The Impact of the COVID-19 Pandemic on Business Expectations

51 Pages Posted: 12 Sep 2020 Last revised: 31 Dec 2020

See all articles by Brent Meyer

Brent Meyer

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Brian Prescott

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Xuguang Simon Sheng

American University

Date Written: September 9, 2020

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 report 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 impacted by the pandemic. Second, firms (like professional forecasters) have responded to the COVID-19 pandemic by lowering their 1-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' 1-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 well-anchored.

Keywords: Business Expectations, COVID-19, Demand Shock, Inflation, Pandemic, Supply Shock

JEL Classification: E31, E32

Suggested Citation

Meyer, Brent H. and Prescott, Brian and Sheng, Xuguang Simon, The Impact of the COVID-19 Pandemic on Business Expectations (September 9, 2020). Available at SSRN: https://ssrn.com/abstract=3690489 or http://dx.doi.org/10.2139/ssrn.3690489

Brent H. Meyer

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Brian Prescott

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Xuguang Simon Sheng (Contact Author)

American University ( email )

4400 Massachusetts Avenue, N.W.
Washington, DC 20016-8029
United States

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