When markets are stampeding, anyone can get run over. And that’s what happened Friday as White House economic adviser Larry Kudlow spoke the truth that the coronavirus threat will eventually pass and the U.S. will recover. Equities nonetheless fell another 1% or so Friday, and the questions are how much damage there will be to the real economy and what, if anything, can be done about it.
Mr. Kudlow is right to want to prevent a panic and buck up consumer confidence, which has been holding up U.S. growth. He’s also right that the foundation of the American economy has been solid with an historically low jobless rate, healthy income gains, and a housing market that is gaining steam.
But stocks don’t fall 11.5% in a week without cause, and they are responding to clear signs that the spreading coronavirus will hit the global economy hard. China’s first quarter GDP may be negative. Europe was already wobbling. The U.S. is sturdier but not immune to global weakness, especially if the virus causes extensive quarantines; business travel restrictions have already begun.
The 10-year Treasury note has fallen through the floor of its historic low to 1.15%, a sign that investors expect slower growth and Federal Reserve rate cuts. The price of Brent crude is down 24% this year to $50 a barrel, on expectations of slower demand. Copper futures are down 9% since January and were off another 1% on Friday in a sign that a manufacturing recovery isn’t imminent. The junk bond and leveraged loan markets are under pressure as financial conditions have tightened.
The rebound in business investment that many expected with the decline in trade tensions will now be postponed for at least the first half of the year. Supply chains need to be restored, and medical and economic uncertainty will have to ease. A U.S. economy that was expected to grow between 2% and 2.5% for the year will now likely be under that for the first half, with hope for a second half bounce.
All of this is complicated by the political uncertainty of an election year and Washington’s climate of relentless and extreme partisanship. Democrats clearly see the Covid-19 disease as a cudgel to use against President Trump, perhaps turning it into his version of Hurricane Katrina in 2005.
There’s no other way to read the rhetorical barrage they’ve aimed at Mr. Trump no matter what he does or says about the virus. The resistance media are also piling on. This feeds the public’s unease and turns every government decision into a political battle.
Our sense is that this could still be an opportunity for Mr. Trump despite the partisan catcalls. Voters aren’t going to blame him for a slowing economy caused by the virus. They will blame him if the government response seems inept, or if he dismisses the problem and it turns out to be much worse than he has advertised.
The best posture is to tell the public the truth that no one knows how much damage the virus may do, while offering assurance that the government’s infectious disease experts and enormous public-health bureaucracy are ready for the challenge. It’s best to project confidence without the gratuitous boasting or attacks.
If reporters ask about some attack from Nancy Pelosi or Chuck Schumer, Mr. Trump should shrug it off and say he’s focused on reducing the risks from the virus. Voters will appreciate the show of leadership, and score Democrats for the rancor. Unlike the impeachment brawl, the public cares about this one and doesn’t want cheap partisanship.
Which brings us to the possible economic policy responses. Mr. Trump could help by immediately lifting his unilateral tariffs, which would amount to a tax cut on trade and consumers. A fiscal “stimulus” is probably a waste of time, given that Democrats would insist on new spending or temporary tax rebates of the kind that Mrs. Pelosi and George W. Bush negotiated in 2008 but didn’t help growth.
Fed Chairman Jerome Powell made clear in an unscheduled statement on Friday that monetary policy is in play, with a 25 basis-point cut in the fed funds rate widely expected in March. We’ve been skeptical that rate cuts can address a classic supply-side shock like the coronavirus. Fed funds are already low at 1.5%-1.75%, so the impact of rate cuts will also be less than if the Fed had moved faster to normalize its policy in the years after the financial panic and 2008-2009 recession.
On the other hand, the Fed can fight a financial virus. Stocks pared their losses after Mr. Powell’s Friday statement, which shows the Fed’s psychological clout. If the Fed does cut rates as an insurance policy, it should be prepared to raise them again quickly if the coronavirus turns out to be less damaging. The Fed kept rates too low for too long after 9/11 and spurred the housing bubble and bust.
This week’s market selloff is a warning but it isn’t cause for panic. We simply don’t know how much harm this coronavirus will do. Investors who keep a cool head will be rewarded, and voters will reward politicians who do the same.
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