As the novel coronavirus spreads across the U.S., economists are reassessing their forecasts for how the outbreak will affect the domestic economy.
Economic data so far haven’t offered much insight into the toll Covid-19, the respiratory disease caused by the coronavirus, might already be taking. The jobs report released Friday, for example, was strong but hardly reflective of the current state as the Labor Department surveyed businesses mid-February, before the disease really started spreading domestically. The situation escalated Saturday when New York became the latest state to declare a state of emergency, joining California, Washington, and Florida.
As more people get sick, events are canceled, and Americans stay home, economists are scrambling to stay on top of the growing risks to the outlook. Many have said the U.S. economic impact would be relatively contained, but the mood is darkening.
Here’s an edited look at what some economists are now saying:
IHS Markit chief economist Joel Prakken:
Fear and financial stress stemming from the coronavirus will materially weaken 2020 economic growth. There were developments in the latest gross domestic report [the economy grew 2.1% in the fourth quarter] that had a bearing on the near-term outlook. Fourth-quarter personal income, for example, was revised sharply lower, implying less support for consumer spending before the virus kicked in.
Meanwhile, market volatility has surged, risk spreads have widened, and equity values have dropped roughly 10% over the last two weeks—wiping out roughly $4 trillion of household net worth, or about $31,000 per household. Unless reversed fully and quickly, this will weigh on consumer spending over the next few years.
More immediately, weakening consumer attitudes will likely slow consumer spending in the second quarter, and businesses are likely to put some investment plans on hold until the outlook clears up.
Following 2.0% growth in the first quarter of this year, we now look for 1.1% GDP growth in the second quarter, followed by 1.9% growth averaged over the rest of 2020. This yields 1.8% growth this year, down from last month’s forecast of 2.1% growth.
The Federal Reserve has already cut the funds rate target by a half percentage point in response to growing Covid-19 risks, and we expect a quarter-point cut in April. The unemployment rate is likely to begin drifting higher this year. We are not forecasting a recession, but the risks have risen.
Lydia Boussour and Gregory Daco, U.S. economists at Oxford Economics:
The bond market signal is particularly worrisome as the 10-year Treasury yield fell as low as 0.66% on Friday—and below 1% for the first time ever last week. We stress that rate cuts are no panacea, and in the absence of a coordinated health and fiscal response, the situation is likely to get worse before it gets better.
The increasingly widespread coronavirus along with the accompanying ‘virus fear’ is severely disrupting travel activity, leading consumers and businesses to curtail demand and disrupting global and domestic supply chains. With financial markets amplifying the disruptions, we have revised the estimated drag from the virus to 0.4 percentage point, or $80 billion, bringing our 2020 GDP forecast to 1.3%. With real output growth flirting with 1% from a year ago in the first half of this year, this will leave the economy highly vulnerable to adverse shocks. We have therefore lifted our recession odds from 25% to 35%.
We continue to stress the main economic risk from the virus is not contagion, or mortality, but rather it stems from the actions that national and local authorities have taken to curb the outbreak—the ‘lockdown paradox.’ While our baseline forecast does not include a lockdown scenario, we note that if authorities decide to close schools, severely restrict travel, and limit all nonessential movement, the U.S. economy will fall into a recession—putting an end to its longest economic expansion ever.
Since the coronavirus outbreak appears to be roughly six weeks behind the China outbreak, we expect to see further disruptions to both supply and demand in the coming weeks. It may be that the disruptions to activity linger well into the second quarter. As such, anticipating a so-called V-shaped recovery would be misguided. A U-shaped path for GDP growth now appears the most likely scenario.
If the coronavirus outbreak becomes a global pandemic, the consequences will be much more severe, with GDP tumbling 1.7 percentage points relative to a no-virus scenario. The total output loss would surpass $300 billion in the resulting recession, with more than 1.5 million individuals losing their jobs.
The New York Federal Reserve:
The New York Fed Staff Nowcast GDP estimate, revised lower on Friday, stands at 1.7% for the first quarter and 1.3% for the second quarter.
News from this week’s data decreased the forecast for the first quarter by 0.4% and decreased the second-quarter estimate by 1%. Negative surprises from the Institute for Supply Management’s manufacturing survey (ISM) drove most of the decrease.
Brett Ryan, U.S. economist at Deutsche Bank:
We expect the Federal Reserve to lower the fed-funds rate by another 0.5% on March 18. In addition, we now project real GDP growth to be flat in the first half of the year—the slowest two-quarter growth rate since the crisis—with the second quarter showing a contraction of 0.6% at an annualized rate.
Economic activity should begin to normalize in the third quarter and rebound more robustly in the final three months of the year. On net, we expect growth this year to come in near 1.6%, about 0.6% below our previous forecast. Offsetting this weaker near-term profile, we have upgraded our 2021 growth forecast to 2.5%, helped by a more accommodative Fed stance.
To be sure, the degree of economic disruption from the coronavirus is subject to significant uncertainty. However, the dislocations in financial markets over the past couple of weeks and heightened concerns over the virus are likely to meaningfully dampen consumer and business confidence.
The downgrade to our growth forecast stems mostly from softer consumer spending, as we now project real personal-consumption expenditures to expand just 0.7% annualized in the first half of the year, compared to 2.2% in our previous forecast.
A pandemic of this nature will no doubt affect all sectors and disrupt the supply and demand sides of the economy. On the demand side, the impact of the coronavirus will be felt throughout the economy as travel and leisure activity are curtailed. Spending on transportation services, food services, accommodations and recreations services—which account for around 13.6% of real personal-consumption expenditures—are likely to be most significantly pared back. One useful comparison here might be the third quarter of 2001, when these categories of spending dropped 4% annualized in the wake of the 9/11 terrorist attacks.
In addition, the expected disruptions to the labor market coupled with the recent shock to financial conditions are likely to drag on consumer confidence, thus further denting spending on other discretionary items.
Write to Lisa Beilfuss at lisa.beilfuss@barrons.com
