Balance between optimism and pessimism in the COVID-19 economy

The COVID-19 pandemic and the recession that has shadowed it over the past seven months continue to divide the business community into two divergent camps, one in which the future is bleak and one in which the future is full of opportunities.

At a day care and preschool in southeastern Minnesota, enrollment remains well below the break-even point, the manager reported in a Minneapolis Fed survey. With many parents out of work or worried about the risk of exposure to COVID-19, she said she was pessimistic about the business conditions for the rest of the year. “We are barely hanging on.”

But at a Twin Cities nanny business, the owner said she was optimistic. Demand is high for in-home child care and continues to rise, allowing her to raise rates and wages, she said.

According to the Minneapolis Fed’s October survey of general business conditions in the Federal Reserve’s Ninth District, about 40 percent of respondents were optimistic and roughly the same number were pessimistic, with most of the remainder neutral (Chart 1). This outlook is an improvement over a similar survey in July, which found that nearly half of respondents were pessimistic.

The survey included responses from 590 businesses, including some nonprofit groups and a handful of government agencies, in Minnesota, the Dakotas, Wisconsin, and the Upper Peninsula of Michigan; there were no respondents from Montana, which is also a part of the district. The survey was not randomized, so results may not be representative of all businesses in the district.

Stark differences

Survey respondents with a pessimistic outlook were more likely to report low consumer demand and continuing declines in revenue and jobs.

A quarter of pessimists said they expect revenue to fall more than 25 percent in the fourth quarter compared with the third quarter (Chart 2). Only 5 percent of optimists felt the same.

“Just completed my fiscal year, and our sales are down 67 percent,” said a “very pessimistic” owner of a western Wisconsin travel agency.

She said she doesn’t expect more job cuts, but that may be because she has already cut her staff down to a skeleton crew. “We are currently working only 16 hours a week, hoping to survive.”

By contrast, a food manufacturer in North Dakota who is “very optimistic” said that, as the economy reopened, sales to restaurants and institutions increased, and now they expect growth to exceed prepandemic levels.

“We are adding 25 percent more full-time employees in the next 60 days,” he said.

This kind of growth appears to be the exception. Nearly two-thirds of survey respondents said third quarter revenues were down compared with last year. Of those reporting this decline, about half said their revenue fell 25 percent or more.

Looking to the recent past, 30 percent of survey respondents said their third quarter revenue (Chart 3) was an improvement over second quarter, which was one of the darkest times for the economy. Only 19 percent, however, said they thought fourth quarter revenue would improve over third quarter, suggesting a slowing recovery.

Some businesses, sectors suffer more

The survey finds that smaller employers were more likely to report continued decline in revenue. Among firms with fewer than 50 employees prior to the pandemic, 42 percent said their third quarter revenue was lower than second quarter compared with 31 percent of larger employers. Minority-owned businesses, which tend to be smaller employers, have fared worse than others, with 53 percent reporting lower third quarter revenue.

The pandemic has been especially difficult for businesses in the entertainment and recreation sector. More than half of survey respondents from this sector, which relies on the ability hold large gatherings, said third quarter revenue was lower than second quarter.

The professional, scientific, and technical services sector has also seen revenue deteriorate, with 43 percent saying third quarter revenue was lower.

The owner of a Twin Cities advertising agency that works with restaurants said she is bracing for continued decline because many clients that squeaked by with patio dining may be forced to shut down when winter weather returns.

Challenges ahead

Winter may bring new challenges for all businesses. Public health experts warn that cold temperatures may bring another wave of infections as more people gather indoors.

New COVID-19 cases are already rising across the United States, particularly in the Ninth District, where Montana, the Dakotas, and Wisconsin led the nation in per capita infection rates at the end of October.

At the same time, vaccines, which many believe will speed up economic recovery, aren’t expected to be widely available for months. That’s a challenge for respondents who say they can only hang on for a few more months.

“We need a vaccine that is safe and people will take,” said the owner of a Twin Cities IT equipment provider. “2020 is a write-off year, sadly, and we hope 2021 is better. If not, after 18 years in business, we might be done.”