Brent H. Meyer, Brian Prescott, and Xuguang Simon Sheng
Working Paper 2020-17a
September 2020 (Revised December 2020)

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Abstract: We document and evaluate how businesses are reacting to the COVID-19 crisis through August 2020. First, on net, firms see the shock (thus far) largely as a demand rather than supply shock. A greater share of firms reports significant or severe disruption to sales activity than to supply chains. We compare these measures of disruption to their expected changes in selling prices and find that, even for firms that report supply chain disruption, they expect to lower near-term selling prices on average. We also show that firms are engaging in wage cuts and expect to trim wages further before the end of 2020. These cuts stem from firms that have been disproportionally negatively affected by the pandemic. Second, firms (like professional forecasters) have responded to the COVID-19 pandemic by lowering their one-year-ahead inflation expectations. These responses stand in stark contrast to that of household inflation expectations (as measured by the University of Michigan or the New York Fed). Indeed, firms' one-year-ahead inflation expectations fell precipitously (to a series low) following the onset of the pandemic, while household measures of inflation expectations jumped markedly. Third, despite the dramatic decline in firms' near-term inflation expectations, their longer-run inflation expectations remain reasonably stable.

JEL classification: E31, E32

Key words: business expectations, COVID-19, demand shock, inflation, pandemic, supply shock link

The authors are indebted to Nick Parker for his outstanding survey expertise and direction on wording questions. They also thank Patrick Higgins, an associate editor, and two anonymous referees for helpful comments. They also thank the participants at the International Institute of Forecasters virtual workshop titled "Economic Forecasting in Times of COVID-19" for their valuable comments and criticisms. They would also like to thank members of the Atlanta Fed’s research department for their comments on these findings through internal briefings. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Brent H. Meyer, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309; Brian Prescott, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309; or Xuguang Simon Sheng, Department of Economics, American University, 4400 Massachusetts Avenue NW, Washington, DC 20016.

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