Business Disruptions From Social Distancing

 

COVID-related social distancing measures have impacted most businesses but not equally. A recent CEPR paper (2^nd one from this edition) attempts to model business sectors by social interaction to understand the winners and losers. The punchline is that retail and the arts are the most affected industries, while manufacturing, publishing and finance are least affected. However, another study which looks into the earnings transcripts of firms finds that manufacturing does get both affected and visibly concerned by the absence of retail demand.

 

Underlying Trends

The researchers identify two major trends that have become dominant over the last 100 years:

1. Face to face communication has increased steadily via urbanization
   Face-to-face interactions are more frequent in dense cities, which means that the urbanised business environment is much more sensitive to social distancing measures. The researchers find that for the highest population density ZIP codes, 43% of workers are employed in customer-facing jobs.
2. Specialization has increased in business services
   Businesses that rely heavily on worker specialization require workers to interact more in order to complete processes. Therefore, social distancing impacts businesses with more specialisation and division of labour.

With these in mind, the researchers focus on either worker-to-customer interaction or on worker-to-worker interaction in different sectors to determine their sensitivity to social distancing. They also look at sectors where physical proximity is required (even without communication).

 

Data Used

The researchers primarily used two datasets:

1) National Center of O*NET Development: this has detailed standardized descriptions on almost 1000 occupations along eight dimensions which are used to measure the characteristics of a given occupation and the importance of worker interaction.

2) US Bureau of Census: this has the precise geographic location of non-farm businesses in the US which is used to map out and measure the impact on businesses from areas with high population density

To calculate the share of workers whose job requires a high level of teamwork, customer contact, and physical presence, the researchers use the same sectoral breakdown as the Current Employment Statistics (CES) (US Bureau of Labour Statistics 2020a). The occupation structure of the industries is retrieved from the official industry-occupation matrix (US Bureau of Labour Statistics 2020b), where they use the employment statistics by occupation-industry for February 2020.

 

Results

1) Surprisingly high correlation

A preliminary but highly important result is related to the actual connection between customer contact and teamwork. While initially the two variables were viewed independently, it turns out their correlation is very high (Fig. 3). This suggests a stylised fact in microeconomics.

 

2) In which industries are teamwork, customer communication and physical presence most important? In which are they the least?

Initial rankings placed hospitals first in all three components (teamwork, customer service and physical presence). However, the researchers removed them because of their direct role in fighting the epidemic. This left retail, accommodation and food services, and the arts as particularly sensitive to the Overall communication factor – meaning teamwork and customer contact taken together (see Table). Meanwhile, transport and construction are reliant on physical presence.

As for the least affected industries these include manufacturing (computers, apparel, furniture, transport), fishing, publishing and data processing (see table in Appendix).

 

 

But The Supply Chain Affects Everyone

Another study, a NBER paper , took another tact in understanding the impact of COVID on firms, The researchers looked at earnings transcripts to determine which sectors discussed COVID impacts. They found:

• Firms’ main concerns as of Q1 2020 are (1) decreasing demand, (2) disruption of the supply chain and closure of production facilities, and (3) increased uncertainty.
• Relatively few firms appear concerned with their financing position.
• Firms which survived other epidemics have much more confidence and a more positive view on their ability to deal with the situation; this is also reflected by subsequent stock market tests where short-window earnings-call returns, capturing the information released in the discussion, as well as first-quarter cumulative returns, are generally lower for firms with higher measured exposure, negative sentiment, and risk related to the Covid-19 outbreak.
• A small set of firms see opportunities as a result of competition disruption, especially the medical supplies sellers or the firms that believe their competitors’ brands are tainted by association with regions stricken by the virus.

In terms of sectors, manufacturers turned out to be most concerned, even more than retail (see bar chart). This suggests that even if social distancing impacts retail more and manufacturers the least – the overall effect of retail stopping is that there would be no demand for manufactured goods.

 

Bottom Line

We’re only starting to understand the impact of the lockdown on the economy. Some industries like retail and the arts are directly impacted by social distancing measures, while others like manufacturing are hit by the absence of demand (from retailers). Meanwhile, other sectors like data processing, finance or fishing are much less affected.

 

Appendix

 

 

 

Stefan Posea is a Research Analyst at Macro Hive. His research interests lie in macro-financial interactions and monetary policy analysis. Stefan graduated with an MSc in Economics at Birkbeck, University of London and previously held roles in M&A and the Public Sector.