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The coronavirus casts a widening shadow across the U.S. economy.
The outbreak in China is dampening visits by Chinese tourists, raising the prospect of shortages and price increases for iPhones and other products, and disrupting parts deliveries for carmakers.
“It’s consequential,” Diane Swonk, chief economist of Grant Thornton, says of shipment delays and product shortages. “It’s going to happen.”
The effects on the economy and commerce have been modest, but the toll is likely to grow if factory shutdowns in China persist and the outbreak continues to spread rapidly. Chinese authorities say the number of new cases has dropped, but global health officials are cautious, noting thousands of infections could go undetected.
The number of coronavirus cases worldwide has surged to nearly 75,300, mostly in China, and the death toll has topped 2,000. There have been 29 cases in the USA.
Under the most likely scenario, which assumes 100,000 to 150,000 total cases, “I think it’s a modest hit to the (U.S.) economy,” the effects of which will play out by summer, says Mark Zandi, chief economist at Moody’s Analytics.
But as U.S. growth is forecast to slow amid sluggish activity overseas, lingering trade jitters and Boeing airplane production snarls, “we’re teetering on the edge of falling off the rails,” Zandi says.
A big wild card is that consumer fears “will escalate and push households into a defensive mode” that reduces their spending and, in turn, discourages business investment, says economist Bob Schwartz of Oxford Economics.
A wider coronavirus outbreak that infects 250,000 to 300,000 people globally almost certainly would topple the nation into recession, Zandi says.
Lost tourism represents the biggest threat. About 3 million Chinese people visit the USA each year, spending about $6,500 per trip, 50% more than typical international tourists, according to Tourism Economics, Moody’s and the U.S. Travel Association. Visits from China will probably fall by about 30% this year, an economic loss of about $5.8 billion, Tourism Economics estimates.
While many Chinese factories are shuttered and Chinese consumer demand is slack, U.S. exports to China will suffer, including computer chips, plant equipment and aircraft, Zandi says. The Trump administration’s Phase 1 trade deal with China calls for $200 billion in additional U.S. shipments to that country – a target that some analysts viewed as a stretch. The outbreak further reduces the odds of reaching that goal.
Though factories can gear up in the second half of the year to offset much of the lost production, boosting growth, a good portion of hotel and restaurant sales will probably not be made up, Zandi says.
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The virus, he says, is likely to lower stock prices by 5% at its peak, trimming consumer and business spending even if the market rebounds by the end of the year.
Market shrugs off virus – for now
In recent weeks, the market has traded at record highs, a sign investors are piling into stocks hoping that the U.S. economy will ride through the epidemic’s challenges, if it’s contained, as a result of a strong labor market and healthy consumer spending.
Yet Wall Street is starting to take notice of the economic risks the virus poses after Apple warned that it won’t meet its revenue targets because of delays in its iPhone production in China, as well as softer consumer demand in that country. If more companies cut their earnings outlook beyond the current quarter because of supply constraints, that could dent corporate profits, tempering gains for stocks and 401(k)s.
“The market has been climbing a wall of worry, but this situation with Apple could be a canary in a coal mine and make some investors more cautious,” says Keith Gangl, portfolio manager at Gradient Investments.
Zandi estimates the coronavirus will cut economic growth by nearly half a percentage point in the first quarter and by one to tenths of a percentage point for the year to 1.7%, down from 2.3% in 2019. There will be about 170,000 fewer jobs by the end of the year, he predicts.
Oxford Economics projects a bigger impact of nearly another half a percentage point from Boeing’s temporary halt to production of its 737 Max airliner after two fatal crashes. The firm expects that and the virus impact to cut first-quarter growth to just 0.4%. That would be the weakest quarterly performance since late 2015.
The Phase 1 trade deal with China and the new trade agreement with Mexico and Canada eased business uncertainty and raised hopes of a turnaround in manufacturing and business investment, which hampered growth last year. The coronavirus doused that optimism.
“This is just another shock,” Schwartz says. “For the most part, consumers will again determine how well the economy holds up” in 2020, along with a resurgent housing market.
Swonk likened the outbreak to the SARS epidemic in southern China in 2002-03. The big difference, she says, is that China has become a much bigger cog in the global economy. China made up just 4% of global gross domestic product in the early 2000s, compared with 16% today, according to Moody’s, supplying the USA with everything from auto parts to smartphones, electronics and other household goods.
Empty store shelves, higher prices?
About a quarter of Walmart’s goods are made in China, according to financial services firm UBS. The company is not having a problem with those shipments, but “we don’t know what’s going to happen next. There are so many moving parts right now,” Doug McMillon, Walmart’s president and CEO, said during a presentation on the chain’s investment day.Shipments typically slow in February because of the Lunar New Year, when factories are shut down in China.Many U.S. retailers and manufacturers bulked up their inventories before the holiday, providing a cushion, Swonk says.
But the outbreak is causing production facilities to stay closed longer than usual, and “major U.S. retail container ports are expected to see a sharper-than-usual drop this month,” according to a report from the National Retail Federation and the maritime industry consulting firm Hackett Associates.
“U.S. retailers were already beginning to shift some sourcing to other countries because of the trade war, but if shutdowns continue, we could see an impact on supply chains,” Jonathan Gold, the NRF’s vice president for supply chain and customs policy, said in the report.
Since commercial flights from China have been grounded, products that ship by air such as computers, phones and chips are arriving sporadically. “Those delays are going to be exacerbated” if production in China remains at a standstill, says Suketu Gandhi, a partner at consulting firm Kearney.
If retailers have to look elsewhere for merchandise or face limited supplies, shoppers might have to pay a little more in the late spring or early summer, says Neil Saunders, managing director of Global Data, a retail consultancy.
“It’s just a matter of time that we start to see this occurring across a wide variety of goods,” including fruits, dolls and electronics, says Sean Maharaj, managing director of AArete, a global management consultancy.
For now, product shortages are not an issue, but if production continues to be stifled, “apparel, homewares, household goods and even seasonal merchandise for Halloween and Christmas could be” affected, Saunders says.
Tech product shortages loom
Supply chain disruptions will lead to shortages of tech products worldwide, including the USA, says Marina Koytcheva, the vice president of forecasting at CCS Insight in London. “But the effect on the global economy and on each industry sector will largely depend on how the virus spreads, affecting the lives and work of people around the globe.”
She expects sales of mobile phones outside China to fall as much as 10% short of what was expected in the first quarter of 2020 before the epidemic broke out.
Apple said this week that because of “a slower return to normal conditions than we had anticipated … we do not expect to meet the revenue guidance we provided for the March quarter.”
According to the TrendForce market intelligence firm, the outbreak will cause shipments of the smart speaker, smartwatch, smartphone, notebooks and video game console sectors to decline at double-digit rates.
Automakers feel effects
Auto part makers may be most vulnerable, some warning they have just weeks of supplies of critical parts, Capital Economics says.
Many automotive plants operate on “just-in-time” delivery of parts that are whisked into the factory and assembled into vehicles. When parts dry up, companies may have to reduce or suspend production until they become available again.
For example, a Nissan plant in Kyushu, Japan, that makes the Nissan Rogue for export to the USA was forced to shut down for two days because of parts shortages, according to LMC Automotive, which tracks global automotive production. The Rogue is still available for sale in the USA and would probably not face shortages unless the outage worsens.
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Some vehicles are imported whole from China. Jaguar Land Rover was forced to shut down a plant in Changshu, China, in a move that “may choke off an expansion” in the company’s exports to the USA “if problems propagate across its supply chain,” according to global trade data tracker Panjiva.
“We’re standing on quicksand,” Swonk says of the wider economic impact.
Contributing: Jessica Menton, Charisse Jones, Ed Baig, Mike Snider and Nathan Bomey
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