Chicago Fed Research and Analysis
March 3, 2021
To answer the question in the title: Thus far, not dramatically so. In this Chicago Fed Letter, I document three facts supporting this conclusion. First, although the Covid period has seen multiple months with high rates of worker movement (reallocation) across industry sectors (relative to previous recessions), net cumulative reallocation from the onset of the pandemic through December 2020 is only the third highest among post-1945 recessions over the same horizon (and is only modestly outside the confidence bound for the average across those recessions). Thus, much of the reallocation during Covid seems to have been a reversion toward the pre-crisis allocation following the highly dispersed initial impact of the virus.
February 2, 2021
As the U.S. economy remains weakened by the Covid-19 pandemic, concern persists for the health and resilience of the municipal bond market. Municipal bonds (muni bonds) are debt securities issued by state and local governments to raise money and are generally considered to be safe investments. However, the recent slowdown in economic activity due to Covid-19 created significant stress on state and local government budgets, leading to a heightened risk for municipal bond downgrades and possibly even defaults. In this Chicago Fed Letter, we examine to what extent property and casualty (P&C) and life insurance companies, which are among the largest direct institutional investors in the municipal bond market, are vulnerable to a significant downturn in the muni bond market.
January 14, 2021
School and day care center restrictions during the Covid-19 pandemic have presented enormous challenges to parents trying to juggle work with child-care responsibilities. Still, empirical evidence on the impact of pandemic-related child-care constraints on the labor market outcomes of working parents is somewhat mixed. Some studies suggest the pandemic had no additional impact on the labor supply of parents, while other studies show not only that it did but that the negative impact was disproportionately borne by working mothers.
We estimate a simple model in which variations in Illinois daily municipal bond yields are explained by high-frequency indicators summarizing economic and public health conditions in Illinois, as well as key changes in the Federal Reserve’s Municipal Liquidity Facility (or MLF). We find that the MLF appears to have reduced Illinois muni yields by more than 200 basis points.
The Chicago Fed hosted the Seventh Annual Summit on Regional Competitiveness during the week of November 16, 2020. The virtual event kicked off with a conversation about the impact of Covid-19 on the economy between Anna Paulson, director of economic research at the Federal Reserve Bank of Chicago, and Austan Goolsbee, the Robert P. Gwinn Professor of Economics at the University of Chicago Booth School of Business. Here is their conversation. It has been edited for clarity, and some figures and references have been included.
Experts from five Chicago nonprofit organizations and research institutions convened for a Project Hometown event on September 25 to discuss the coronavirus pandemic’s impact on the health and economy of Chicago’s diverse neighborhoods. While the pandemic has affected everyone, it hasn’t affected everyone equally. Both health and economic outcomes have been more severe for Chicago’s communities of color, panelists described.
What Risk Managers from NASDAQ and Options Clearing Corp Learned From the Covid-19 Crisis: Perspectives on Resilience and Challenges During the Pandemic
This episode of the LaSalle Street podcast welcomes chief risk officers from Options Clearing Corporation and Nasdaq Inc. to discuss what the pandemic is teaching us about risk management and global financial markets.
The new episode hosted by Ketan Patel, Policy Advisor and Head of Financial Markets Risk Analysis in the Chicago Fed’s Financial Markets Group, delves into a range of market issues, from initial margining and operational risk management at central clearing counterparties during the pandemic to climate change and the biggest risks on the horizon for the rest of 2020. The discussion features Roland Chai, Chief Risk Officer of Nasdaq Inc., and John J. Fennell, Chief Risk Officer of the Options Clearing Corporation.
This paper documents that the employment of Asian Americans with no college education has been especially hard hit by the economic crisis associated with the Covid-19 pandemic. This cannot be explained by differences in demographics or in job characteristics. Asian American employment is also harder hit unconditional on education. This suggests that different selection into education levels across ethnic groups alone cannot explain the main results. This pattern does not apply to the 2008 economic crisis. Our findings suggest that this period might be fundamentally different from the previous recession.
The severe and prolonged economic consequences of the Covid-19 pandemic have stressed the earnings of tens of millions of households. The pandemic has also widened the racial disparities in health and economic outcomes for Black and Latinx families. And the existing social safety net has not provided sufficient cash and in-kind transfers to support families dealing with the impacts of surging unemployment, waning fiscal relief, and extended remote learning. These shortfalls are likely to affect not just households’ immediate needs, but also, as research suggests, their long-term economic prospects.
Over the past decade or so, higher education in the U.S. has faced three major disruptive factors—declining public funding, declining enrollments, and the rise of online instruction. The Covid-19 pandemic has only magnified these challenges, creating a perfect storm situation for many universities and colleges across the nation. In this blog post, senior business economist Paul Traub discusses each of these three key factors chiefly in the context of public higher education in the state of Michigan.
On March 17, 2020, seven counties in the San Francisco Bay Area put into place the first stay-at-home orders in the United States. In the following weeks, counties and states implemented a cascading sequence of stay-at-home orders, bans on public gatherings, shutdowns of nonessential businesses, and face mask mandates. But as small businesses began to face financial insolvency, states and counties began easing these restrictions. To evaluate the effectiveness of policies restricting mobility and business activity, it is important to document the effects of reopening businesses on public health and economic activity. In this Chicago Fed Letter, we measure the relationship between state-level reopenings of nonessential businesses and health outcomes (Covid-19 cases and deaths), mobility, and revenue at small and large retail businesses.
This paper explores the relationship between Covid-19 infection rates, race, and type of work. We focus on three U.S. cities—Chicago, New York, and Philadelphia—allowing us to exploit zip code-level variation in infection rates and testing rates over time, while controlling for a variety of neighborhood demographic characteristics. We find that neighborhoods with higher Black and Hispanic population shares, and neighborhoods with higher shares of workers in high-social contact jobs within essential businesses, had disproportionately higher Covid-19 infection rates, even after applying our testing and demographic controls. These higher rates coincide with citywide peak infection rates, suggesting an amplified response for these groups. Local variation in type of work accounts for relatively little of the variation in infection rates by race. Additional evidence for Arizona, Florida, and Texas also shows amplified infection rates for these groups around statewide peak infection rates, despite their peaks occurring months after the cities in our main sample. Evidence from these states also shows higher infection rates among high-social contact workers in nonessential businesses that coincides with a more aggressive reopening of these businesses.
In a previous blog post, authors Scott A. Brave and Ross Cole described several indexes produced by the Federal Reserve Banks of Chicago, Philadelphia, and New York and showed how they could be used to measure the decline in U.S. economic activity in the spring of 2020. In this blog post, they show how these indexes can now be used to track the subsequent recovery.
In a previous Chicago Fed Insights blog post, the authors took a closer look at what drives the correlation between Google Trends unemployment topic indexes and state initial unemployment insurance (UI) claims at the U.S. metro area level. They found that the positive correlation between Google search intensity for unemployment-related terms and the rate of UI take-up during the Covid-19 pandemic was primarily driven by variation within U.S. metro areas across time (the time series dimension) and less so by variation across U.S. metro areas within weeks (the cross-sectional dimension). In this blog post, they examine how this correlation during the current recession compares with the correlation during the previous recession. They find that differences in the correlations across the two recessions can mostly be explained by the federal Pandemic Unemployment Assistance (PUA) program.
The virtual event will bring together government, community, health, and business leaders to discuss visions for how Chicago recovers from the COVID-19 crisis.
The discussion moderated by Charles Evans, president of the Federal Reserve Bank of Chicago, will look at how Chicago can meet the public health challenge of COVID-19, rebuild the economy, and ensure all residents share in a strong future for the city.
The Covid-19 public health crisis has sharply reduced the earnings of millions of U.S. households, following the severe curtailment of economic activity needed to contain the spread of the virus. Meanwhile, households continue to confront their ongoing financial obligations. The ability of households to manage these obligations has important consequences for the speed at which the U.S. economy can recover from the current crisis. Households that are wiped out financially in the coming months will not be in a position to strongly resume spending once the virus containment issues have passed. Moreover, a wave of missed payments on mortgages and other types of household debt could propagate through the financial system—weakening financial institutions, unnerving investors, and further prolonging the economic slump.
Results from a Special Chicago Fed Survey of Business Conditions on the Impact of Covid-19 on Manufacturers
In late May 2020, the Federal Reserve Bank of Chicago collaborated with the Illinois Manufacturing Excellence Center (IMEC) and the Michigan Manufacturing Technology Center (MMTC) to conduct a survey on the impact of the Covid-19 pandemic on businesses affiliated with either of these two organizations. The survey was based on the methodology of the broader Chicago Fed Survey of Business Conditions (CFSBC) and asked questions about the impact of the outbreak so far and expectations for the coming months. The questionnaire was similar to an earlier survey we conducted in collaboration with chambers of commerce in the five Seventh District states (Illinois, Indiana, Iowa, Michigan, and Wisconsin). All survey respondents were from manufacturing companies, and the responses were collected between May 20 and June 5, 2020. This blog post presents the results from the full set of questions within several charts.
Financial Positions of U.S. Public Corporations: Part 5, The Main Street Lending Program: Potential Benefits and Costs
In this post, authors Nicolas Crouzet and François Gourio study the economic benefits and costs of the Main Street Lending Program, created by the Federal Reserve to support corporations during this crisis. They make four points, which reflect our analysis and are not the views of the Federal Reserve System or the Federal Reserve Bank of Chicago. First, the main potential benefit of this program is to supplement private funding to corporations so that they can avoid financial distress during the pandemic. Private funding may be insufficient either because financial intermediaries’ ability to lend is limited or because the intermediaries do not take into account the broader benefits associated with lending to distressed firms. Second, while the program is quite large, so that it has the potential to provide credit support to many firms, its potential might not be fully realized because all parties involved (borrowers, banks, and outstanding creditors) may not always have sufficient incentives to participate. Third, the program excludes some firms, which may limit its efficacy. And fourth, it is possible that the program may help the economy in the short run but marginally slow economic growth in the medium run by increasing debt overhang for participating firms.
Since the onset of the pandemic, there has been growing interest in tracking labor market activity with “big data” sources like Google Trends. Just as an example, one can track how the number of Google searches with the term unemployment office has changed over the past week for the Chicago metro area or explore how unemployment became one of the top searched issues across the U.S. during the early months of the pandemic here.
In this post, authors Scott A. Brave, R. Andrew Butters, and Michael Fogarty show that at the U.S. metro area level, the positive correlation between the Google Trends unemployment topic index and the rate of unemployment insurance (UI) take-up during the Covid-19 pandemic is primarily driven by variation within U.S. metro areas across time (the time series dimension) and less so by variation across U.S. metro areas within weeks (the cross-sectional dimension). Furthermore, it also appears likely that at least some of this correlation has been driven by UI policy changes and the news coverage surrounding them as opposed to search activity more directly related to filing a UI claim.
In recent weeks the country has begun to ease restrictions put in place to counter the Covid-19 pandemic. Consequently, it is important for policymakers and the public to understand the extent to which increasing levels of mobility among the population may lead to a rise in the spread of the disease.
On June 8, 2020, the National Bureau of Economic Research (NBER) issued a statement announcing that its Business Cycle Dating Committee determined U.S. economic activity had reached a cyclical peak in February 2020. Beginning in March 2020, a multitude of economic indicators declined sharply as public health orders that required nonessential businesses to close were implemented during the early stages of the Covid-19 pandemic here in the U.S. The declines then accelerated in April as these orders were expanded to cover nearly the entire country. However, the data for May released so far seem to indicate that once the orders were eased or lifted, the rates of decline slowed. In this blog post, authors Scott A. Brave and Ross Cole take a closer look at these changes using several summary indexes of economic activity.
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.