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The coronavirus is posing a growing threat to the U.S. economy as the outbreak shifts from a short-term headache for travel and manufacturing companies into a broader crisis that’s prompting many Americans to hunker down and limit their day-to-day activities.
That’s extending the pandemic’s reach into nearly every corner of commerce as many consumers avoid large gatherings of people in places such as movie theaters, malls, restaurants and sporting events.
“It’s starting to affect people’s behavior all over,” says economist Jesse Edgerton of JPMorgan Chase.
Some leading economists are now forecasting a recession this year, though the nation could still dodge that outcome if the outbreak begins abating in the U.S. by summer, as some health officials predict, and growth swiftly rebounds.
But the body blows to the economy are mounting.
The NBA’s announcement Wednesday night that it was suspending all games until further notice may have marked a watershed. While the revenue generated by the league registers barely a blip in the overall economy, “It will convince most everyone that the virus is a serious threat to the nation’s health and economy, weighing on the collective psyche of investors, businesses and most importantly, the American consumer,” says Mark Zandi, chief economist of Moody’s Analytics.
The NHL also suspended its games, Disney World is closed and Broadway has gone dark.
With business investment weak, healthy household consumption had been propping up economic growth.
President Donald Trump’s televised announcement this week of a 30-day ban on all travel from Europe to the U.S. deepened the pain for the battered travel and tourism industry.
Ironically, the manufacturing supply snags that have jeopardized the delivery of parts and retail goods from China to the U.S. are easing somewhat, experts say, though obstacles remain. Yet there’s a growing worry that many shoppers won’t be there to buy the products.
“It’s morphing from a significant supply shock into a demand shock that becomes a more persistent drag on the economy,” says Michelle Meyer, chief U.S. Economist at Bank of America Merrill Lynch.
The number of cases in the U.S. is still limited at over 1,600, with a death toll of 41, compared to a total of more than 130,000 cases and about 5,000 deaths across the globe. But those U.S. instances have spread quickly across the country from the initial epicenter in Seattle.
“You see a tornado three miles away and you say, ‘That’s pretty bad but it’s not real,’ Zandi says. “Now, it’s a foot away and you go, ‘My God, it’s really bad!”
If the number of global cases peaks at 1 million and the U.S. total tops out at 50,000 to 100,000, Zandi reckons the U.S. could avoid a recession. But the timetable is also key. Diane Swonk, chief economist at Grant Thornton, says that if the outbreak continues to accelerate into the summer, as she expects, a downturn lasting six months or so becomes more likely.
“And it’s harder to get (the economy) going again,” she says.
Swonk expects the outbreak to shave about a percentage point off growth, leaving the economy expanding just 1% this year.
She’s also predicting hundreds of thousands of layoffs – a development that would worsen the impact as unemployed workers cut back spending, creating a toxic cycle. There have been about 630 virus-related job cuts so far, including 145 drivers at the Port of Los Angeles due to stalled shipments from China, according to outplacement firm Challenger, Gray and Christmas.
Zandi expects less than half that impact to growth and believes employers will sharply rein in hiring but avoid layoffs in a tight labor market with widespread worker shortages.
Americans are hunkering down
The pandemic’s most visible impact in public places initially was largely limited to Seattle, where the outbreak took root, and California. But as the outbreak has spread, so has the fear.
Eighty-nine percent of shoppers worry the coronavirus will get worse in the U.S over the next month, and as a result 27% say they will make fewer trips to the mall, according to research by Global Data. The same share of shoppers also say they’ll eat out less often.
“Such a sudden and sharp drop in footfall will significantly diminish retail takings and will push many retailers into the red,’’ wrote Neil Saunders, Global Data’s managing director.
Jill Lewis, 63, of Norfolk, Virginia, says she and her husband, both retired Naval officers have stopped going out to dinners and movies.
Noting she has asthma, Lewis says, “It doesn’t seem worth the risk.” Of restaurants, she adds, “Everybody’s really close together. You just never know.”
In Parker, Colorado, Ethan Reed, a high school junior, says he and his family are avoiding restaurants as well as malls, fitness centers and indoor pools. He says they started to become more cautious when the first Colorado case was confirmed in Douglas County, where they live.
“It’s very nerve-racking,” Reed says.
Such behavior is starting to take a toll. Movie box office receipts were down about 40% last weekend from the same period a year ago, Edgerton says. He chalks up about half the drop to the coronavirus, noting the popularity of movies in a given week plays a huge role. But Jeff Bock, senior media analyst, at Exhibitor Relations, says it’s difficult to pinpoint the reasons for the pullback.
The stock market’s 20% plunge from its mid-February peak will likely also dampen consumer spending – by 4.5 cents for every $1 drop in wealth, Moody’s says. Such wealth effects build over time when the market is rising but can have a more immediate impact when stocks are tumbling, Zandi says. That could cut economic growth by a full percentage point, he says.
In the San Francisco Bay Area, business as usual is grinding to a halt. Office buildings and universities are turning into ghost towns. Business districts are emptying out.
Usually packed subway cars offer row after row of empty seats. BART said ridership plunged 8% last week from the previous week as people avoided being in such tight proximity to others during morning and evening rush hours. Parking lots that overflow by the early morning hours are still largely deserted at noon. Some of those passengers who hopped a ride on BART wear masks and other protective gear.
Bay Area gridlock has largely vanished, too, as commuters, hardened by bumper-to-bumper traffic, sail along highways and across normally congested bridges. Many avoided piling into carpools.
In Seattle, Fon Spaulding, owner of Kati Thai restaurant, says sales are down about 80% because of the virus. That’s largely because Amazon has shuttered its nearby headquarters as employees work from home. Normally, patrons endure long lines to get in but the 55-seat restaurant is now dotted with customers at one or two tables. Two workers are on temporary leave and Spaulding is spreading sharply reduced hours among the remaining 23 workers.
“We can go another three months (like this), but not longer,” she says.
Travel
Businesses are canceling trade shows and conferences and Americans are putting off trips.
The International Air Transport Association, which represents global airlines, last week boosted its estimates of the global financial hit from COVID-19 from $29.3 billion to $63 billion to $113 billion as the bookings falloff has spread beyond Asia.
That would put airlines in their most precarious position since after the Sept. 11, 2001, terrorist attacks. In the U.S. alone, the travel industry lost $40 billion from 2001 to 2005.
Unlike during the 2007-09 recession, which hurt business travel more than vacation travel, the drop in bookings is broad, Delta executives said Tuesday during a Wall Street aviation conference.
“This clearly is not an economic event,” Delta CEO Ed Bastian said. “This is a fear event probably more akin to 9/11 than what we saw in (the recession in) 2009.”
The airlines are also seeing a sharp drop in demand. JetBlue’s president Joanna Geraghty says that while flying remains safe for those who are not deemed high risk because of age, or chronic health issues, the carrier still expects to cut capacity by 5%. It will evaluate conditions on a monthly basis to determine if additional cuts are needed.
Right now, she said, the dip in passenger demand appears to be even more significant than what the airline industry dealt with in the aftermath of the 9/11 terror attacks.
Amtrak’s bookings are down 50% and cancellations are up 300%.
“You should expect significant reductions in train service across portions of our network in response to the sharp drop in ridership,” Stephen Gardner, Amtrak’s senior executive vice president, chief operating and commercial officer, said in a memo to employees. “At this rate, we believe we will likely suffer the loss of several hundred million dollars in revenue during this fiscal year, and we might lose more.”
He added that the company will soon seek out employees, working in “non-mission critical’’ positions, to volunteer to take time off without pay.
For hotels, revenue per room was down 16% for the week ending March 7, according to JPMorgan.
Airlines, cruises, lodging and recreation such as movie theaters and amusement parks make up 4.2% of the economy, Meyer says. If spending on those services alone falls 10% to 25%, as she expects, it would cut economic growth by about two percentage points, according to her analysis. That likely would mean a contracting economy.
Supply disruptions
Many retailers and manufacturers stocked up on products and parts from China ahead of the Chinese Lunar New Year. But those stockpiles are running low. Seventy-five percent of companies are reporting disruptions related to the coronavirus, according to a survey released this week by the Institute for Supply Management (ISM).
With Chinese factories slowly ramping back up, most retailers should avoid shortages, says Sue Welch, CEO of Bamboo Rose, a logistics software and consulting company. But many longshoremen, truck drivers and other Chinese workers are still idled, contributing to three to seven week delays in deliveries, she says. Welch expects most retailers to catch up and preserve the back-to-school season.
But manufacturers, particularly in industries such as pharmaceuticals and medical devices, are running short of parts and some have eliminated shifts, reduced workers’ hours or temporarily laid off employees, says Thomas Derry, CEO of ISM.
To limit the economic damage, Congress is weighing a multibillion dollar stimulus package and the Federal Reserve said it’s injecting $1.5 trillion into the banking system to ensure adequate cash reserves. The Fed is also effectively launching a scaled-down version of its crisis-era bond-buying to lower long-term interest rates. But investors don’t think such measures will be sufficient, helping send the market Thursday to its largest percentage drop since Black Monday in 1987.
Contributing: Charisse Jones, Jessica Guynn
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