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Regional Matters

January 7, 2021

The End of a Volatile Year: What Have Firms Told Us?

In the last 10 months—since the coronavirus pandemic started to impact the U.S. economy and our businesses in such a dramatic way—the Richmond Fed has published numerous Regional Matters articles on the results of our Fifth District business surveys. With the close of 2020, this article aims to understand the conditions that Fifth District firms are currently facing, what changes there have been in firms’ responses in the last few months, and what we should anticipate as we enter 2021. In general, we find that firms are still struggling with revenues, employment, and investment that is below February 2020 levels. And, although the positive news on a coronavirus vaccine has mitigated some uncertainty, firms remain unsure as to when they will return to pre-COVID business activity and, even more, if they will return: Our new normal might look different from our old normal. Finally, results from our November special survey indicate that rehiring from “temporary” spring layoffs is not likely to be the driver of employment growth going forward.

Is Anyone Back to Pre-COVID?

The December survey results are consistent with the past 10 months in that fewer than 50% of firms in our sample have revenue, employment, or investment at or above 100% of pre-COVID levels. Most firms, in fact, are between 80-100%, and even in December, 8.5% of our 177 respondents reported employment below 50% of pre-COVID levels and 11.2% of 178 respondents reported revenue below 50% of pre-COVID levels. Naturally, this varies by industry, with our manufacturers broadly doing better than our service providers. Our survey responses are generally consistent with other economic data. The third estimate of gross domestic product (GDP) released by the Bureau of Economic Analysis (BEA) on Dec. 22, for example, reported third quarter GDP at about 98% of its first quarter level. Even with the anticipated fourth quarter growth, most economists are forecasting an overall economic decline in 2020 of somewhere between 2 and 4 percent, annualized. And, as of November, payroll employment was still 6.1% below its year-ago level, and the growth was slowing—we added only 245,000 jobs in November, which was the smallest addition since January 2020.

This is not to say that the current state is the same as it was in April. In April, our service sector revenues index got down to -86, a record low. It fell in December, but only to -9, indicating that more, but not nearly as many, service sector firms had a decrease in revenues from November. The manufacturing shipments index rose to 19, indicating that most manufacturers were still operating under improving conditions. (The diffusion indices are roughly the share who reported that an indicator, such as revenues or shipments, improved in the last month minus the share who reported that the indicator worsened.) Of course, the value in our surveys lies not only in what it can tell us about what firms have faced, but also about what firms are expecting. So, what do our surveys tell us about when firms in the Fifth District anticipate returning to pre-COVID levels of economic activity?

Uncertainty and the Timing of a Recovery

In spite of the positive news on vaccine development and distribution, uncertainty among firms remains relatively high, at least in part due to rising cases, oncoming winter, and uncertainty around the timing of broad vaccine availability. Anecdotal information collected by the Richmond Fed indicates that for many firms, the vaccine has provided a light at the end of the tunnel, although they are not sure when the tunnel will end and how their business will look at the end of it. In December, when asked when they will return to pre-COVID levels of employment and revenue, about 40% of survey respondents still reported being “unsure.” Lack of certainty around investment plans was also high.

For those who provided the month of their expected return to pre-COVID activity, only 66.1% of 59 responding firms anticipated being at pre-COVID revenue by the end of 2021; 94.9% anticipate being there by the end of 2022. For employment, although 80.6% of responding firms anticipate being at pre-COVID levels of employment by the end of 2022, a full 15.3% don’t anticipate returning to pre-COVID employment at all.

There is another piece of the economic recovery that matters a lot: the difference between permanent and temporary job loss. In a recent post from the San Francisco Fed, Wolcott et al. noted that most of the surge in unemployment in April was due to temporary layoffs. In our November survey, of the 40% of firms that reported having laid off workers for reasons related to the pandemic, three-quarters of those reported that the layoffs were intended to be temporary. Many of those cuts have already been rehired, but some became permanent. In fact, only 8% of firms that responded could still hire back the temporary layoffs (2% tried to rehire but were unsuccessful, and 6% had not rehired for “other reasons.”) It might very well be that the labor recovery, going forward, will have to rely on the return of workers from permanent layoffs.

The New Normal

There are some hypotheses as to why 15% of firms in December did not anticipate returning to pre-COVID levels of employment. For example, there are indications that firms have invested in technology throughout 2020, some of which could replace the need for workers. The nature of the pandemic made it difficult to engage in economic activity that required people to be in close proximity—how many firms, then, invested in technology to reduce the need for workers? There is some recent evidence from The CFO Survey that many firms across the U.S. invested in automation during the COVID-19 pandemic that they might not have otherwise and that some of that automation will replace the need for workers.

We might see other changes too. The third quarter release of The CFO Survey reported that over 40% of respondents to that survey do not anticipate returning to pre-COVID levels of remote work. There is a lot of uncertainty about what that might mean for downtowns or, even more immediately, for office space demand. The December Fifth District survey sheds some light on this question: 28.9% of the 180 respondent firms intend to change their office configuration. Of those who intend to change office space, most reported some planned reduction in square footage.

Looking Ahead

When we entered 2020, we had an economy that was growing at a steady pace and a labor market that was the tightest it had been in 50 years. There was some concern about slowing investment, particularly in manufacturing, but we were maintaining our longest post-WWIII expansion. The coronavirus upended that expansion and created considerable hardship for Fifth District households and businesses. Firms in the Fifth District remain unsure as to when they will return to their pre-COVID activity and, in fact, many are anticipating permanent changes to their business models. Hopefully, broad vaccine distribution will enable a resumption of economic activity in 2021 and we will continue the process of recovering to our new normal.


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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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