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These posts examine local, regional and national data that matter to the Fifth District economy and our communities.

The Coronavirus and Firms in the Fifth District: As of March 2020

Regional Matters
March 24, 2020


On Jan. 21, 2020, the CDC confirmed the first positive test for the novel coronavirus in the United States, in Washington state. On March 13, 2020, the president declared a national state of emergency. By March 16, every state and the District of Columbia had declared states of emergency, all due to the rapid escalation of positive cases of COVID-19, the disease caused by the novel coronavirus that first presented itself in Wuhan, China, in December 2019. However, Fifth District firms were reporting impacts from the virus before the emergency declarations and the initiation of social distancing mandates in states and localities across the country. This Regional Matters post describes the results of a survey of Fifth District firms fielded from Feb. 26 through March 18. It is intended to be the first in a series of posts that will describe not only the impact of the coronavirus on our region’s businesses, but also the role that our business surveys play in understanding economic activity throughout the Fifth District.

What are the Fifth District Monthly Business Surveys?

Every month, the Research Department of the Federal Reserve Bank of Richmond surveys manufacturers and service sector providers on their business activity in the last month. (For more information, see our posts about how we use survey diffusion indices and what they can tell us.) These data are critical inputs into immediate monetary policy deliberations, particularly since most available data on economic activity, at both the national and regional level, are lagged. In addition to the five-minute survey about changes in indicators such as shipments, new orders, revenues, employment, and prices, survey participants are often asked to answer special questions that provide input on an important issue facing policymakers (e.g., hiring and wages, tariffs, and hurricane impacts). Participants are also given the opportunity to provide comments on any part of their business.

The Coronavirus

The first sense that Fifth District firms could be impacted by the novel coronavirus came toward the end of January 2020. In fact, enough firms expressed concern about the impact of the virus on supply chains that at the end of January the Richmond Fed started to include questions about the virus effects throughout our firm engagement activities. However, there were only five comments that mentioned the coronavirus in the survey fielded from Jan. 30 to Feb. 19—four from manufacturers and one from a service provider—and all of them focused on uncertainty around the timing of inputs coming from or through China.

As the situation worsened in China and throughout the world, it became clearly important by the end of February to include questions about the scope of the economic fallout from the virus in the March survey (fielded from Feb. 27 through March 18). The questions asked of participants were: (1) To date, how has the spread of the coronavirus impacted your organization’s operations? (2) How do you expect the spread of the coronavirus to affect your organization’s operations? (3) How has the spread of the coronavirus affected your outlook for the U.S. economy? Across our two monthly business conditions surveys, we had a total of 127 responses. The results of the survey are discussed below.

To date, how has the spread of the coronavirus impacted your organization's operations?

When asked about the effects of the coronavirus outbreak so far, approximately 54 percent of businesses said they were not yet affected, while 41 percent reported a negative effect by the time they responded to the survey. Over the course of the three weeks that the survey was fielded, however, the landscape changed dramatically: The number of positive cases in the United States and the District surged, the Centers for Disease Control and Prevention changed its recommendation on social distancing and group gatherings, the White House declared a national state of emergency (March 13), and numerous states and localities in the Fifth District took action to curtail group gatherings, including closing schools, closing restaurants, and requiring/encouraging work–at-home policies. Those developments were reflected in our survey results. When broken out by week of the survey, the data show a similar share of firms reporting no effects in week one and week two but a large decline in that share in the third week (March 12-18), along with a large increase in the share of firms reporting negative effects. (See chart below.) It is important to note that a slightly larger number of responses came in the first week (55 responses) compared with the second and third weeks, which had 38 and 34 responses, respectively.

In addition to an increase in the number of firms that reported a negative effect of the virus, the impact on industry shifted: In the first two weeks, it was primarily manufacturing firms that reported a “slight” negative effect, which most anticipated to be temporary. By week three, the negative effect shifted toward services firms and increased in severity, with more reports of “medium” and “large” negative impacts. This phenomenon also manifested itself in the open-ended comment field. In the first two weeks of the survey, comments were concentrated among manufacturers that reported delays (sometimes considerable delays) in supplies coming from China. In the service sector, the (less common) negative effects emanated from either the same supply chain concerns of manufacturers or scattered cancellations of meetings or events.

By the last week of the survey, although there were still comments from manufacturers on supply chain disruption (primarily outside of China), the impacts were centered on demand rather than supply. Manufacturers reported operations changes in light of social distancing, and all firms—manufacturing, retail, and services—reported reduced demand. According to one respondent in the hospitality industry, business was close to a complete standstill.

Over the course of all three weeks, the companies that reported positive effects of the virus benefited from lower interest rates, increased demand for cleaning and medical supplies, and decreased competition with Chinese firms.

How do you expect the spread of the coronavirus to affect your organization’s operations?

At the time of response, many firms had not yet seen an effect of COVID-19 on their operations, but almost 80 percent of firms anticipated a negative impact. Not surprisingly, the breakdown of those results also changed considerably between the second and third weeks of the survey period. As evidenced in the chart below, the share of firms that expected a negative impact on their operations increased from around 70 percent in the first two weeks to almost 94 percent in the last week.

In the first two weeks of the survey, the comments indicated a sense of uncertainty among both service sector firms and manufacturers. Several producers reported uncertainty around the full effect of supply chain disruptions in China. One manufacturer was concerned about the large negative effect of quarantining production employees. Meanwhile, service sector firms expressed concern about customers avoiding crowds by limiting travel and shopping.

In the final week of the survey, the tenor of the comments was increasingly dire: Firms were worried about the productivity and demand implications of universal remote work and self-isolation. One of the most forward-looking comments came from an hotelier that reported the possibility of shutting down for the next three months if the cancellations continued.

How has the spread of the coronavirus affected your outlook for the U.S. economy?

Aggregating the three weeks of the survey, most firms (84 percent) reported a deterioration in their outlook for the U.S. economy. In the last week of the survey, that number rose to 100 percent of respondents, and, as the chart below shows, many of those respondents indicated that their outlook had deteriorated substantially. In their comments, respondents pointed to recent stock market declines, shutdowns of schools and restaurants, canceled travel and events, and general expectations for a decline in consumer spending.

Summary of results and overall survey results

The results of this special survey on the coronavirus give us insight into the results of our manufacturing and service sector surveys released on March 24. The composite manufacturing index—a combination of the indexes for shipments, new orders, and employment—remained relatively flat in March, with a reading of 2. The results worsened, however, over the course of the survey period, and we anticipate those numbers to be lower with the next survey release on April 28. Even in the March survey, indexes for manufacturing indicators such as backlog of orders and local business conditions were already negative. Among service sector firms, the revenues index dropped dramatically, to a reading of 1, as the measure for local business conditions out of that survey turned negative.

What next?

In this case, what’s next is now. Schools in many parts of the District remain closed. From our business contacts, we hear that grocery stores are struggling to keep shelves stocked, restaurants are closing, and the restaurant food supply chain is not easily convertible to grocery. Everything from salons to toy stores are suffering from immediate customer declines while larger online retailers or firms that ship goods are struggling to find transportation. Trucking and freight firms struggle to balance demand with concern for employee health. And conditions continue to change rapidly.

Stay tuned.

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Views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.

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