Make no mistake, America’s tattered economy is at war. Not since Japan bombed Pearl Harbor has our nation faced such a daunting economic landscape. Wall Street analysts recently predicted as much as a 40 percent drop to second quarter GDP and a full 5 percent contraction to the 2020 U.S. economy. Since COVID-19 seemingly entered our daily vocabulary, more than 30 million Americans have filed for unemployment. Global equity markets have sold off and we are, by almost every account, already in a recession.
Alongside New York and New Jersey, Michigan has been ground zero of our national coronavirus nightmare. Astonishingly, nearly a quarter of Michigan’s population has already sought unemployment relief, a breathtaking 4,000 percent increase since March. According to economists at the University of Michigan, our pandemic-induced jobless rate will ultimately be double what it was during the 2008 financial crisis.
Congress has moved swiftly in approving trillions of dollars to rescue both small businesses and large corporations. Last month, lawmakers added a second $320 billion round of funding for the Paycheck Protection Program (PPP), which is designed to backstop small businesses — those with fewer than 500 employees — with forgivable loans if used to retain workers and pay rent. The federal government has also rightly stepped in to bail out the aviation and hospital industries, provided financing to large corporate employers, and injected financial markets with unprecedented liquidity in response to America’s nationwide shutdown.
Given these historic bailouts one must ask: Why is Washington ignoring the looming catastrophe facing our nation’s middle-sized businesses and one-quarter of all American employees who work for them? Lawmakers must act immediately to rescue America’s middle-sized companies from falling victim to the devastating financial impact of COVID-19. Failure to do so will bring a prolonged economic crisis unseen since the Great Depression.
Wedged between small businesses and large corporations, mid-sized companies, often referred to as the “middle market,” are generally considered to have revenues between $10 million and $1 billion. Although these companies make up only 1 percent of all U.S. businesses, they are directly responsible for more than 30 percent of GDP. In employment terms, the middle market makes up over a quarter of the country’s workforce and was responsible for more than 50 percent of all new jobs created since the Great Recession. If America’s middle market businesses were its own country, it would be the third largest economy in the world.
These mid-sized businesses include names you know such as Biggby Coffee, Belle Tire, and Pet Supplies Plus. They are also companies you’ve never heard of: companies such as the tier-two automotive supplier your neighbor works for, the asphalt company that repaved your neighborhood last summer, the metal fabricator that welded the panels to your RV, and the distribution company that stocks our local groceries with food and supplies.
Although most middle market companies keep a low profile, they have been financial juggernauts in the expansion of Michigan’s economy and employment over the past 10 years.
Michigan is a nationwide leader for middle market business growth. This has brought jobs, investment, and economic activity that have been key to our remarkable post-financial crisis recovery. In 2009, nearly 14 percent of Michigan’s workforce was unemployed; the highest jobless rate in the country at that time. This past February, our unemployment was at a multi-decade record low of 3.6 percent. This boon to hiring was largely driven by the significant 10-year expansion of Michigan’s middle market. Consider this: nearly one in three of all workers in southeast Michigan are now employed by a mid-sized business.
Despite this progress, large portions of Michigan’s middle market economy are at grave risk of permanently disappearing due to the coronavirus pandemic. An alarming survey recently released by the National Center for the Middle Market revealed that 25 percent of mid-sized companies anticipate a “catastrophic” impact to revenues. In addition, more than 50 percent of middle market companies will have a “major” negative impact to employment and almost half (44 percent) will need to undergo major restructuring. Because of COVID-19, Michigan’s middle market businesses are fighting for survival.
Given a tiny fraction of American businesses are classified as middle market, these companies are frequently overlooked by policymakers who often focus on the interests of small businesses and large corporations.
This is true of Washington’s latest round of bailouts, which have failed to understand the financial ruin currently facing middle market companies. In addition to the small business focused PPP, lawmakers provided $454 billion to the Federal Reserve to stabilize the economy. The Fed in turn proposed the “Main Street Lending Program” (MSLP) to bridge mid-sized companies through the pandemic. This program is designed to extend four-year loans to businesses that have up to 15,000 employees or $5 billion in revenues. This will help some middle market businesses, but the MSLP falls far short in comparison to its small business PPP counterpart.
For example, unlike the small business PPP, there is no option under the MSLP for loan forgiveness if used to maintain employees and pay rent, and the interest rate is nearly four times more expensive (LIBOR +3 percent). Further, middle market businesses that apply for these loans are unable to self-certify their financials, which makes approval difficult and time consuming in comparison to the PPP bailout.
Michigan’s middle market companies – especially those shutdown as “non-essential” – need cash, and they need it now.
Although the MSLP was originally announced by the Federal Reserve in early April, it has yet to be implemented. Funding likely won’t be received by approved business applicants until early June despite the fact that Congress has already ratified and deployed multiple rounds of PPP funding. This delay is hurting mid-sized companies and sending Michigan workers to the unemployment line.
Beyond making the MSLP funds immediately available, Congress must make the program more flexible and affordable to middle market businesses. Loan repayment terms need to be extended from four to six years. Most importantly, like the PPP, interest should be fixed at 1 percent, and a path must be created for these middle market businesses to have loans forgiven if used to retain employees and pay rent. It is simply shortsighted for lawmakers to disqualify mid-sized companies from government stimulus for having 500 vs. 499 employees.
One-third of southeast Michigan workers cannot afford a breakdown of the powerful engine that has been the biggest driver of our economic growth and employment over the past 10 years. Michigan will need the middle market to survive this pandemic if we are going to continue the story of our extraordinary – yet fragile – financial comeback. We have already lost far too much to this pandemic; Washington must partner with the middle market, as they already have with small businesses and large corporations, and take immediate action to ensure these mid-sized businesses do not become another casualty of COVID-19.
Christopher T.R. Letts is chairman of the Detroit chapter of the Association of Corporate Growth, a global middle market advocacy organization. He also sits on the Eli Broad College of Business Finance Advisory Board at Michigan State University.