Chicago Fed Research and Analysis
After nonessential businesses shut down their operations to slow the spread of the Covid-19 virus in March 2020, many business owners looked to their property insurance policies for relief. Such policies often include business interruption (BI) insurance, which covers income losses if a business is forced to close. Given the shelter-in-place orders issued by state and local governments, BI coverage was assumed by many to apply.
Authors Ezra Karger and Aastha Rajan identify 16,016 recipients of Covid-19 Economic Impact Payments in anonymized transaction-level debit card data from Facteus. We use an event study framework to show that in the two weeks following a sudden $1,200 payment from the IRS, consumers immediately increased spending by an average of $577, implying a marginal propensity to consume (MPC) of 48%. Consumer spending falls back to normal levels after two weeks. Stimulus recipients who live paycheck-to-paycheck spend 68% of the stimulus payment immediately, while recipients who save much of their monthly income spend 23% of the stimulus payment immediately. Consumer age and location are only marginally correlated with individual MPCs after controlling for each individual’s pre-pandemic propensity to save. We use the 2018 American Community Survey to re-weight our data to match the U.S. population. Ignoring equilibrium effects and assuming a constant MPC for each person, we estimate that the CARES Act’s $296 billion of payments to individuals will increase consumer spending by $138 billion (47% of total outlays). A stimulus bill of the same size targeted at individuals with the highest MPCs would have instead increased consumer spending by $201 billion (68% of total outlays).
In late April, the Federal Reserve Bank of Chicago collaborated with the executive associations of the chambers of commerce in its five District states (Illinois, Indiana, Iowa, Michigan, and Wisconsin) to conduct a survey on the impact of the Covid-19 pandemic on chamber members’ businesses. This survey was based on the methodology of the broader Chicago Fed Survey of Business Conditions (CFSBC). The new survey asked questions about the impact of the outbreak so far and expectations for the coming months. The survey was voluntary, and we primarily heard from small businesses in industries heavily affected by Covid-19.
The main results are as follows:
- Many small businesses in the Midwest are experiencing the negative effects of the massive global economic shock caused by the Covid-19 pandemic.
- The new social distancing requirements necessary to slow the virus’s spread have put significant capacity constraints on many businesses’ operations.
- Many of the small businesses we heard from—especially those in the entertainment, tourism, recreation, restaurant, and retail sectors—are in danger of financial distress.
- There is substantial uncertainty about what will happen over the next few months and years.
These results show that many businesses are facing very difficult challenges that are unlikely to go away quickly.
In this study, Stefania D’Amico, Vamsi Kurakula, and Stephen Lee use the liquid and efficient bond ETF prices and CDX spreads to quantify the effects of the announcements of the Primary and Secondary Market Corporate Credit Facilities on the underlying corporate bonds. The authors find that those announcements triggered: (i) large and positive jumps in the prices of directly-eligible ETFs as well as ETFs holding eligible bonds and their close substitutes; (ii) a discrete drop in the perceived credit risk of eligible bonds especially following the April 9th announcement; (iii) a roaring back of investment-grade issuance and a pick-up in high-yield issuance. Importantly, across all ETFs in our sample, the magnitude of their price response does not seem directly related to the size of the reduction in either credit risk or liquidity risk, but rather appears to reflect mostly the eligibility of the ETF and its underlying bonds at the Federal Reserve facilities. This leads us to believe that the main factor driving the reaction to the announcements might be the elimination of “disaster risk” for eligible issuers.
In this post, Nicolas Crouzet and François Gourio discuss the adjustments to federal tax policy that have been initiated to support U.S. businesses and their possible effects. These measures represent a significant fiscal cost ($280 billion over ten years) and an even larger positive cash flow effect for businesses in 2020 (over $700 billion), because some measures are effectively loans. However, the measures are also relatively untargeted, i.e., they are not restricted to the industries or firms most significantly impacted by the pandemic. Because of this, the autors expect that they are unlikely to reduce substantially the number of firms facing illiquidity or insolvency, and as a result their aggregate effects on investment or employment could be relatively small.
In this post, Nicolas Crouzet and François Gourio attempt to quantify the risk to the solvency and to the liquidity of U.S. public corporations, and how this risk can be reduced or eliminated by firms’ decisions. These calculations should be taken as illustrative only, given the high uncertainty about the evolution of the economy; they do not constitute a forecast, and reflect only the views of the authors and not of the Federal Reserve Bank of Chicago or the Federal Reserve System. First, the calculations suggest that, if firms were to keep dividend payouts, borrowing, and investment at their pre-pandemic levels, the authors' estimate of the shock to earnings caused by the pandemic is large enough that one-fourth of public firms would run out of cash by the third quarter of 2020. Second, if firms solely increase borrowing in response to this liquidity shortage, the additional debt needed to offset the decline in earnings could lead to a doubling of the share of highly levered firms by the middle of 2021 (i.e., firms with a net book leverage above 60%). Third, reducing investment (capital expenditures) and payouts are powerful tools to avoid over-indebtedness. For instance, entirely eliminating investment in 2020 and 2021 would be roughly sufficient to keep the fraction of highly levered firms at the pre-pandemic level.
This blog is the second in a series from Nicolas Crouzet and François Gourio that discusses how the current pandemic affects the financial positions of publicly traded U.S. corporations, the potential implications of these financial developments, and the federal policy response. The first blog discussed the financial positions before the pandemic started. It documented that many nonfinancial publicly traded companies entered 2020 with historically elevated levels of leverage. This second blog explains the authors use stock returns to project the potential earnings losses due to Covid-19; this will be used in the next blog to project the evolution of firms’ financial positions.
In order to understand better how the unfolding economic crisis is likely to affect U.S. households, this Chicago Fed Letter looks at what happens when borrowers miss debt payments and how long it takes for them to face a severe adverse consequence, such as foreclosure, wage garnishment, or repossession.
Chicago Fed President Charles L. Evans delivers remarks on the Covid-19 crisis and U.S. economy to the Lansing Regional Chamber of Commerce.
This blog is the first in a series from Nicolas Crouzet and François Gourio that will discuss how the current pandemic affects the financial positions of publicly traded U.S. corporations, the potential implications of these financial developments, and the federal policy response. This first blog discusses the financial positions before the pandemic started. We document three facts: (1) the share of nonfinancial public companies with large amounts of leverage was elevated, suggesting financial fragility; however, (2) interest expenses were small for most firms due to the low level of interest rates; and (3) most firms had significant liquidity.
A new report from the 12 Federal Reserve banks and the Board of Governors of the Federal Reserve System shows the scope and scale of the challenges that communities throughout the country face amid the Covid-19 pandemic.
Daniel Aaronson, Scott A. Brave, R. Andrew Butters, and Michael Fogarty look at the relationships between internet searches for unemployment-related terms, unemployment insurance (UI), and the public health orders issued in the U.S. during the Covid-19 pandemic. They find that Google searches for unemployment-related subjects surged before the record increase in initial UI claims, which in turn peaked before the public health orders were implemented. As of mid-April 2020, these orders covered the vast majority of the U.S. population. Since then, the rates of increase in both search activity and initial UI claims have slowed.
The Covid-19 pandemic hit the U.S. economy at a time in which the ability of policymakers to react to adverse shocks is greatly limited. The current low interest rate environment limits the Federal Reserve’s ability to stabilize the economy, while the large public debt curtails the efficacy of fiscal interventions by inducing expectations of costly fiscal adjustments. This working paper analyzes a coordinated fiscal and monetary strategy that aims to create a controlled rise of inflation to wear away a targeted fraction of debt. Under this model, the fiscal authority introduces an emergency budget with no provisions on how it will be balanced, while the monetary authority allows a temporary increase in inflation. The strategy results in only moderate levels of inflation by separating long-run fiscal sustainability from a short-run policy intervention.
There are tens of millions of people are currently out of work in the United States. More than 26 million workers filed for unemployment benefits between mid-March and mid-April alone. The most popular measure of the strength of the labor market is the unemployment rate. Despite its popularity, the official unemployment rate does not capture all workers facing adverse employment conditions.
Jason Faberman and Aastha Rajan have developed a new measure of labor market underutilization that is tailored to the Covid-19 crisis by including individuals who are on unpaid leave and those who want work but are not actively searching. Between February and March, the official unemployment rate rose by 0.8 percentage points, from 3.8% to 4.5%, representing an increase of 1.2 million workers. But their measure rose by 2.5 percentage points, from 10.4% to 12.9%, representing an increase of about 4.1 million workers. Projecting these changes into April under different scenarios predicts an additional rise of 3.7 to 11.5 percentage points in the official unemployment rate, increasing as high as 16.0%, and an additional rise in our new measure of between 12.2 and 21.7 percentage points, increasing as high as 34.6%.
In a Chicago Fed Insights blog post, Scott Brave, Ross Cole, and Michael Fogarty document that the National Financial Conditions Index saw large positive revisions to its recent values in much of March 2020 as Covid-19 spread across the U.S. They show that since May 2011, such revisions have often preceded substantial increases in stock market volatility.
Do Stay-at-Home Orders Cause People to Stay at Home? Effects of Stay-at-Home Orders on Consumer Behavior
Diane Alexander and Ezra Karger link the county-level rollout of stay-at-home orders to anonymized cellphone records and consumer spending data. They document three patterns. First, stay-at-home orders caused people to stay at home: county-level measures of mobility declined by between 9% and 13% by the day after the stay-at-home order went into effect. Second, stay-at-home orders caused large reductions in spending in sectors associated with mobility: restaurants and retail stores. However, food delivery sharply increased after orders went into effect. Third, there is substantial county-level heterogeneity in consumer behavior in the days leading up to a stay-at-home order.
President Evans Participates in a Virtual Program Hosted by The Economic Club of Chicago
What Happened to the US Economy During the 1918 Influenza Pandemic? A View Through High-Frequency Data
Burns and Mitchell (1946, 109) found a recession of “exceptional brevity and moderate amplitude.” François R. Velde confirms their judgment by examining a variety of high-frequency data. Industrial output fell sharply but rebounded within months. Retail seemed little affected and there is no evidence of increased business failures or stressed financial system. Cross-sectional data from the coal industry documents the short-lived impact of the epidemic on labor supply. The Armistice possibly prolonged the 1918 recession, short as it was, by injecting momentary uncertainty. Interventions to hinder the contagion were brief (typically a month) and there is some evidence that interventions made a difference for economic outcomes.
Daniel Aaronson, Scott A. Brave, R. Andrew Butters, Daniel Sacks, and Boyoung Seo leverage an event-study research design focused on the seven costliest hurricanes to hit the US mainland since 2004 to identify the elasticity of unemployment insurance filings with respect to search intensity. Applying their elasticity estimate to the state-level Google Trends indexes for the topic “unemployment,” they show that out-of-sample forecasts made ahead of the official data releases for March 21 and 28 predicted to a large degree the extent of the Covid-19 related surge in the demand for unemployment insurance. In addition, they provide a robust assessment of the uncertainty surrounding these estimates and demonstrate their use within a broader forecasting framework for US economic activity.
Jason Faberman presents an unemployment projection exercise that uses the most up-to-date, frequent, and well-measured labor market data that are widely available: initial unemployment insurance (UI) claims. The U.S. Labor Department reports these data weekly and they represent the universe of all individuals that have applied for UI in the preceding week. The projection uses these data, in conjunction with the most recent data on payroll employment, real earnings, and transitions from employment to unemployment, to produce estimates of the unemployment rate over the next several months.
Daniel Aaronson, Helen Burkhardt, and Jason Faberman conduct an exercise to determine the potential consequences of the Covid-19 pandemic on near-term labor market outcomes.
As the coronavirus (Covid-19) public health crisis unfolds, a second crisis in the economy is developing as well. One economic concern, among many, is the debt burden of households. Price Fishback, Jonathan Rose, and Ken Snowden investigate.