Lessons from the Great Recession about COVID economic recovery
Some industries and states recovered more quickly than others following the Great Recession. What might that event teach us about how the economy could rebound from the COVID-19 pandemic?
The long-term economic effects of the COVID-19 pandemic will take years to ascertain fully. To overcome the economic challenges created by the pandemic and its fallout, it’s important to have a good initial understanding of the state of U.S. business creation and longevity prior to the current COVID-19 crisis.
For this purpose, CommercialCafe recently released a new study that offers an overview of the U.S. business landscape between 2008 and 2018, focusing on net gains or losses in the total number of active businesses, as well as the specific industries and states in which these changes were most notable. That 10-year period is important because it represents the last significant economic event and the years after during which the U.S. economy struggled to regain its footing — the Great Recession.
“The recession that began in 2008 led to many upheavals in the U.S. economy — from home foreclosures and major financial institutions defaulting to business closures throughout the nation,” notes CommercialCafe’s Diana Sabau. “In fact, in 2008 alone, the country lost nearly 120,000 enterprises — and that downward trend continued for another few years. By 2018, the U.S. economy had recouped and increased its total number of active companies, but the progress proved to be uneven across industries, as well as states.”
This report compiles the latest U.S. Census data for the continental states and Washington, D.C. for the following metrics: the average age of businesses; the average size of businesses (number of employees) and the share of the employed labor force they utilize in each state; as well as the number and distribution of businesses across sectors of the economy.
Wisconsin was notable in a few areas:
- Wisconsin had around 115,000 active businesses in 2008, and little more than 109,000 firms in 2018, closing off the 10-year period with a 5% decrease.
- However, businesses providing educational services increased by 182 firms — a 13% hike over the 10-year period.
- Wisconsin has among the oldest businesses in the country, with 43% of companies here having been active for more than 16 years, while 11% of businesses are younger than two years.
- About 84% of the total number of companies in the state have fewer than 20 employees, and only 3% employ more than 500 people.
2008–2018: An economic retrospective
In the aftermath of the financial crisis and its domino effect on the rest of the economy, companies struggled to stay afloat, notes Sabau. Moreover, until 2012 — when the trend slowly changed course and started inching closer to pre-recession values — the U.S. had witnessed the closure of roughly 204,000 companies.
Yet, by 2018, the number of U.S. businesses had increased from 5.9 million to an estimated 6.1 million, following a 2.5% growth throughout the decade.
Specifically, Washington, D.C. and New York were the first to bounce back from the crash in 2010. Their lowest points in 2009 turned out to be comparatively minor dips and were followed by a swift recovery in terms of business numbers, explains Sabau.
Meanwhile, states such as California, Colorado, Nebraska, South Dakota, and Utah bottomed out in 2011, only to make up for their lost numbers of firms by 2014. With its comeback in 2015, Nevada rounded out the list of the top 10 fastest-recovering states after the recession.
Wisconsin, like many Midwestern states, was not as hard hit by the Great Recession; however, the Badger State was likewise much slower to recover than other states due to its more traditional, conservative approach to the financial and housing markets.
Notably, with millions of Americans going back to school during the recession — eager to stave off unemployment or improve their job or business prospects — firms falling under the educational services category witnessed a 21.5% hike during the 10-year period, Sabau states.
Some of this growth was aided by a push toward education at the federal level, as the 2009 Recovery Act increased both the amount of Pell Grants to low-income students, as well as the number of eligible people. By 2018, with the addition of 17,000 active companies to the roster, the final tally for the decade stood at 95,554.
Despite being initially excluded from stimulus packages, the arts, entertainment, and recreation industry had the second-largest percentage increase in businesses at 16.5%. More precisely, the sector added 19,000 companies over the course of the decade, reaching 134,432 by 2018. However, the gains were not uniformly distributed across the industry.
For example, growth in the gambling business is tied to economic expansion, and only lottery consumption appears to be recession-proof. Similarly, digital distribution and streaming has been on the rise for years now — and the pandemic has only added to that trend. In contrast, museums, art centers, and theaters faced financial insecurity due to endowment cuts and insufficient private funding.
Likewise, with a large portion of the baby boomer generation retiring, health care and social assistance companies also contributed copiously to the growth of U.S. businesses: Throughout the course of the decade, the number of active firms increased by 43,000 — bringing the sector-wide total from 621,000 to 663,800. Some of the largest gains in terms of health care and social assistance firms were in California, Texas, and Missouri.
At the same time, the rise of the gig economy spurred the creation of companies that operated in the accommodation and food service sector, resulting in a net gain of 72,000 active companies between 2008–2018, Sabau says. In fact, the latest estimates suggest that there are approximately 550,000 active companies within the industry, which represents around 9% of the total number of U.S. firms.
It’s also important to note that accommodation and food service enterprises have often stepped in to fill gaps created by the decline of activity in other sectors, according to Sabau. As an example, in California, the overall expansion of the hospitality sector played a major role in replacing some of the jobs and businesses that were lost due to the decline of defense spending in the state.
The decade following the financial crisis was also marked by an increased churn rate for businesses operating in certain industries. Roughly 35,500 manufacturing firms went under between 2008–2018, but the number of construction businesses also fell by 5.5%, going from approximately 761,000 to 719,000. The latter sector’s 10-year low point came in 2012 — when the total number of firms shrank to less than 641,000.
Because construction businesses are sellers and buyers of materials and adjacent services, any changes in that sector has an influence on companies involved in everything from retail to mining and finance.
Indeed, retail trade was the hardest hit, losing the greatest number of companies during the decade studied. The sector’s decline was due to several simultaneous changes that have been reshaping the U.S. economy since 2008, chief among them the shift to e-commerce, along with increased difficulty in refinancing retail assets. By 2018, roughly 50,000 companies had gone under, marking a 7% decline. Some of the states that were most affected by the drop were California, Ohio, Illinois, and Pennsylvania.
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