Two surveys from the past month show that, while economic conditions in the US showed definite signs of improvement during the third quarter of 2020, any recovery will be somewhat protracted. In the first data point, the Citizens Business Conditions Index rose to 61.2 at the end of the third quarter, up from 60.3 at the end of the second quarter, with some sectors, such as manufacturing, faring better than others as the US economy started to get back on track.

Citizens’ proprietary measure of business activity among clients showed particular strength in the industrial and government services sectors. The fourth quarter may pose continued challenges for some sectors, however, as the number of COVID-19 cases rises in many states.

“It’s obvious to everyone that life is not back to ‘normal’ in the United States with the ongoing battle to contain COVID-19," said Tony Bedikian, head of global markets at Citizens. "Still, businesses are proving to be incredibly resilient. The support from the Fed has been a huge factor. The capital markets are operating well and we are seeing a lot of effective adjustments made by small and medium-sized companies as the government weighs possible additional stimulus.”

The Index is derived from a number of underlying components, most of which improved during the third quarter.

• The Institute for Supply Management (ISM) Manufacturing and Non-Manufacturing Indexes were up for the quarter. Manufacturing rose more sharply while the broader services sector recovery held steady.
• Employment increased during the third quarter, but wage growth decreased, impacted by the growing rate of job gains in the lower-wage workforce.
• Proprietary measures of business activity among Citizens’ more than 7,000 clients across the United States were down slightly with a few sectors improving and others still languishing.

The Index draws from public information and proprietary corporate data to establish a unique view of business conditions across the country. An index value greater than 50 indicates expansion and points to positive business activity for the next quarter.

CFOs expect a slow recovery

Corporate financial decision-makers in the US generally expect employment and revenues to remain below pre-COVID levels until at least 2021, although they remain optimistic about the future financial prospects for the U.S. economy and their own firms. This is according to results of The CFO Survey, a collaboration of Duke University’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta.

The CFO Survey was conducted from 14-25 September 2020, among financial decision-makers in US firms of varying sizes and across industries. When participants were asked to rate their optimism for the financial prospects of their firms, the average optimism was just above 70 on a scale of 0 to 100 - approximately in-line with the second-quarter reading.

When asked to rate their optimism about the overall US economy, the average rating was 61, also in-line with the average of 60 from the second-quarter survey, which was conducted from 15-26 June. Both of the new optimism ratings were well above those reported in the first quarter, which marked the onset of the pandemic-induced economic downturn.

Despite the increased optimism since the spring, firms still report being below their pre-COVID levels of revenue and employment. In addition, the average firm anticipated months, if not years, until a full recovery, and almost 40% of respondents said they are not likely to revert to pre-COVID levels of remote work.

“More than 60% of respondents reported that revenue projections have not recovered to their pre-COVID mark and about 40% report lower employment,” said Fuqua finance professor John Graham. "Moreover, only about one-quarter of the firms that are below pre-COVID levels anticipated a full revenue or employment recovery by June 2021.”

Spending and investment remains stifled

CFOs also indicate that their firms continue to limit spending and investment. More than half of respondent firms reported either “somewhat” or “significantly” decreased spending in the third quarter, compared to what is typical for the business. Looking forward, fewer than a third of the firms report plans to increase spending on structures over the next six months. Of the 60% who plan equipment spending, most report spending to repair or replace existing equipment. Firms that are abstaining from spending on structures or equipment offer three primary reasons: an uncertain environment, no need to expand capacity and a need to preserve cash.

“Measures of uncertainty remain elevated and we can see that reflected in the decision by many firms not to invest in capital,” said Brent Meyer, senior policy advisor at the Federal Reserve Bank of Atlanta.

With respect to gross domestic product, firms anticipate continued slow growth during the next four quarters, averaging about 2.2%. The most pressing concerns firms cited involved their own demand, sales or revenues, as well as labor availability, the broad health of the economy and the political climate.

“The economy is recovering, to be sure, and business confidence has improved since the spring,” said economist Sonya Ravindranath Waddell, a vice president at the Federal Reserve Bank of Richmond. “But all indicators from The CFO Survey point towards a slow return to normal that is challenging to forecast due to the uncertainty created by this virus.”