This work is a summary of research on the impact of COVID-19 on various parts of the economy. You can find the work in full on ssrn.

The COVID Factor

The Covid-19 pandemic has led to unprecedented disruptions in how firms conduct their business. In response, unprecedentedly large government spending programs have been launched, many of which aimed to provide relief to ailing businesses. The initial wave of firm assistance, as exemplified by the United States’ Paycheck Protection Program (PPP), arrived rapidly and almost surely helped to mitigate disruptions in the economy. However, this policy treated all firms satisfying some basic criteria identically despite the fact that not every sector was affected the same.

But is this strategy effective and fiscally sound? To answer that question, we looked at the differences between firms who could more easily shift to a remote workforce and those who could not. The American Time Use Survey (ATUS) asks people about the extent to which they are able to and have experience with working from home. Occupations vary immensely by whether people report they are able to telecommute—ranging from 3% for transportation and material moving to 78% for computer programmers. We combine this information with employment data from the Current Population Survey and the Bureau of Labor Statistics to see how sectors have fared relative to their pre-pandemic levels.

Quantifying the Cost of being Unable to Work from Home

To better identify the impact of COVID on firm’s whose workforce cannot be remote, we isolated the industries who are not designated as “essential” (grocery stores, for example, have had little disruption). We find that firms in sectors in which most of the work could be done remotely fared much better than industries where employees needed to work on site across nearly all measures we looked at. Sectors that lack the ability to work remotely had significantly worse forward revenue projections that cannot work from home as easily have larger drops in employment, worse stock returns, and lower projected revenue. We also find that firms in sectors who are more exposed to this labor shock have a higher predicted likelihood of default as calculated by the Risk Management Institute of Singapore.

It is clear COVID-19 does not treat all sectors equally. If we look across all industries, a one standard deviation change in the percentage of the workforce that could work from home was associated with a 7% drop in employment since April of 2019. If we only look at our measure in industries who were determined to be “non-essential,” that number becomes 10%.

The Uneven Impact of the COVID-19 Shock

But this number just describes the average outcome for all workers exposed to the shock; the effects of COVID on economic outcomes were substantially worse for people who were already receiving lower wages. The outcomes are particularly painful for women who have children and lack a college education. Within that group, a decrease in the ability to work remotely is associated with a three times higher probability of unemployment!

Many lower-paid workers are already clustered in certain sectors of the economy that are most impacted by COVID-19. The industries which laid off the most workers also have bleaker prospects going forward. A one-standard-deviation change in the ability of workers to do their jobs from home is associated with an 8% decrease in projected revenues and a 7% decline in stock market performance.

Recent firm surveys also bear bad news for firms in more exposed sectors: firms that were more exposed to COVID-19 are 9 percentage points more likely to experience a major disruption in operations, 6 percentage points more likely to reduce headcount, and 6 percentage points more likely to fail to meet future payments. They are also significantly more likely to report reducing their overall payroll and hours of existing employees, and are likely to have less than one month of liquid savings.

Market Reactions to COVID-19

To get a sense of the scale of the disruption, and how it might reverberate through the economy, we created a portfolio of stocks that over-weighted industries that could more easily accommodate working from home, and under-weighted those who could not. We see that the returns of our ‘COVID-19 factor’ portfolio largely tracks the news related to the pandemic. This pattern supports the view that COVID-19 does not affect all sectors equally, but rather that its most devastating impacts are concentrated in specific parts of the economy.

This portfolio is not only further evidence of the uneven impact of COVID-19, but also a model of how an investor might try to hedge a portfolio against some of the economic impacts at place. In other words, if an investor wanted to protect against these types of shocks, this long-short portfolio might be a suitable investment strategy.

To get a better sense of what is driving these returns, we created 4 portfolios of industries grouped by their exposures, and plotted their cumulative returns relative to the market since the beginning of the year. As expected, the more able an industry's workforce is to transition to working from home, the better their stock returns.

The Fiscal Response, and Future Aid

In March 2020, the U.S. Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which included the Paycheck Protection Program (PPP). The PPP is a $669 billion loan program run by the U.S. Small Business Administration (SBA) intended to help smaller firms during the crisis; this program is the largest component of the fiscal stimulus provided to firms in the US. This initial wave of firm assistance arrived rapidly and almost surely helped to mitigate disruptions in the economy. However, this policy treated all firms satisfying some basic criteria identically despite the fact that not every sector was affected the same.

The sector that received the largest number of PPP loans and the second-highest total amount of funding was “Professional and Technical Services” with 589,000 loans totaling approximately $65B. According to our calculations, this sector has the highest fraction of workers who can work remotely and is one of those least exposed to the disruptions associated with the pandemic. If we compare total volume of PPP loans made available to this sector to 2017 estimates of employment in firms with fewer than 500 employees, this amounts to more than $12,500 per employee. By way of contrast, comparable figures are around $4,800 and $5,400 in the much harder-hit “Accommodation and Food Services” and “Arts, Entertainment, and Recreation” categories.

Going forward, we believe that providing targeted assistance to workers and firms based on an ex-ante measure of exposure to Covid-19 work disruptions could be a more cost-effective way to alleviate the economic impacts of the virus. Shifting the marginal dollar to industries that are significantly more affected could provide more effective insurance.