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COVID-19 and Fifth District Firms: Where Are They Now?

Regional Matters
September 3, 2020


The economic environment during the COVID-19 pandemic has been rapidly changing. Over the past several months, we have regularly asked Fifth District firms about the effects of COVID-19 on their businesses. These questions have provided key insight into firm sentiment and business conditions through the evolution of the pandemic. In particular, we have tracked how revenue, employment, and capital spending have changed for firms in our surveys, from a sharp drop in April to the improvements we have seen since. This post summarizes the results of our July and August COVID-19 surveys, which were fielded from June 25-July 23 and July 30-Aug. 19, respectively. In July, 158 firms responded to the survey, and in August, 191 firms responded.

COVID-19 and Its Effect on Fifth District Firms

When the COVID-19 pandemic hit the U.S. in early 2020, many firms were forced to cut back production due to supply chain disruptions, labor constraints, or low demand. As we discussed in prior posts in March and April, this aggregate decline was reflected in our monthly surveys of business activity. Although we generally separate our reporting between manufacturing and service sector firms, the graph below represents the diffusion index (share that reported increase minus the share that reported decrease) for all respondent firms for sales (shipments for manufacturing firms), employment, and capital expenditures. As is clear, April was the low point for all three indicators, but they remained negative — indicating continued contraction — for several months. Particularly notable from these indicators was the sharper fall in the sales/shipments index, which also preceded the other two indexes in recovery. The positive index values in the last two months suggest economic recovery after the sharp declines in the spring, but to get more detail, we asked a series of questions specifically related to how firms have fared as a result of COVID-19 disruptions and how they view the recovery.

Where Are Firms Now?

The survey specifically related to COVID-19 included questions around where firm revenues, employment, and capital spending are now compared with pre-COVID-19. One result that immediately stands out in the charts below is that when aggregated, there was little change in firm reporting from July to August. When asked how current revenue compares with pre-COVID-19 levels, firms reported similar situations in July and August. In both July and August, more than half of respondents reported a revenue level of at least 80 percent of pre-COVID-19 levels. On the other hand, there was also more divergence in responses in August: Although surveyed firms were somewhat more likely to have fully recovered in August than in July, they were also somewhat more likely to be operating with less than 50 percent of pre-COVID-19 revenue.

Employment was not as far below pre-COVID-19 levels as revenue among our respondents in recent months, but it has remained below pre-COVID-19 levels for many firms. In July, 59 percent of firms had employment below pre-COVID-19 levels, and in August, that number rose to 68 percent. In both months, more than half of firms saw employment levels of at least 90 percent of what they were before COVID-19. In August, there was a larger portion of firms with employment lower than 50 percent than in July but that was still under 11 percent of firms — less than the 14 percent of firms that had less than 50 percent of pre-COVID-19 revenues.

Capital expenditures appeared slower to recover, with firms more likely to be at a lower level of capital spending (relative to pre-COVID-19) than for revenue or employment. Anecdotally, firms suggest hesitancy to invest during a downturn or uncertain times. In July, 75 percent of firms had not returned to pre-COVID-19 levels of investment, and 28 percent had capital spending of less than 50 percent of pre-COVID-19 levels. The pattern was similar in August, as these numbers were 79 percent and 27 percent, respectively.

Through our monthly surveys, we are able to observe changes in sales, employment, and capital spending during the pandemic. The survey results paint a fairly consistent picture, suggesting that all three indicators of firm activity fell sharply in the spring but improved in recent months. They also indicate that capital spending has been the slowest to recover. In August, the diffusion indexes for employment and sales were positive, indicating improvement, while the capital spending index showed continued contraction. Likewise, in July and August firms reported that capital spending was lower relative to pre-COVID-19 than revenues and employment. Why might this be? Anecdotally, sales and employment have been more affected by social distancing mandates that have now been relaxed, and they react quickly to improvement in consumer demand. Spending decisions can be spread over the long term. Some firms did not halt capital projects that were already underway when demand hit, but they delayed starting new projects because of lost revenue even as demand increased. Many firms are also hesitant to invest given that they are unsure of the course the economy will take and the way business will develop in the coming months and years. Although businesses are seeing some recovery at the moment, they are uncertain about the future and how the economy and their companies will fare in the longer run.

What Can We Expect Going Forward?

Although the path that both the virus and the economy will take in the coming months is far from certain, respondents offered insights into their expectations for recovery. Of firms that had not yet reached pre-COVID-19 revenue levels, the average estimate of the time it would take to recover was 12 months in July and 13 months in August. On the employment side, in July, the expected time to recover to pre-COVID-19 employment levels was 10 months, suggesting that firms expected to see employment recover before revenue. However, in August, the expectation for employment rose to 13 months. Firms expected it to take even longer for them to return to pre-COVID-19 levels in capital spending than in revenue and employment. The average time to full recovery in capital spending was 14 months in July and 15 months in August. While estimates of time to recovery did not change substantially from July to August, it is noteworthy that in all three categories — revenue, employment, and capital spending — the expected recovery time increased, suggesting that firms are less optimistic about when they will be back to pre-COVID-19 levels.

In addition to providing information on the length of time needed for recovery, firms estimated how long they could sustain their business under current conditions. The average response in both July and August was 10 months. This showed some improvement from June, when businesses said, on average, they could only sustain current conditions for fewer than five months. A very small portion of firms expected to permanently run leaner than they had before COVID-19, but none of our survey participants expected to run more than 30 percent leaner.

Although economic activity in the Fifth District, as reported by firms, improved since the spring, respondents did not report broad improvement from July to August. The results of these surveys also suggest that firms are revising estimates of when their business will be fully recovered. Despite economic improvements, uncertainty remains over how both the pandemic and the economy will develop in the coming months. We can continue to use our surveys as one method of tracking how businesses will react to the economic situation.

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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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