[PPT] - The Economic Impact of COVID on the US economy Nick Bloom PowerPoint Presentation

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The Economic Impact of COVID on the US economy

Nick Bloom (Stanford) SIEPR, May 2020

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Warning – depressing economic forecasts. Take precautions

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Key Points

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1. Massive uncertainty - medical progress, policy response, industrial impact etc
2. Short-run - unemployment rising to about 20% and GDP down about 20% in 2020Q2
3. Long-run – likely U-shaped (very slow recovery) or W-shaped (double-dip)
4. Recovery headwinds – bankruptcies, skills erosion, trade, immigration, taxes, politics

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I asked a friend who is a senior forecaster about his views: “Since the beginning of March we basically quit trying – if you ask me, it is a stupid exercise and the only reason anyone would even attempt a forecast at any horizon is because they are getting paid, have no shame, are drunk, or likely all three.”

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My PhD was on uncertainty – these are incredible figures

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Notes: Weekly US economic policy uncertainty index, monthly average data 1/2/1990 to 5/7/2020. This reports the normalized share of US daily newspaper articles discussing economic policy

uncertainty. Source: https://fred.stlouisfed.org/series/USEPUINDXD

Notes: Weekly implied volatility on the S&P500 index from the Chicago Board of Options Exchange 1/2/1990 to 5/7/2020. This is the 1 month VIX (implied volatility over the next 30 days) in annualized units. Source: https://fred.stlouisfed.org/series/VIXCLS

S&P500 Implied Volatility (VIX) Economic Policy Uncertainty (EPU)

20 40 60 80 VIX 1990 2000 2010 2020 Year 200 400 600 Daily US Economic Policy Uncertainty Index 1990 1995 2000 2005 2010 2015 2020 Year

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COVID now the largest source of uncertainty for 90% of firms

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10 20 30 40 50 60 70 80 90 100 6 March (29%) 7-11 March (20%) 12-16 March (30%) 17-20 March (20%) 3 April (29%) 4-8 April (15%) 9-15 April (28%) 16-17 April (28%)

Survey submission date

March survey April survey

Source: Decision Maker Panel Survey conducted by the Bank of England, Nottingham University and Stanford University, Details in Bloom, Bunn, Chen, Mizen, Smietanka and Thwaites (2019) and on www.decisionmakerpanel.com .

% U.K. firms reporting Covid-19 as their top source of uncertainty

3 April

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This uncertainty is leading firms to abandon earnings guidance

Source: https://www.wsj.com/articles/stocks-keep-rallying-despite-lack-of-visibility-on-economy-11588498201?mod=hp_lead_pos1

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Key Points

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1. Massive uncertainty - medical progress, policy response, industrial impact etc
2. Short-run - unemployment rising to about 20% and GDP down about 20% in 2020Q2
3. Long-run – likely U-shaped (very slow recovery) or W-shaped (double-dip)
4. Recovery headwinds – bankruptcies, skills erosion, trade, immigration, taxes, politics

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One way to see the damage is the share of daily lost GDP, which has risen to about 30%

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Source: https://www.wsj.com/articles/state-coronavirus-shutdowns-have-taken-29-of-u-s-economy-offline-11586079001

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Happened incredibly fast - went from February 2020, a 60 year low rate of unemployment, to April 2020, an 80 year high

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Source: Survey of Business Uncertainty (March 9-20 & April 13-24, 2020), (Atlanta Fed, Chicago University and Stanford University). Details in Altig, Barrero, Bloom, Davis, Meyer, Mihaylov and Parker (2020) and https://www.frbatlanta.org/blogs/macroblog

What is your best guess for the impact of coronavirus developments on your firm’s sales revenue in 2020?

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COVID has a hugely varied impact on firms and industries

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Source: Stanford-Stripe survey of US 2,000 firms forecast for impact of COVID on 2020Q2 sales. Details in Bloom, Fletcher and Yeh (2020) and on (https://siepr.stanford.edu/research/projects/stanford-stripe-study-internet-entrepreneurship).

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Also variation across firms by founder types (driven by industry mix)

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Source: Stanford-Stripe survey of US 2,000 firms forecast for impact of COVID on 2020Q2 sales. Details in Bloom, Fletcher and Yeh (2020) and on (https://siepr.stanford.edu/research/projects/stanford-stripe-study-internet-entrepreneurship).

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COVID → “Frankenstein recession”: combines the size of the Great Depression, the speed of Katrina and the reallocation of WWII

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Great Depression COVID (so far) Hurricane Katrina COVID (so far) “The coronavirus pandemic is forcing the fastest reallocation of labor since World War II, with companies and governments mobilizing an army of idled workers into new activities that are urgently needed.” (Wall Street Journal, 3/29/2020 https://bfi.uchicago.edu/working-paper/covid- 19-is-also-a-reallocation-shock/

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Hence, I am less optimistic than the market

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Key Points

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1. Massive uncertainty - medical progress, policy response, industrial impact etc
2. Short-run - unemployment rising to about 20% and GDP down about 20% in 2020Q2
3. Long-run – likely U-shaped (very slow recovery) or W-shaped (double-dip)
4. Recovery headwinds – bankruptcies, skills erosion, trade, immigration, taxes, politics

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faster

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Source: https://www.wsj.com/articles/why-the-economic-recovery-will-be-more-of-a-swoosh-than-v-shaped-11589203608?mod=hp_lead_pos1

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Key Points

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1. Massive uncertainty - medical progress, policy response, industrial impact etc
2. Short-run - unemployment rising to about 20% and GDP down about 20% in 2020Q2
3. Long-run – likely U-shaped (very slow recovery) or W-shaped (double-dip)
4. Recovery headwinds – bankruptcies, skills erosion, trade, immigration, taxes, politics

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Taxes: another long run concern as they eventually will need to rise

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Deficits from Great Depression and World War II led to sharp rises in income taxes that only came fully back down in the 1980s

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Source: Bradford Tax Institute https://bradfordtaxinstitute.com/Free_Resources/Federal-Income-Tax-Rates.aspx

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Political extremism: 50% of Americans are facing real hardship, which risks political disasters (think 1930s politics)

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I’m guessing you finished your drink…

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The Promise of Working From Home Post COVID

Nick Bloom (Stanford) SIEPR, May 2020

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Working from home traditionally had a bad image (a 2017 search)

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In 2012 I ran a randomized control trial of WFH on Ctrip, China’s largest travel agency ($15bn on NASDAQ, 40,000 employees)

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CTrip – inside like a typical US office

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The experiment was public: Chairman James Liang pulls the ball

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Individuals randomized home (even birthdays)

Working at home Working at home Working at home Working at home

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First, massive improvement in performance – 13% more output

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10 20

20
15
10
5

5 10 15 20 25 30 35

% Improvement in performance Weeks after the start of the experiment

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Second, quit rates drop by 50%

5 10 15 20 25 30 35 40 45 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38

Home (♦) Office (●) Cumulative quit rate (percent) Weeks after the start of the experiment

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Third, choice doubled the impact – after the experiment the firm let all employees choose

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10 20 30 40 50

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4 12 20 28 36 44 52 60 68 76 84 92 100

% Improvement in performance During the experiment Company roll-out Before the experiment Weeks after the start of the experiment

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CTrip increased profits by $2,000 per employee working from home, and actively rolled this out

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Firms with more employees WFH are now less negative on COVID

Source: Decision Maker Panel Survey conducted by the Bank of England, Nottingham University and Stanford University and Bloom, Bunn, Chen, Mizen, Smietanka and Thwaites (2019) and www.decisionmakerpanel.com

80
60
40
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Expected impact of Covid-19 on sales in Q2 (%) Percentage of employees working from home 0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80-89 90-100

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But working from home under COVID is hard for four reasons

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1) Kids

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2) Job match – only a third of jobs can (and are) working from home

10 20 30 40 50 60 70 80 90 100 Accom & Food Recreational Services Construction Wholesale & Retail Manufacturing Transport & Storage Real Estate Admin & Support Other Services Prof & Scientific Health Finance & Insurance Other Production Info & Comms All firms Furloughed Unable to work (eg sick, self isolating) Working on business premises Working from home Percentage of employees Source: Headline: How many jobs can be done at home” Dingel and Nieman (2020), Covid Journal

f

Economics https://cepr.org/sites/default/files/news/CovidEcon1%20final.pdf, Graph: Decision Maker Panel Survey conducted by the Bank of England, Nottingham and Stanford Universities, and Bloom, Bunn, Chen, Mizen, Smietanka and Thwaites (2019) and www.decisionmakerpanel.com

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3) Space

If you have any photos to share of WFH challenges please send them to me at nbloom@stanford.edu thanks

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85.3 8.1 2.6 1.9 2.1

20 40 60 80 mean of share Never Occasionally (e.g. monthly) 1 to 2 days per week 3 to 4 days per week 5+ days per week

4) Full-time – pre-COVID only 2% of people were full time

Source: BLS data https://www.bls.gov/news.release/flex2.htm

Why? Office time important for 1) Creativity 2) Motivation 3) Loyalty

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Three key tips of WFH post COVID 1) Part-time – regular 2 days per week at home (e.g. T,Th) 2) Optional – only about 50% of employees want to WFH 3) Privilege – under-performers warned, recalled to the office

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COVID will shrink the modern office, not eliminate it

Pre-COVID 5% of working days from home During COVID 35% of working days at home Post COVID I predict about 15% to 20% of working days at home

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The Economic Impact of COVID on the US economy

Nick Bloom (Stanford) SIEPR, May 2020

Warning – depressing economic forecasts. Take precautions

Key Points

My PhD was on uncertainty – these are incredible figures

COVID now the largest source of uncertainty for 90% of firms

This uncertainty is leading firms to abandon earnings guidance

Key Points

One way to see the damage is the share of daily lost GDP, which has risen to about 30%

Happened incredibly fast - went from February 2020, a 60 year low rate of unemployment, to April 2020, an 80 year high

COVID has a hugely varied impact on firms and industries

Also variation across firms by founder types (driven by industry mix)

COVID → “Frankenstein recession”: combines the size of the Great Depression, the speed of Katrina and the reallocation of WWII

Hence, I am less optimistic than the market

Key Points

Key Points

Taxes: another long run concern as they eventually will need to rise

Deficits from Great Depression and World War II led to sharp rises in income taxes that only came fully back down in the 1980s

Political extremism: 50% of Americans are facing real hardship, which risks political disasters (think 1930s politics)

I’m guessing you finished your drink…

The Promise of Working From Home Post COVID

Nick Bloom (Stanford) SIEPR, May 2020

Working from home traditionally had a bad image (a 2017 search)

In 2012 I ran a randomized control trial of WFH on Ctrip, China’s largest travel agency ($15bn on NASDAQ, 40,000 employees)

CTrip – inside like a typical US office

The experiment was public: Chairman James Liang pulls the ball

Individuals randomized home (even birthdays)

First, massive improvement in performance – 13% more output

Second, quit rates drop by 50%

Third, choice doubled the impact – after the experiment the firm let all employees choose

CTrip increased profits by $2,000 per employee working from home, and actively rolled this out

Firms with more employees WFH are now less negative on COVID

But working from home under COVID is hard for four reasons

1) Kids

2) Job match – only a third of jobs can (and are) working from home

3) Space

4) Full-time – pre-COVID only 2% of people were full time

Why? Office time important for 1) Creativity 2) Motivation 3) Loyalty

Three key tips of WFH post COVID 1) Part-time – regular 2 days per week at home (e.g. T,Th) 2) Optional – only about 50% of employees want to WFH 3) Privilege – under-performers warned, recalled to the office

COVID will shrink the modern office, not eliminate it

Pre-COVID 5% of working days from home During COVID 35% of working days at home Post COVID I predict about 15% to 20% of working days at home

Further Reading References