Is a recession coming?
The stock market’s dizzying plunge, sparked by the fast-spreading coronavirus, seems to be heralding a U.S. downturn.
But while the virus is pummeling America’s travel and tourism industry, disrupting manufacturing supply chains and setting off a historic market sell-off, it likely won’t tip the U.S. into recession unless it spreads across a wider swath of the nation, economists say. To date, there have been more than 600 cases and 22 deaths in the U.S.
“The stock market is not the economy,” says economist Ryan Sweet of Moody’s Analytics.
Still, of the 12 U.S. recession since 1945, eight were preceded by bear markets (a decline of at least 20% from a recent peak) and three were preceded by market corrections (a drop of at least 10% from peak), says Sam Stovall, chief investment strategist at CFRA Research. The Standard & Poor’s 500 index is about 19% off its February 19 high.
Ultimately, the course the economy takes largely depends on consumers, who account for 70% of economic activity, experts say. The Conference Board’s widely-followed measure of consumer confidence in February was strong but readings in recent weeks by the Morning Consult have pointed up declining sentiment.
“If we start to see consumer confidence move down even further, that’s going to be a problem,” Sweet says.
Moody’s Analytics recently raised its odds of a recession to 50% from about 33% just days ago. Grant Thornton also reckons there’s a 50% chance of a slump.
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“As of right now, (the virus) appears both sufficiently dangerous and sufficiently contagious to impact economic behavior in a major way,” says David Kelly, chief global strategist of JPMorgan Funds.
The Federal Reserve stepped in last week to limit the damage, cutting its key interest rate by half a percentage point to a range of 1% to 1.25%. Many economists now expect the Fed to lower the rate to near zero over the next couple of months, as it did during the 2008 financial crisis. That can help spur more purchases of houses and cars but it can’t prod fearful Americans to visit malls and restaurants.
Many economists also expect Congress to pass a stimulus that could lower the payroll tax workers pay and possibly provide bridge loans to small businesses that are struggling because of the virus, among other measures.
Oil plunge raises risks
Monday’s steep drop in oil prices normally would cushion the coronavirus’s blow by lowering gasoline prices and prompting consumers to spend more. But this time consumers will probably sock away those savings because of the uncertain environment, says economist Lydia Boussour of Oxford Economics. Meanwhile, U.S. oil producers, which make up a notable share of the economy because of the shale boom, will pull back spending, meaning the oil price drop will have a negative impact on the economy overall, Boussour says.
The most recent barometers of the economy’s health have been solid. Employers added a blockbuster 273,000 jobs in February, the Labor Department said Friday. But that was before the virus began affecting the market and economy.
Airport ghost towns
So far, the coronavirus has taken the biggest toll on travel. Chinese tourism, which accounts for more U.S. spending than visits from any other country, has been hammered. American businesses are canceling conferences and trade shows and consumers are scuttling vacation plans to avoid the higher risks of contagion posed by large gatherings and airplane trips. Airports have become ghost towns and thousands of airline workers could be laid off.
Airlines make up just 0.5% of the nation’s gross domestic product and hotels make up just 0.4%, says economist Paul Ashworth of Capital Economics.
Still, layoffs in those sectors are likely to curtail consumer spending and ripple to other industries, says Diane Swonk, chief economist of Grant Thornton.
Empty stores shelves?
The virus also has stalled or severely limited factory production in China for weeks. Many U.S. retailers and manufacturers stocked up on goods and factory parts ahead of the Chinese Lunar New Year anyway, limiting the effects. But those stockpiles are expected to run dry in coming weeks, leading to empty store shelves and stalled production lines.
A piece of good news is that the spread of the coronavirus in China has slowed substantially in recent days. Chinese factories are ramping back up, says Jonathan Gold, vice president of supply chain and customs policy, for the National Retail Federation. Yet with dockworkers and truckers returning to work only gradually, delivery snarls are likely to persist into spring, Gold says.
That’s likely to mean manufacturing layoffs that also hurt consumer spending, Swonk says.
Tumbling stocks leave Americans feeling pinched
The tumbling stock market also could play a role by making Americans feel less wealthy, prompting a pullback in both consumer and business spending, Sweet says.
All told, Sweet doesn’t expect the economy to expand at all in the first half of the year as the coronavirus knocks a full percentage point off growth and the unemployment rate rises before a rebound in the second half.
Ashworth, however, says avoiding recession hinges on a coronavirus outbreak in the U.S. that affects tens of thousands of Americans rather than millions.
If the disease — or school closings, quarantines and other government steps to contain the spread — widely limit Americans’ mobility, a recession will become likely as business dries up at restaurants, shops and sporting events, Ashworth says.
Meanwhile, he says, “It’s going to get worse before it gets better.”
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