Businesses treading water amid unprecedented conditions

As the COVID-19 pandemic continues to evolve, businesses have been forced to manage both health and economic considerations: trying to stay in business while protecting the health of workers, customers, their own families, and the public at large.

Results from a recent Minneapolis Fed survey of firms across the Ninth District suggest that this struggle might be likened to treading water in a flooded springtime river. Everybody in the water is affected. Some find comparative safety—albeit temporary and inconvenient, but less damaging—in the eddies and smaller pools created outside the main current. Others are simply gully-washed.

The owner of a cafeteria and catering business in North Dakota said her revenue was down to a trickle. The cafeteria now does take-out only, and all of her catering orders in March, April, and May were canceled.

“Every day there’s new cancellations. It’s hard to watch all your hopes, hard work, and dreams come to a halt,” she said, adding that it “leaves you with so much uncertainty and concern for your business, for your employees, for the future.”

This survey was a follow-up to March and April surveys gauging the pandemic’s effects. Many of the challenges identified previously persist: Revenues are down steeply, workforces have been slashed, wages are being cut for many of those who remain employed, certain sectors are affected more deeply than others, and insolvency is a real risk for many firms.

This survey found, maybe not surprisingly, that while firms in all Ninth District states have suffered considerably, those in states with more restrictive policies toward businesses (especially non-essential ones) tended to report more negative economic effects. It also found that many businesses have received government assistance—a life jacket that appears to have had a small but positive effect on firms’ ability to keep kicking in the pandemic’s tide.

Same flood, different day

The Minneapolis Fed conducted the survey from Monday, May 4, to Friday, May 8, doing so via email through partnerships with local and state chambers of commerce and regional economic development organizations. A total of 1,086 responses were received.

(Technical notes: Due to survey timing and sampling, earlier surveys by the Minneapolis Fed mentioned in this article are not uniformly comparable, scientifically speaking; rather, each survey is a snapshot at a particular point in time. Care should be taken not to overinterpret results among these surveys.

Also, several major state-level actions took place during or after the execution of this survey, including the expiration of Minnesota’s stay-at-home order, which allowed for the reopening of many businesses on May 18, and the Wisconsin Supreme Court’s decision on May 14 to overturn the state’s stay-at-home order, which effectively allowed many previously closed, non-essential businesses to reopen immediately. As such, any changes in overall sentiment or activity as a result of these post-survey policy changes are not reflected in this survey.)

The survey found that the pandemic continues to apply unprecedented economic pressure on firms and their workers. Eight in 10 respondents have seen revenues drop during the pandemic, many precipitously. The decline is widespread, but cuts are hitting more deeply in certain sectors. Of the more than 300 respondents in food, lodging, entertainment, and retail sectors, 56 percent have seen revenues decline by 75 percent or more; many have seen revenues go to zero.

The owner of a corporate events firm in the Twin Cities said the industry has been gutted because all events have been canceled. Last year, the company had nearly $3 million in revenue, “and [we] have gone to almost nothing overnight. It is devastating.”

Effects also varied geographically. Firms in Minnesota and Michigan’s Upper Peninsula, which have been under tighter restrictions, reported the most negative revenue performance. Conversely, the Dakotas, which have generally seen fewer restrictions on business operations, saw smaller revenue declines. But neither have they been spared; roughly half of respondents in the Dakotas have seen at least a 25 percent drop in revenue. Under ordinary circumstances, that would be considered catastrophic. Today, it’s considered fortunate.

Revenue shocks continued to transfer to workforce cuts. Half of all firms said that April staffing levels were lower than a year earlier, and further cuts were expected by the end of May. Firms in the U.P. were almost twice as likely to report staffing cuts as those in the Dakotas (Chart 1).

Those lucky enough to remain employed (including owners) were absorbing other negative effects; 28 percent of firms said they had cut wages, and the majority of this group cut wages by more than 10 percent. Again, there were large geographic splits; 38 percent of Minnesota firms reported that they had cut wages, but fewer than 15 percent of firms in North and South Dakota had done similarly.  

Return to work? Yes, kinda

The timing of this survey also coincided with the growing debate over reopening state economies, which has occurred at a staggered pace across the Ninth District.

Firms were asked about their ability and interest in ramping up operations. About half of those firms whose operations have been affected by the pandemic said they would return to normal business operations immediately or gradually in the following weeks as state rules allowed. Here, geographic variations were aligned differently (Chart 2). Affected firms in the Twin Cities and South Dakota were less likely to cite a quick return to normal operations, possibly because those places have also experienced higher virus infection rates than elsewhere in the district.

Among firms that had cut staff (about half), 40 percent expected to rehire furloughed workers either immediately or in the coming weeks—or at least try to. Among several thousand open comments provided by respondents, one of the strongest themes had to do with the enhanced unemployment benefits that were part of the emergency Cares Act, which tacked an additional $600 every week onto benefit checks.

“It creates a situation where many of the workers are making more money than they were when they worked full time,” said a bakery firm in Greater Minnesota.

Responding firms were themselves big users of emergency government programs like the federal Payroll Protection Program (PPP) that provided forgivable loans to firms in exchange for keeping workers on payroll. More than 70 percent of firms said they had applied for emergency aid or were in the process of doing so, and 52 percent said they had received funding (or almost three of every four that applied).

It’s not known what proportion of aid came from PPP versus other sources. While numerous local and state aid programs exist, they are dwarfed in scale by the PPP, which has provided about 225,000 loans worth $27 billion in five district states (Michigan, located mostly outside the District, is not included in that total; it received 110,000 loans for $16 billion).

One notable, and encouraging, sign is that businesses appear a bit more optimistic about their solvency; 26 percent said they could tread water for up to three months (Chart 3). That might not sound like good news, but a similar survey in early April found that 33 percent had a solvency window of less than three months. While the two surveys are technically not comparable (see earlier discussion), the fact that a significant amount of aid was received by a large number of firms in the interim between these two surveys suggests that aid programs may be having the intended effect.

Here, again, the difference in sentiment was stark across geography; in the Dakotas, only about 10 percent of firms said they would be insolvent within three months under current conditions. In the U.P. and Greater Minnesota, it was close to 40 percent.

Some of the geographic difference in response throughout this survey, however, may be influenced by respondent mix. Minnesota and the U.P., for example, tended to have modestly higher shares of very small firms (10 or fewer employees) in their respondent pools, and research to date suggests that these firms have suffered more hardship. These states also had proportionately larger responses from firms in food, lodging, entertainment, health care, and retail sectors, which have also suffered worse outcomes. As a group, the Dakotas had a comparatively higher share of larger firms, as well as more firms in sectors like banking and manufacturing that have fared less poorly to date than other sectors.

The timing of this survey coincided fairly closely with the debate over reopening state economies and lifting restrictions on many businesses, especially those deemed non-essential. Minnesota and Wisconsin, in particular, have lifted many restrictions on business operations since this survey’s execution, a matter that the Minneapolis Fed will be tracking over time.

But the proverbial flood doesn’t end if, or when, the doors reopen. Many businesses face significant cost increases to maintain sanitary conditions for customers and workers. Numerous contacts said some workers were eager to get back to work, while others were nervous about the potential health risks. The same can be said of consumers.

“It is tough to imagine what it will be like going forward,” said the owner of a small assisted living facility in Greater Minnesota. More people were choosing to keep their parents at home rather than placing them in care facilities due, in part, to fear of a possible outbreak, which would also eliminate visitation. The firm received a PPP loan, which has kept a staff of about a dozen employed, including additional staff for infection control.

It’s enough to keep the company above water, treading furiously below the surface. By the end of the loan period in July, “hopefully, by then, the outlook will be a little different, and we will be able to get a few phone calls of residents wanting to move in again.”