How the Impact of Social Distancing Ripples through the Economy

While COVID-19 is having a devastating impact on the U.S. economy, its impact across industries is likely to be heterogeneous. High contact-intensive industries—ones that rely more on face-to-face interactions—are likely be more negatively affected.

• On the one hand, these industries may experience a drop in the demand for their products as consumers seek to avoid contagion (e.g., beauty salons, food services and dentists).
• On the other hand, workers in these industries may be less able to work remotely and thus are likely to be relatively more affected by recent social distancing policies.

But the decline of contact-intensive industries may also affect industries that rely less on close physical interactions via input-output linkages; thus, these links propagate the initial shock through the rest of the economy. For instance, contact-intensive industries may rely on intermediate inputs from other sectors, or such sectors may depend heavily on inputs from contact-intensive industries.

In this article, we investigate the extent to which the shock on contact-intensive industries may propagate to the rest of the economy. To do so, we classified industries according to their contact intensity and quantified the effect of a demand drop in contact-intensive industries on gross output. This uncovered the importance of the input-output structure of the economy in propagating shocks across industries. We found that a 51% drop in the final demand for goods and services from contact-intensive industries implies a 13% decline in the gross output of low contact-intensive industries and a 24% drop in aggregate gross output.

Contact Intensity of Industries

We followed the methodology from our previous blog postLeibovici, Fernando; Santacreu, Ana Maria; and Famiglietti, Matthew. “Social Distancing and Contact-Intensive Occupations.” St. Louis Fed On the Economy Blog, March 24, 2020. and classified industries according to their degree of contact intensity. That previous work classified occupations according to an index of physical proximity from O*NETS, an occupational database. We built on our earlier work by using the 2017 American Community Survey to construct an industry-specific index of physical proximity, which we computed as the weighted average of the physical proximity index of the occupations in that industry, with weights given by employment shares.

We classified industries with a physical proximity index above 60 as contact-intensive and referred to the rest as low contact-intensive industries.We also included seven industries that have an index below 60 but that are likely to be affected by social distancing policies, given the type of goods and services produced. These are community and vocational rehabilitation services; bakeries and tortilla manufacturing; travel arrangement and reservation services; museums; personal and household goods repair; accommodation; and dry cleaning and laundry services. The table below reports the list of high contact-intensive industries. These are personal care services, food services, construction, education, transportation and health services among others. Out of a total of 150 NAICS industries (excluding federal, state and local government industries), our approach identified 38 high contact-intensive industries. They represent 55% of total employment and 46% of labor income.

However, not all of these industries are likely to be affected equally by social distancing. For instance, despite their jobs requiring a high degree of face-to-face interaction, some of these industries—such as health services—will be unaffected, as they provide essential services during a pandemic. We thus divided high contact-intensive industries into affected and unaffected according to whether they have largely continued operating as essential services in environments in which social distancing measures were put in place.

How Important Are High Contact-Intensive Industries?

In the table below, we divided the industries in our sample into three groups:

• Low contact-intensive industries (physical proximity index below 60)
• Unaffected high contact-intensive industries (physical proximity index above 60 in health, construction and truck transportation)
• Affected high contact-intensive industries

The last group accounts for an important share of U.S. employment and labor income: 35% of the total U.S. employment and 27% of total labor income. Hence, a drop in the demand for goods and services provided by these highly impacted industries is likely to have an important effect on U.S. employment and output.

The drop in final demand not only will reduce production in affected high contact-intensive industries but also is likely to impact industries upstream and downstream: those that use the output of the affected industries as an intermediate input as well as those industries that supply intermediate inputs to the affected industries. The strength of propagation will depend on how interconnected high and low contact-intensive industries are in the input-output structure.

Propagation through Input-Output Linkages

We used input-output tables from the Bureau of Labor Statistics to examine the degree of interconnectedness between high and low contact-intensive industries.Note that we only considered two groups of industries in the following tables. We merged unaffected and affected high contact-intensive industries in one group as we found their input-output structure to be very similar.

The table below decomposes the destination of the output produced by each industry.

We found that 85% of the production of high contact-intensive industries is destined to final demand (e.g., consumption and investment), whereas the remaining 15% is sold to other industries to be used as intermediate inputs.

In low contact-intensive industries, only 39% percent of their production is used as a final good. Thus, most of the goods and services produced by low contact-intensive industries are sold to other industries to be used as intermediates, with 16% of their production being demanded by high contact-intensive industries. Hence, the negative impact of the pandemic on high contact-intensive industries will propagate to the rest of the economy through the input-output structure.

Furthermore, the table below reports the types of intermediate inputs demanded by each industry as well as the composition of final demand across industries. We found that 85% of inputs used by high contact-intensive industries are purchased from low-contact intensive industries; hence, a drop in the demand of high contact-intensive industries is likely to have an important indirect effect on the rest of the economy through the input-output structure.

Conclusion

We quantified the importance of these input-output linkages by studying the effect on gross output of the collapse to zero of the demand for affected high contact-intensive industries, as classified above. The collapse of affected high contact-intensive industries implies a 51% drop of final demand for the goods and services produced by all high contact-intensive industries. We found that gross output decreases by 47% in these industries and by 13% in low contact-intensive industries. Hence, the initial drop in final demand in high contact-intensive industries propagates throughout the rest of the economy because of its input-output structure. As a result, aggregate gross output decreases by 24%. In the absence of this indirect effect, the drop in gross output would have been much lower, around 14%.

We conclude that the indirect impact of COVID-19 on economic activity via input-output linkages is likely to significantly amplify its direct impact on high contact-intensive industries. Thus, the economic impact of social distancing may extend well beyond its direct impact on contact-intensive industries via the indirect impact on low contact-intensive industries.

Notes and References

¹ Leibovici, Fernando; Santacreu, Ana Maria; and Famiglietti, Matthew. “Social Distancing and Contact-Intensive Occupations.” St. Louis Fed On the Economy Blog, March 24, 2020.

² We also included seven industries that have an index below 60 but that are likely to be affected by social distancing policies, given the type of goods and services produced. These are community and vocational rehabilitation services; bakeries and tortilla manufacturing; travel arrangement and reservation services; museums; personal and household goods repair; accommodation; and dry cleaning and laundry services.

³ Note that we only considered two groups of industries in the following tables. We merged unaffected and affected high contact-intensive industries in one group as we found their input-output structure to be very similar.

Additional Resources

• St. Louis Fed’s COVID-19 resource page
• On the Economy: How Closing Restaurants and Hotels Spills Over to Total Employment
• On the Economy: Social Distancing and Contact-Intensive Occupations