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October 1, 2020
Post-COVID Recovery? Not So Fast, My Friend
The recent economic data paint a picture of recovery. Our in-house gross domestic product growth tracker, GDPNow, has pegged third quarter 2020 growth at an astonishing 32 percent annualized pace. The unemployment rate has fallen from a high of 14.7 percent in the depths of the pandemic to 8.4 percent alongside the addition of nearly 11 million payroll jobs.
Yet, despite that dramatic initial bounceback, the unemployment rate is more than double its February level of 3.5 percent and nonfarm payrolls still sit 11.5 million below their prepandemic levels. Moody's Analytics and CNN Business's "Back-to-Normal Index" suggests that the economy is operating at about three-quarters of its prepandemic levels. However, progress toward "normal" appears to have stalled out in recent weeks.
The question of how quickly the United States is going to return to prepandemic levels of economic activity looms large. Data from the Survey of Business Uncertainty (SBU) suggest that the road forward is going to be a tough slog. Businesses hold tepid expectations for year-ahead employment and sales growth. Expectations are, in fact, so tepid that, based on the latest average projection, it will take firms more than four-and-a-half years to recover their pre-COVID employment levels and about three-and-a-half years to recover their lost sales revenue. In short, the coronavirus pandemic has knocked the economy off its previous robust path and firms don't see us returning to that path anytime in the foreseeable future.
Charts 1 and 2 make use of SBU survey data on past sales growth rates and current and year-ago employment levels in addition to firms' forward expectations. The indexes plot the cumulative sales and employment growth using January 2016 as a starting point and use data and expectations through September 2020. For reference, we plot a trend line based on the actual, relatively stable and strong sales and employment growth firms reported over the 2017–19 period.
As the charts show, since the onset of the pandemic, firms' sales revenues have plummeted by more than 10 percent and employment levels, which have stabilized in recent months, are on average still about 5 percent below prepandemic levels. Essentially, the pandemic has erased all the growth that firms have enjoyed over the previous two years.
The evolution of firms' expectations since the beginning of the pandemic is also of particular interest. Before the pandemic, firms' expectations for both sales and employment growth remained relatively on trend. However, by April, firms appeared to have rapidly adjusted down their expectations for sales revenues over the year ahead, while holding to an expectation that employment levels would remain more or less constant. However, firms' expectations became much less optimistic over the summer months—perhaps as firms came to grips with the length of time COVID-related uncertainty is likely to remain with us. Firms now anticipate a modest increase in sales revenue and a mere 0.7 percent gain in employment over the year ahead.
So, when will the economy recover "back to normal"? Well, based on firms' latest projections, they do not anticipate regaining their pre-COVID (February 2020) employment level for another 55 months (or until April 2025). For sales revenue, the mean projection suggests that revenues will not retake their February 2020 levels until January of 2024. Effectively, COVID-19 has permanently shifted downward firms' expectations for employment and sales growth trends.
It's worth noting that these projections from firms are somewhat more pessimistic than those of professional forecasters. In a special question posed to the Blue Chip Panel of Economic Forecasters in September, the majority of professional forecasters see real GDP overtaking its prepandemic level sometime in 2022. However, the latest employment projections from the Survey of Professional Forecasters still have nonfarm payroll employment well shy (by roughly 8 million jobs) of its prepandemic peakby the end of their quarterly projection period in the third quarter of 2021. Projecting forward using their last quarterly forecasted growth rate suggests nonfarm payroll employment may return to its prepandemic peak by the first quarter of 2024.
Overall, our results indicate that our survey panel participants do not see the chances of the U.S. economy retaking its pre-COVID levels and getting back on its prepandemic trend anytime in the foreseeable future. As Lee Corso, ESPN college football analyst, would put it: "Not so fast, my friend."
September 2, 2020
Firms Anticipate COVID-19 Uncertainty to Persist, but Not Worsen
Back in April, during the height of the current pandemic, we asked panelists in our national Survey of Business Uncertainty a couple of key questions: what impact they anticipated the pandemic to have on their sales revenue in 2020, and when they expected COVID-related uncertainty to have largely abated. We repeated this line of inquiry in August, and the results are quite interesting. For the most part, firms' views about the size of the coronavirus impact on 2020 sales revenue haven't changed since April. However, they do anticipate that disruption from the virus will remain a part of the economic landscape for quite a bit longer than they did four months ago. Amid these views, firms' year-ahead expectations for sales and employment growth remain highly uncertain.
Chart 1 shows firms' best guesses about the impact of coronavirus developments on 2020 sales revenue in August, and it compares these results to the last two times we asked this question (in April and March). As we've documented before, expectations from March to April declined dramatically, likely as the breadth and severity of the COVID-19 pandemic became apparent. Since then, however, firms' sense of the COVID-19 impact on 2020 sales revenues has mostly remained unchanged, an expectation that would hold true even if we were to restrict the sample only to respondents who answered all three iterations of this question.
Digging into the industry cross-section, retail and wholesale trade is the only sector where 2020 sales expectations have materially changed since spring. Firms in retail and wholesale trade have significantly revised downward the expected impact of COVID-19 on sales revenue. In April, they anticipated a 25 percent hit to sales, and in August they foresaw about a 10 percent impact. This improvement seems consistent with the relatively strong rebound we've seen to date in the retail trade reports from the U.S. Census Bureau and in data about high-frequency debit and credit card spending.
As chart 2 shows, despite the severity of the anticipated 2020 (calendar year) COVID-related impact on sales revenue, firms' year-ahead (a rolling four quarters) sales growth expectations, which turned negative in April and May, have rebounded. However, this rebound is only a partial one relative to the precoronavirus sales-growth trend. At roughly 1 percent, firms' nominal sales growth expectations over the next four quarters (through the third quarter of 2021) are tepid and suggest a muted and prolonged recovery from the pandemic-induced recession on the part of firms (and thus the economy).
Firms' year-ahead employment growth expectations have improved moderately, rising from an expectation of near zero growth back in April (over a time period covering April 2020 to April 2021) to roughly 2.5 percent (from August 2020 to August 2021). Although employment growth expectations have risen to the highs we saw during the strong labor market period of 2018 and 2019, it's important to note that these expectations are forward-looking growth rates and do not show the dramatic, swift decline in employment that the economy experienced earlier this year. The current employment growth estimates still suggest that, on average, firms will not have regained their pre-COVID employment levels by August of next year.
Unlike measures of market-based volatility (like the Chicago Board of Exchange's VIX) that have swiftly returned to more normal levels, uncertainty over firms' sales and employment growth over the year ahead remains elevated (see chart 3). Sales growth uncertainty, in particular, shot up by roughly 200 percent April and is still 167 percent above normal. So, though expectations have improved, firms continue to view their own year-ahead outlooks with great uncertainty.
Perhaps these persistently high levels of uncertainty shouldn't come as much of a surprise. Firms' sentiment about how long it will take pandemic-related uncertainty to dissipate has become more pessimistic and more dispersed (see chart 4) than it was early in the crisis. In April, roughly three-fourths of the firms in our panel expected COVID-related uncertainty to be behind us by the end of the year. Now, the majority of firms anticipate a return to a more "business-as-usual" stance at some point in 2021, and less than 20 percent are optimistic that the end of the year will see normal conditions. Moreover, the tail of this distribution has grown quite long, and roughly 10 percent of firms anticipate that uncertainty will linger into 2022—or beyond.
Overall, our results indicate that firms continue to see COVID-19’s impact on 2020 sales revenue as significant. Although firms’ expectations for sales and employment growth have risen from their depths earlier in the crisis, our results reflect the belief that the economy is in for a tepid, protracted return to its pre-COVID state. And, perhaps those sluggish and highly uncertain expectations make sense given how long COVID-related uncertainty might last.
August 4, 2020
Businesses Anticipate Slashing Postpandemic Travel Budgets
In the months (and years) following 9/11, airline travel was fundamentally altered. Despite a host of new measures to increase safety, not until April 2004 did airlines see passenger loads reach pre-9/11 levels. When thinking about how that crisis compares to the current pandemic, current and former airline execs say the current pandemic is having a much more significant impact on travel than 9/11 did. On the prospect of when travel could return to pre-COVID levels, a former CEO of American Airlines, Robert Crandall, flatly predicted in the Wall Street Journal that "you are never going to see the volume of business travel that you've seen in the past."
And official statistics confirm this notion. The U.S. Bureau of Transportation Statistics' index for passenger travel (shown in chart 1) registered a roughly 20 percent drop around September 2001, while as of April (the most recent month of data), passenger travel fell off a cliff. The raw index level was 10, which means that passenger transportation across all modes fell to 10 percent of its average level during 2000—two decades ago.
Although higher-frequency data point to a modest rebound in travel since bottoming out in April, the travel numbers at airports are now only about 70 percent below last year's levels (as opposed to down 95 percent in early April). But that hasn't kept many folks from wondering what the future of air travel will look like or how long it will take until people are once again comfortable enough to starting flying for work or leisure.
As we've highlighted during the past couple of months, the coronavirus pandemic has had a profound impact on job reallocation, firms' expectations for employees working from home after the pandemic, and reconsideration of firms' future office space needs. This post also discusses possible coming changes. Results from our most recent Survey of Business Uncertainty (SBU) suggest that firms anticipate slashing their postpandemic travel budgets and tripling the share of external meetings (those with external clients, patients, suppliers, and customers) conducted virtually.
In our latest SBU—which was in the field July 13–24—we asked business decision makers to describe how, relative to 2019 (see chart 2), their travel budgets are likely to change after the pandemic is over and whether the postpandemic share of external meetings conducted virtually will change. (You can read more about the SBU here.)
Chart 2 indicates that air travel accounted for roughly 40 percent of 2019 travel expenses for most broad industries, with the remainder split between accommodation and all other travel costs. And, as you may have expected, industries such as business services, information, finance, and insurance accounted for an outsize share of overall travel spending (42 percent of all travel spending in our data).
As chart 1 clearly indicates, the pandemic has led many firms to halt or severely curtail travel, but the important question is whether business travel recovers fully following the pandemic. Unfortunately, for the transportation and travel industries, our results cast doubt on the prospect for a quick and complete rebound in business travel. Firms anticipate slashing their annual travel expenditures by nearly 30 percent when concerns over the virus subside (see chart 3). The expected decline in travel expenditures is particularly severe for information, finance, insurance, and professional and business services. Firms in these industries are marking in a nearly 40 percent reduction in travel spending after the pandemic is over. Overall, these results paint a fairly pessimistic view going forward.
Firms in our survey are not alone in their pessimism. A recent forecast from the International Air Transport Association projects air travel will remain below its prepandemic trend through 2024.
Such a large, broad-based reduction in travel spending not only suggests a sluggish and potentially drawn-out recovery for the travel, accommodation, and transportation industries, but it also indicates that firms expect to shift from face-to-face meetings to lower-cost virtual meetings. And, as chart 4 shows, that's exactly what we found when we asked firms about the share of virtual meetings they held in 2019 versus the share they anticipate holding in a post-COVID world.
After the pandemic ends, firms anticipate conducting roughly half of all meetings with external clients, customers, patients, and suppliers by videoconference. Said another way, they expect the share of virtual meetings to triple relative to prepandemic averages.
The coronavirus pandemic is reshaping the economic landscape in myriad ways. Business travel appears to be front and center in this transformation, as firms anticipate slashing travel expenses by a quarter and tripling the share of external meetings conducted virtually.
Move over, jet lag—here comes "Zoom" fatigue.
Authors' notes on this post's charts:
- Chart 1: The passenger transportation index consists of: 1) local mass transit, 2) intercity passenger rail, and 3) passenger air transportation. It does not include intercity bus, sightseeing services, ferry services, taxi service, private automobile usage, or bicycling and other nonmotorized means of transportation.
- Chart 2: The survey was conducted July 13–24, 2020. In computing the data, each firm is weighted by its employment, and industries are further weighted to match the one-digit distribution of payroll employment in the U.S. economy.
- Chart 3: The survey was conducted July 13-24, 2020. These data have been weighted using the same procedure as in chart 2 and have been winsorized at the 1st and 99th percentile to remove the influence of outliers. For firms overall, the 95 percent confidence interval for the anticipated percentage change in travel expenditures is -33.4 percent to -23.8 percent. "Business Services" includes information services, finance and insurance, and professional and business services. "Other Services" includes educational services, health care and social assistance services, leisure and hospitality, as well as other services except government.
- Chart 4: The survey was conducted July 13–24, 2020. "External meetings" indicates those involving customers, clients, patients, suppliers, etc. These data have been weighted using the same procedure as in chart 2.
July 10, 2020
COVID Won't Kill Demand for Office Space
Last month, we noted that employers expect working from home to triple after the pandemic as compared to the prepandemic situation. The large shift to working from home has prompted many to speculate about the demise of commercial real estate (CRE) and the demand for office space.
We also wonder what will happen. So, in our latest Survey of Business Uncertainty (SBU)—fielded from June 8 to 19—we asked firms this question: "After the coronavirus pandemic is over, how do you anticipate your firm's floor space needs will have changed, if at all?"
Before we dig into the results shown in the chart, we want to note a couple important caveats. First, we survey only continuing firms. Firms that went out of business in the wake of the pandemic aren't around to answer our survey questions, and we don't capture the reduction in their floor space needs. On the flip side, new firms aren't part of our sample frame, so we miss their new demands for space. Second, our survey yields data at the level of firms and not at the level of individual business facilities. For example, if the pandemic prompts a firm to shift its office workers from a high-rise building in the city center to a low-rise suburban office park with the same square footage, such a change is not captured by our survey.
As the chart shows, roughly 80 percent of our 390 respondents anticipate no change to their current floor space needs. Responses from the other 20 percent are highly dispersed, leading to long-tailed distributions. Some of the firms in our sample expect to either reduce or expand floor space by a third or more.
Although firms in our sample don't anticipate their overall square footage to change much, exactly how much change they expect depends on how we weight the sample responses. When we weight by firm size as measured by number of employees, overall demand for floor space is expected to shrink by 2.8 percent (with a standard error of 0.7 percent). When we weight by the firm's current floor space usage, overall demand for floor space is expected to rise by 0.4 percent (with a standard error of 0.6 percent). Either way, the expected change in the overall demand for commercial real estate is quite modest.
If we focus on firms in business services, information, finance, and insurance—industries that dominate the demand for office space—and weight by current floor space, we obtain an expected increase of 1.6 percent (with a standard error of 0.9 percent). One possible interpretation of these results is that new desires for social distancing will offset the impact of greater working from home on the overall demand for office space and CRE more generally.
While overall floor space needs aren’t expected to change materially, the long tails in chart 1 imply some reallocation of workspace across firms—that is, footprints will expand for some firms and shrink for others. To quantify this reallocation, we compute two quantities: the extra floorspace needed by firms that expect to expand their footprints, and the reduction in floorspace for firms that expect to shrink their footprints. Taking the minimum of these two quantities, we find that 1.7 percent of floor space will be reallocated across firms, according to our survey responses. This pandemic-induced reallocation of floor space across firms is quite modest.
Our results are consistent with early evidence from asset markets indicates that the COVID-19 shock has materially shifted the distribution of CRE values, improving the relative outlook for real estate devoted to data centers, cell towers, self-storage, and warehousing while worsening the relative outlook for real estate holdings in the hospitality and retail sectors.
To shed more light on the forces driving floor space needs, we performed a regression of the expected percent change in each firm's floor space needs on its expected growth rate of sales (or employment) and its share of full-time employees working from home. Although our regression model explains only a small fraction of expected firm-level changes in floor space, we find a statistically significant negative effect of the firm's current working-from-home share on its expected change in floor space needs. However, that effect is overshadowed by the effect of the firm's expected growth in sales (or employment). The takeaway here is that changes in square footage align more closely with expected growth than with the share of folks working from home.
To sum up, our survey evidence points to a very small impact of the pandemic on overall CRE demand. In fact, our data cannot reject a net effect of zero. Our results also suggest that the pandemic-induced reallocation of total space across firms will be quite modest. Of course, we might see firms change the mix of space—for example, shifting from office space in urban high-rise buildings to suburban office parks.
Finally, subject to the caveats listed above, our conclusion that overall business demand for floor space will be nearly unchanged does not bode well for a resurgence in the growth of nonresidential construction (which has overall been rather flat over the past several years). In terms of thinking about the pace of the recovery, it seems unlikely that the demand for office space will be a big positive or negative factor.
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