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Policy Hub: Macroblog provides concise commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues for a broad audience.

Authors for Policy Hub: Macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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May 4, 2020

U.S. Firms Foresee Intensifying Coronavirus Impact

In late March—even before many states had issued shelter-in-place, stay-at-home, or shutdown orders—we noted that firms were bracing for a huge negative impact on sales revenues from developments surrounding the coronavirus. Results from our March Survey of Business Uncertainty (SBU)—a national survey of firms of varying sizes and industries—revealed that disruptions stemming from COVID-19 had led to sharp declines in expectations for year-ahead sales growth.

Our April survey, which was in the field from April 13 to April 24, suggests that year-ahead sales growth expectations have only grown bleaker and more uncertain. Exhibit 1 shows that year-ahead sales growth expectations followed up the largest one-month decline in the history of the SBU (which goes back to October 2014) with another sizable decline. Since February, sales growth expectations have fallen by nearly 7 percentage points, and firms' collective view is that by this time next year, aggregate sales levels will be about 2 percent lower than they are now.

At the same time, firms' confidence in those expectations has continued to deteriorate sharply. Year-ahead sales growth uncertainty has more than doubled since the beginning of the year, dwarfing any worries firms may have attached to concerns over trade and tariffs over the previous two years.

Exhibit 1: Sales Revenue Growth Rate Expectations and Uncertainty

To better understand the impact of COVID-19 on panelists' sales outlook, we posed the following question in March and again (as a part of a larger battery of special questions) in April: "What is your best guess for the impact of coronavirus developments on your firm's sales revenue in 2020?" As exhibit 2 shows, that negative impact has intensified markedly from early March through the fourth week of April. From week to week, as the breadth and severity of COVID-19's impact on Americans' health and U.S. economic performance became clear, firms' collective judgment about the size of the impact has nearly quadrupled—from roughly a 5 percent impact in early March to around 20 percent by late April.

Exhibit 2: Anticipated Coronavirus Impact on 2020 Sales Revenues, Percentage Amounts

Not only can we see the growing intensity and widening reach of the pandemic in the mean responses, but a cross-section of respondents also makes it evident. In early March, just two-thirds of the panel reported being negatively affected by the outbreak (with a mean COVID-19 impact in that group smaller than minus 10 percent). However, by April, nearly 90 percent of the panel indicated they anticipate a negative hit to 2020 sales revenue as a result of COVID-19 (with a corresponding mean impact of minus 20 percent). Consistent with our findings regarding firms' staffing decisions, a small set (a bit more than 5 percent) of firms anticipate higher sales levels in 2020 as a result of the pandemic.

Perhaps it feels incongruous to use the word "good" as a descriptor at times like these, but perhaps the news from our analysis is that from the first to the second week of the April, the anticipated impact of the pandemic on sales revenue did not continue to worsen materially. This tentative stabilization brings up other fundamental questions regarding how firms' sales growth expectations are coalescing. Namely, when do firms think the cloud of uncertainty surrounding the pandemic will have largely dissipated, allowing them to revert to a more "business as usual" stance? And will they need to tap additional sources of funding to allow them to bridge the crisis?

In April, we first posed this question to SBU panelists about their unusually uncertain environment: "When do you think it is most likely that the coronavirus-related uncertainty facing your firm will be largely resolved?" The second question was, "In light of current conditions, for how many months can your firm continue to operate without tapping new sources of funding (credit lines, emergency loans, debt markets, etc.)?" Exhibit 3 shows the responses to these questions.

Exhibit 3: Statements Regarding When COVID-Related Uncertainty Will Be Resolved and How Long Firms Can Persist in This Environment without Further Help

Roughly three-fourths of surveyed firms expect COVID-19-related uncertainty will be in the rearview mirror by the end of the year. However, the tail of this distribution is quite long, with a few of the more pessimistic respondents anticipating COVID-19-related uncertainty to linger through 2022.

Interestingly, responses to the question regarding the need for additional funding vary quite widely. The typical respondent indicated they would be able to hold out until the start of the fourth quarter without needing to tap new funding sources, should these exigent circumstances persist. And more than a quarter of our panel indicated they'd be able to hold out for at least a year.

Taking a step back and viewing our April survey results as a whole, for the most part firms appear to indicate a relatively optimistic baseline outlook. Year-ahead sales growth expectations, though negative, are nowhere near as bad as the expected impact of COVID-19 on 2020 sales levels. This disparity suggests firms see a very strong snapback in sales activity in late 2020 through the first quarter of 2021, consistent with their collective statement on when COVID-related uncertainty will end. Although that narrative is appealing, let's keep in mind that firms' collective outlook for the year ahead can only be described as "highly uncertain."


May 1, 2020

COVID-19 Caused 3 New Hires for Every 10 Layoffs

Reports about the economic fallout from the coronavirus pandemic and efforts to slow its spread make for grim reading. One especially grim statistic is the number of layoffs. Since early March, just over 28 million persons have filed new claims for unemployment insurance benefits (roughly 30 million if you seasonally adjust).

Some analysts anticipate that as a result, the unemployment rate for April will be above 20 percent. By way of comparison, the unemployment rate peaked at 10 percent in October 2009 in the midst of the Great Recession and 24.9 percent (by one measure) during the Great Depression.

The extraordinary scale of recent job losses commands attention, and rightly so. But there's more to the story of recent labor market developments: quite a few firms are also hiring new workers in response to pandemic-induced demand increases. In fact, the latest Survey of Business Uncertainty (SBU) says that, for the U.S. economy overall, the COVID-19 shock caused three new hires for every 10 layoffs.

In the latest wave of the SBU (fielded from April 13–24), we posed two special questions about staffing changes. The first question asks how developments related to the coronavirus caused firms to alter their staffing levels since March 1 across five categories: permanent layoffs, temporary layoffs and furloughs, new hires, cuts to the number of contractors and leased workers, and additions to the number of contractors and leased workers. A follow-up question asks panelists what staffing changes they plan to make over the ensuing four weeks in response to coronavirus-related developments.

The chart below examines all of the changes firms can make in staffing levels (layoffs, hiring, changes in contractors, etc.) and isolates the percentage changes associated with each type of action. These changes include total (or gross) reductions, gross additions, and the net impact on staffing levels (that is, gross additions minus gross reductions). The results presented in the chart are striking. Between March 1 and mid-April, firms implemented gross staffing reductions equal to 10.9 percent of employment. During the ensuing four weeks, they plan additional cuts equal to 4 percent of employment. The sum of these two figures yields gross staffing reductions over two and a half months equal to 14.9 percent of March 1 employment—a staggering job loss rate, to be sure.

But there's another aspect to the story. In the same span of two and a half months, coronavirus-related developments caused firms to increase gross staffing levels by an amount that equals 4 percent of March 1 employment. In other words, the COVID-19 shock led to roughly three new hires for every 10 layoffs. The exact ratio is a bit less than 3 to 10, especially if we include contractors and leased workers. This result aligns with news reports of large-scale hiring at firms like Amazon, Walmart, CVS Healthcare, Domino's Pizza, and other companies that saw increased demand in reaction to the pandemic and partial shutdown.

There are good reasons to think that our survey results actually understate the true extent of gross staffing gains and losses in reaction to the pandemic. First, the SBU undersamples younger firms. (We know from other research that young firms have higher gross staffing gain and loss rates on average.) Second, highly stressed firms are less likely to respond to surveys, which means that our results probably understate gross staffing reductions. Third, our survey does not capture hiring by new firms. U.S. Census Bureau statistics (derived from administrative sources) say that business formations continue even in the wake of the pandemic. Since the latter part of March, applications for new businesses that the Census Bureau regards as having a "high propensity" to hire workers in the near future are running at about two-thirds of the 2019 pace.

The chart also sheds light on the nature of staffing reductions from the employer perspective: More than three quarters of these reductions are temporary layoffs and furloughs, implying that most workers will return to their old jobs, which can happen more quickly than hiring new employees (or those individuals finding a new job). However, this expectation warrants some skepticism. As we reported last month, SBU panel members express record-high levels of uncertainty in the outlooks for their firms, a reading that sounds right to us. No one yet knows how rapidly the pandemic will recede, or how much permanent economic damage it will cause.


March 23, 2020

American Firms Foresee a Huge Negative Impact of the Coronavirus

The rapid unfolding of the COVID-19 pandemic has created grave concerns for the health and welfare of the U.S. population and the economy. The economic worries are very apparent in financial markets. From the closing bell on February 21 through March 20, U.S. equities fell more than 30 percent, and stock market volatility skyrocketed.

At present, we simply don't know the extent of the overall disruption to the economy. We are still months away from confidently gauging COVID-19's impact on output growth. However, the latest wave of results from our Survey of Business Uncertainty (SBU) indicates that firms are bracing for a huge negative impact on their businesses. Our results also say the outlook deteriorated rapidly over the past two weeks.

The SBU was in the field from March 9 until last Friday, March 20. Relative to February, firms' four-quarter-ahead sales growth expectations fell sharply, from above 5 percent to below zero. This fall is, by far, the starkest one-month swing we've recorded since the inception of the SBU in October 2014. In addition, firms' uncertainty about their own sales growth rates rose 44 percent from February to March (see exhibit 1).

Exhibit #1. Survey of Business Uncertainty: Sales Revenue Growth Rate Expectations and Uncertainty

Interestingly, SBU respondents did not report a material softening in the outlook for employment growth during the next 12 months, or in the capital investment rate four quarters hence. However, given the latest signals from the labor market—most notably, last Thursday's initial unemployment claims report—employment is set to contract sharply for at least a few weeks. Perhaps respondent firms see the coronavirus impact as sharp but short-lived, with little impact on longer-term employment and plans for capital expenditure.

To better gauge how firms see the direct impact of COVID-19 on their sales outlook, the March SBU included the following special question: “What is your best guess for the impact of coronavirus developments on your firm's sales revenue in 2020?” Exhibit 2 summarizes the results.

Exhibit 2. Anticipated Coronavirus Impact on 2020 Sales Revenues, Percentage Amounts

Pooling responses over the survey's full two weeks in the field, firms anticipate revenue losses of more than 6 percent in 2020 as a result of coronavirus-related disruptions. Perhaps even more telling is how the responses evolved over the two-week period. As the virus spread—and as companies, households, and governments reacted—the collective judgment of responding firms about the severity of the negative hit to sales more than doubled.

In the first week, roughly two thirds of firms said coronavirus-related developments would harm their sales in 2020. Among those affected, the average expected decline was 9 percent. In the second week, nearly 85 percent said coronavirus-related developments would negatively affect their sales, with an average decline of 16 percent among affected firms—making it clear that from one week to the next, both the reach and severity of the anticipated impact rose sharply.

Exhibit 3 breaks down anticipated effects by major industry sector and shows that no sector is immune to the disruptive effects surrounding the virus and efforts to restrain its spread.

Exhibit 3. Anticipated Coronavirus Impact on 2020 Sales Revenues, by Sector

In sum, our March survey results show a very large and very negative impact on sales. Our direct question about coronavirus's anticipated impact on the sales outlook (exhibit 2) and the deterioration in the outlook from February to March (exhibit 1) suggest that recent events will lower sales by 6 percent or more. At this point, though, anticipating a sales decline of 6 percent might be too optimistic, for two reasons. First, the anticipated coronavirus impact intensified greatly from the first week to the second week of our March survey. Second, the virus continues a rapid spread domestically and abroad, prompting governments to respond with tighter travel restrictions and stricter social distancing policies.


October 26, 2018

On Maximizing Employment, a Case for Caution

Over the past few months, I have been asked one question regularly: Why is the Fed removing monetary policy stimulus when there is little sign that inflation has run amok and threatens to undermine economic growth? This is a good question, and it speaks to a philosophy of how to maintain the stability of both economic performance and prices, which I view as important for the effective implementation of monetary policy.

In assessing the degree to which the Fed is achieving the congressional mandate of price stability, the Federal Open Market Committee (FOMC) identified 2 percent inflation in consumption prices as a benchmark—see here for more details. Based on currently available data, it seems that inflation is running close to this benchmark.

The Fed's other mandate from Congress is to foster maximum employment. A key metric for performance relative to that mandate is the official unemployment rate. So, when some people ask why the FOMC is reducing monetary policy stimulus in the absence of clear inflationary pressure, what they really might be thinking is, "Why doesn't the Fed just conduct monetary policy to help the unemployment rate go as low as physically possible? Isn't this by definition the representation of maximum employment?"

While this is indeed one definition of full employment, I think this is a somewhat short-sighted perspective that doesn't ultimately serve the economy and American workers well.  One important reason for being skeptical of this view is our nation's past experience with "high-pressure" economic periods. High-pressure periods are typically defined as periods in which the unemployment rate falls below the so-called natural rate—using an estimate of the natural rate, such as the one produced by the Congressional Budget Office (CBO).

As the CBO defines it, the natural rate is "the unemployment rate that arises from all sources other than fluctuations in demand associated with business cycles." These "other sources" include frictions like the time it takes people to find a job or frictions that result from a mismatch between the set of skills workers currently possess and the set of skills employers want to find.

When the actual unemployment rate declines substantially below the natural rate—highlighted as the red areas in the following chart—the economy has moved into a "high-pressure period."

For the purposes of this discussion, the important thing about high-pressure economies is that, virtually without exception, they are followed by a recession. Why? Well, as I described in a recent speech:

"One view is that it is because monetary policy tends to take on a much more 'muscular' stance—some might say too muscular—at the end of these high-pressure periods to combat rising nominal pressures.

"The other alternative is that the economy destabilizes when it pushes beyond its natural potential. These high-pressure periods lead to a buildup of competitive excesses, misdirected investment, and an inefficient allocation of societal resources. A recession naturally results and is needed to undo all the inefficiencies that have built up during the high-pressure period.

"Yet, some people suggest that deliberately running these high-pressure periods can improve outcomes for workers in communities who have been less attached to the labor market, such as minorities, those with lower incomes, and those living in rural communities. These workers have long had higher unemployment rates than other workers, and they are often the last to benefit from periods of extended economic growth.

"For example, the gap between the unemployment rates of minority and white workers narrows as recoveries endure. So, the argument goes, allowing the economy to run further and longer into these red areas on the chart provides a net benefit to these under-attached communities.

"But the key question isn't whether the high-pressure economy brings new people from disadvantaged groups into the labor market. Rather, the right question is whether these benefits are durable in the face of the recession that appears to inevitably follow.

"This question was explored in a research paper by Atlanta Fed economist Julie Hotchkiss and her research colleague Robert Moore. Unfortunately, they found that while workers in these aforementioned communities tend to experience greater benefits from these high-pressure periods, the pain and dislocation associated with the aftermath of the subsequent recession is just as significant, if not more so.

"Importantly, this research tells me we ought to guard against letting the economy slip too far into these high-pressure periods that ultimately impose heavy costs on many people across the economy. Facilitating a prolonged period of low—and sustainable—unemployment rates is a far more beneficial approach."

In short, I conclude that the pain inflicted from shifting from a high-pressure to a low-pressure economy is too great, and this tells me that it is important for the Fed to beware the potential for the economy overheating.

Formulating monetary policy would all be a lot easier, of course, if we were certain about the actual natural rate of unemployment. But we are not. The CBO has an estimate—currently 4.5 percent. The FOMC produces projections, and other forecasters produce estimates of what it thinks the unemployment rate would be over the longer run.

For my part, I estimate that the natural rate is closer to 4 percent, and given the current absence of accelerating inflationary pressures, we can't completely dismiss the possibility that the natural rate is even lower. Nonetheless, with the unemployment rate currently at 3.7 percent, it seems likely that we're at least at our full employment mandate.

So, what is this policymaker to do? Back to my speech:

"My thinking will be informed by the evolution of the incoming data and from what I'm able to glean from my business contacts. And while I wrestle with that choice, one thing seems clear: there is little reason to keep our foot on the gas pedal."