International Journal of Forecasting

Available online 5 March 2021

In Press, Corrected ProofWhat are Corrected Proof articles?

The impact of the COVID-19 pandemic on

business expectations☆
Author links open overlay panelBrent H.MeyeraBrianPrescottaXuguang SimonShengb
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https://doi.org/10.1016/j.ijforecast.2021.02.009Get rights and content

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
disruptions 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 disruptions, they expect to lower near-term 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 one-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’ one-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 have remained relatively stable.

Keywords

Business expectations
COVID-19
Demand shock
Inflation
Pandemic
Supply shock

Highlights
•
Covid-19 crisis presents opportunities to firms for digitization.

•
Essentiality of products and services combined with information
intensity.

•
Product and process information intensity present scope for digitization.

•
Anecdotal evidence suggests agile firms adapt to utilize opportunities.

Abstract
No amount of crystal ball gazing may help us fathom the full impact of the
Covid-19 (C-19) crisis on business organizations in a distinct manner. Given
the lack of precedence, any such analyses seem to demand routine revisions as
we progress further up the “number of infected” curve. Most countries of the
world have imposed restrictions on social congregations or even people
working in close proximity to each other. Industries that produce and deliver
information products and services therefore, have continued to function while
those that manufacture physical products especially labor-intensive firms
were forced to minimize operations or temporarily shut down. However, in
most countries, physical products which were essential in nature were
reluctantly permitted to be manufactured given the need for them in people’s
everyday life. In this viewpoint, I draw upon three dimensions – information
intensity of product/service, information intensity of process/value chain;
along with a third dimension – essential nature of the product/service to help
understand the immediate implications of C-19. I also present some anecdotal
evidences of attempts to alter business models in these circumstances in order
to address the challenges that certain product characteristics impose but at the
same capitalize on the business opportunities presented by the essentiality of
the products.