The Impact of the COVID-19 Pandemic on Business Expectations

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 nearterm 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.

How economic crises affect inflation beliefs: Evidence from the Covid-19 pandemic

“…Candia et al (2020) suggest that, similar to households, firms see the pandemic as an inflationary supply shock. In contrast, Meyer, Prescott and Sheng (2020) report that, similar to market participants and professional forecasters, firms have responded to Covid-19 by lowering their one-year-ahead inflation expectations as they see the pandemic as a demand shock. Further, Meyer et al (2020) find that, as of June 2020, firms' longer-run inflation expectations have changed little throughout the pandemic and remained reasonably well anchored.…”

Analysis of COVID-19 Impact on Micro, Small, and Medium Enterprises (MSMEs) Credit Distribution in East Java Banks

“…Besides impacting banks' difficulty in collecting third-party funds, the COVID-19 pandemic can also result in changes in a country's inflation rate (Meyer, Prescott, & Sheng, 2020). Changes in the high inflation rate will certainly affect the level of bank loans to the public because it will decrease real interest rates, impacting decreasing the public's desire to raise funds in banks (Tika, 2015).…”

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“…In regards to inflation uncertainty, the New York Fed's measures of short-run uncertainty rose disproportionally relative to the uncertainty expressed by firms and professionals. Meyer et al (2020) highlight that households may be disporportionately responding to sharp increases in the price of salient grocery store items rather than expressing a belief that aggregate inflation will rise.…”

“…As highlighted by Meyer et al (2020), the disconnect between firms and professionals expectations and the expectations of households widened after the onset of the COVID-19 pandemic. In April 2020, firms' inflation expectations fell to an all-time low (going back to 2011), mirroring the decline in professional forecaster expectations.…”