The new pandemic normal for Ninth District businesses?

Adapt or perish. That old business truism might never be more apt than in the current pandemic environment that has turned the best business models and their previously profitable companies unceremoniously and repeatedly on their head.

Results from a recent Federal Reserve Bank of Minneapolis survey of firms across the Ninth District suggest that the struggle for survival endures for many. While the summer has offered some improvement for businesses closed during the early stages of the pandemic, revenues remain down for many companies. Workers and wages continue to suffer, and certain sectors and types of firms are absorbing a much larger proportional punch. Many firms continue to operate below their prepandemic capacity, due as much to lagging demand as any government restrictions limiting their operations.

There are other modest signs (with caveats) of improvement; the share of firms that said they could not survive longer than three months fell from levels reported in May. But uncertainty reigns, and as one Twin Cities construction respondent said, “Uncertainty is the ultimate demand killer.”

Pandemic redo

The Minneapolis Fed conducted the survey from Monday, July 20, to Friday, July 24, doing so via email through partnerships with local and state chambers of commerce, regional economic development organizations, and other organizations with close ties to businesses, including minority-, women-, and veteran-owned firms. A total of 1,129 responses were received.

Similar surveys were conducted in March, April, and May as an ongoing gauge of the pandemic’s effects. Due to survey sampling, earlier surveys by the Minneapolis Fed 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 survey results.

The survey makes clear that despite an uptick in business for some—thanks to government stimulus and the reopening of state economies in May in June—conditions for most businesses remain dour. Fewer than half (44 percent) of firms achieved positive or even flat revenue trends in June and July. While that might sound ominous, it’s a notable improvement over earlier surveys, in part because shelter-in-place restrictions temporarily closed many businesses in the early months of the pandemic.

Even for firms experiencing recent revenue growth, it was a modest win at best for many. A professional services firm in greater Minnesota said it was “basically shut down in March and April and had almost no revenue.” Despite increases in June and July, revenue was still “dramatically lower from last year. While we are seeing increases in new clientele, we are by no means recovered.”

A manufacturer in Montana said that comparing June and July revenues with those earlier in the pandemic “is like comparing week-old dead animals to one-month-old dead animals. Both smell and are horrible to look at. April and May were so low that anything could be better. But June and July are still down 25 to 35 percent at best from last year.”

Not surprisingly, lower revenues continue to spill over to workforces. Roughly one-third of firms said that July staffing levels were lower than May levels. Maybe worse, a similar share expected further job cuts by the end of September, though some of these cuts will likely be the shearing of some seasonal summer staff. Only 12 percent of firms expected their workforce to grow in the near future.

Wages are also taking a hit. Three in 10 respondents said they had cut wages; for a majority of these firms, the cut was more than 10 percent. A quarter expected additional wage cuts by the end of the year.

Results also suggest that businesses believed that the current environment was not going to change quickly or dramatically going forward. For example, 31 percent of firms said that at least half of all staff time in July was being performed remotely. By the end of the year, 23 percent of firms expected to be operating with that level of remote work, only a modest decline.

Average operating capacity has improved in recent months, as states have reopened their economies and loosened some restrictions for consumer-facing businesses, like retail and restaurants. However, overall capacity remains well below prepandemic levels. Roughly half of respondents said they were operating at 75 percent or less of potential capacity in July. Only slight improvements were expected by the end of September (Chart 1).

While many might point to state limitations on businesses, a more likely culprit was sagging demand. Almost 70 percent of respondents said that customer demand in July was somewhat or well below their supply capacity. By the end of September, it was expected to improve marginally, to 63 percent (Chart 2). So customer demand appears to be lagging, even in a supply-constrained environment.

Other results from a cross section of variables:

Geography: Results were fairly uniform across Ninth District states, despite about half of respondents coming from the Twin Cities. There were a few outliers, mostly involving South Dakota. Respondents there, for example, said job and wage cuts were less common or expected in the future compared with other district states. Some of this may be related to the state’s softer approach to business restrictions. But some also appears to be related to the state’s respondent composition. For example, South Dakota had twice the share of finance firms as the rest of the response sample, and this group was the least impacted of any industry sector districtwide, by a fair margin.

Industry sector: Among business sectors, entertainment firms continued to see outsized, negative effects, reporting more dire circumstances, even compared with other hard-hit sectors—retail, food and drink, accommodation—which saw modest improvement thanks to the reopening of state economies and modest rebound in consumer demand in May and June. Most in the entertainment sector were not operating at anything close to capacity because of both state restrictions limiting crowds and consumer wariness of those very crowds.

A Wisconsin arts and culture organization said it was operating at less than 25 percent capacity because it could not offer sufficient seating “to cover existing expenses, much less additional costs for COVID-19 cleaning and safe building use. People are afraid of attending events or of spending money because there is so much insecurity. … I was feeling more optimistic until the transmission spikes in the southern states.”

Firm size: Small firms are reporting more grim circumstances than their larger peers. The smaller the firm, the larger or more negative the impact in many measures, though there was greater balance on workforce cuts and overall outlook. But larger firms were operating at higher capacity—closer to prepandemic levels—and seeing higher customer demand. And given that scale has its advantages, larger firms also reported much better solvency.

Ownership: The survey asked firms to identify whether they were minority-, women-, or veteran-owned or none of the above. Almost across the board, minority firms fared the worst, whether related to revenue, wage, workforce, capacity, or solvency (Chart 3).

Sector representation and firm size likely play some role here. Responses for minority-owned firms were underrepresented in finance and manufacturing, both of which outperformed other sectors. Minority-owned firms, on average, were also smaller in size, and smaller firms reported worse outcomes across the Ninth District; nearly six in 10 minority-owned firms had 10 or fewer employees, compared with four in 10 for firms that were not minority-, woman-, or veteran-owned.

Solvency: One bit of cheer came from reports on solvency. Although 16 percent of firms said they could not survive more than three months under current conditions, that’s a notable improvement over earlier surveys.

That piece of good news, however, comes with some salt. Given the sampling methodology and the severe economic effects on many firms, an unknown share of firms invited to respond to past surveys has likely gone out of business, which would improve results among remaining firms.

The outlook among firms remained pessimistic overall. One-third expressed some optimism for the remainder of the year, which might be considered a moral victory under the circumstances. But 43 percent were somewhat or very pessimistic, and another 3 percent said they expected to go out of business.

Many firms noted a glut of uncertainty regarding infection rates and the related response by governments and consumers. A minority-owned commercial laundry company in Michigan’s Upper Peninsula commented that its business depended on many consumer-facing firms like health care, restaurants, bars, and hotels—firms caught in the middle of both government restrictions and sagging consumer demand.

“Many businesses have opened back up and some have not, [and it’s] difficult when we have no idea whether there will be more limitations or shutdowns.” Burdened with a high debt load, “we do not want to borrow any more. … With the uncertainly of what the future holds and what the government may implement, I am very nervous if we will be able to keep going.”