In this article, I will write a continuation of the previous article. liberty street economics In this series, we will post by researching other impacts of extreme weather events on practical fields. Federal Reserve Small Business Credit Survey (SBCS) data reveals how small businesses in the Second District are affected by natural disasters (hurricanes, floods, wildfires, droughts, winter storms, etc.) I'm doing it. Among our findings: an increasing share of small businesses in the region increases losses from natural disasters, with minority-owned businesses suffering losses at a disproportionately higher rate than white-owned businesses. One example is that there are For many minority-owned companies, these losses represent a large portion of total revenue. A sister article examines the post-disaster recovery of District 2 small businesses. How long will it remain closed and what are the sources of disaster relief?
Vulnerability to disaster-related losses
This study considers small businesses in three states in the Fed's 2nd District: New York, New Jersey, and Connecticut (omit Puerto Rico and the U.S. Virgin Islands due to limited data availability). Masu). First, we use SBCS data for the period 2021-22 to compare our exposure to disaster-related losses with small businesses in other states. (previous liberty street economics Post [see here and here] We will investigate the disaster vulnerability of small and medium-sized enterprises nationwide from 2019 to 2021. ) The annual survey provides detailed information on the operating and financial health of small businesses with fewer than 500 employees and records the demographics of business owners. In the 2021 and 2022 surveys, 18,190 and 13,910 people responded, respectively.
The natural disaster module of the survey asks respondents whether their business has suffered a direct or indirect loss due to a natural disaster in the past 12 months. As the graph below shows, the proportion of companies that reported natural disaster-related losses in 2021-2022 was particularly high in the sample states, resulting in the finding of large disparities in disaster vulnerability in the region. It suggests that. Additionally, states along the Gulf Coast and West Coast have a higher proportion of small businesses reporting disaster-related losses compared to the central region.
Percentage of businesses reporting disaster-related losses, by state, 2021-22
Are minority-owned small businesses in this region more likely to report disaster-related losses?
Natural disasters can negatively impact small businesses, especially minority-owned businesses. These companies are typically resource-constrained and less resilient. A company is defined as a minority-owned company if at least 51% of the company's stock is held by minority (i.e., Asian, Black, Native American, or Hispanic) owners. A company is defined as white-owned if its stock is at least 50 percent owned by non-Hispanic white managers. Racial/ethnic categories are not mutually exclusive. For example, low-income and minority Americans are more likely to live in areas at higher risk of flooding, which can result in disparities in the effects of natural disasters. Conditional on exposure, disparities in the effects of natural disasters are also related to existing inequalities caused by historical practices such as redlining.
We report the percentage of businesses in District 2 states that experienced disaster-related losses, with data going back to 2019. Across companies, this proportion increased from 2% in 2019 to 18% in 2021 and then stabilized (see left panel of the figure). (diagram below). By race and ethnicity, we find that disparities have continued to widen since 2019, a year in which no minority businesses reported experiencing a natural disaster in the three states in our sample. was). In 2020, 4% of white-owned businesses and 9% of minority-owned businesses reported disaster-related losses. Both of these percentages rose in 2021, and rose further in 2022 to 12 percent and 29 percent, respectively (see right panel of graph below).
Qualitatively similar results were obtained for the national sample, but by comparison, the disparities were smaller in all years since 2020 (not shown). The percentage of companies reporting disasters increased from about 7% in 2019 to about 15% in 2022, and the gap widened accordingly. For example, in 2022, 22 percent of minority-owned businesses nationwide faced disaster-related losses, compared to 12 percent of white-owned businesses.
The disparity in the proportion of companies with losses and the amount of losses in the region has increased since 2019.
Among the small businesses in the disaster area in the sample, more minority-owned businesses were affected than white-owned businesses. We demonstrate this by focusing on a subsample of small businesses located in counties designated as disaster-affected counties by the Federal Emergency Management Agency (FEMA) during the study period. We found that 12 percent of white-owned businesses reported disaster-related losses in 2021 and 2022, compared to 29 percent of minority-owned businesses.
Do minority-owned businesses in the region suffer greater disaster-related losses?
The 2021 and 2022 surveys ask companies reporting disaster-related losses to estimate their losses from natural disasters and their revenue for the previous year. We normalize these losses as a percentage of the firm's total revenue from the previous year.
Minority-owned businesses in the three states are disproportionately likely to experience disaster-related losses that account for a large portion of their revenue (see chart below). For example, 38% of minority-owned businesses reported losses equal to 60% or more of their revenue in 2019, while only 18% of white-owned businesses reported similar losses. In contrast, white-owned businesses were more likely to suffer moderate disaster-related losses. For example, 65 percent of white-owned businesses experienced less than 30 percent of disaster-related losses, while about 50 percent of minority-owned businesses suffered similar losses. Qualitatively similar results are obtained for the national sample (not shown). For example, the percentage of minority-owned businesses experiencing normalized losses of more than 60% was about 30%, compared to 22% of white-owned businesses.
There are many minority-owned businesses in this region, and the share of profits from disaster-related losses is high.
The distribution of normalized losses is primarily driven by revenue declines for minority-owned businesses, with natural disasters placing a greater burden on minority-owned businesses because they amplify existing racial disparities. has been suggested (e.g. related to difficulties in accessing start-up capital and credit) to have a negative impact on small business profits.
Of concern is that our results in 2021 are driven by increased revenue losses for minority-owned businesses due to the 2020 COVID-19 pandemic. To address this concern, we examined the normalized loss for 2022 only and found a similar pattern. This result is also consistent with the distribution of normalized losses in 2020.
For the future
Our findings suggest that minority-owned small businesses in the region are more vulnerable to natural disasters than white-owned businesses. Minority-owned small businesses across the country face challenges in accessing credit and are located in areas with a lack of investment in climate infrastructure, and these challenges remain prominent in the Second District. be. In our next post, we will explore the resources small businesses can rely on to cope with losses after a disaster, including access to disaster relief.
Asani Sarkar is a Financial Research Advisor for Nonbank Financial Institutions Research in the Research and Statistics Group at the Federal Reserve Bank of New York.
How to cite this post:
Asani Sarkar, “How Do Natural Disasters Affect Small Business Owners in Fed District 2?” Federal Reserve Bank of New York liberty street economicsNovember 15, 2023, https://libertystreeteconomics.newyorkfed.org/2023/11/how-do-natural-disasters-affect-small-business-owners-in-the-feds-second-district/.
The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.