both measured by the number of COVID-19 cases per capita and by the number of initial unemployment claims per capita, does not explain the geographical distribution of PPP loans. In contrast, we find that lenders’ preference for borrowers with an existing relationship and the market share of community banks are the main factors explaining the geographical variation in PPP funding.


An EPJ reader emails:
I just read your post at EPJ entitled “Where Have The Paycheck Protection Loans Gone So Far?”  What was interesting to me was the Fed’s reasons for PPP loan disparities to companies in different industries.  I would add another reason for the disparity and it has to do with the banking relationship of individual companies seeking PPP loans.  As an employee of a $7 billion dollar bank, we were set up pretty well to handle the large flood of PPP loan applications.  Some of our competitors - some of the largest banks, some of the smallest banks and some of those in between - were not properly set up to handle PPP loan demand.  Our bank was able to get PPP loans for clients from competitor banks for this very reason.  In one such instance, we actually took an application got it approved and funded for a company before that company’s own bank got back to them to tell them that PPP funds had been exhausted.

On another note, I have my seatbelt fasten for the price inflation ride we’re about to take.  And my portfolio, thanks to the EPJ Daily Alert is well positioned for the coming price inflation.  Can you say SOG?

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