Editor’s note: Dr. Mike Walden is a William Neal Reynolds Distinguished Professor in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook, and public policy. This article was originally published on February 28. It has since been updated in light of recent events and WRAL TechWire is re-publishing in the public’s interest.
RALEIGH — I’ve recently been asked a new question about the economy when I speak to groups and organizations. It’s a question I haven’t heard in many years. The question is whether the coronavirus that has hit the world – including the U.S. – could send us into a recession, or worse.
The worry is understandable. Viruses are scary things. I’ve read my share of medical thrillers based on some new virus spreading throughout the globe, killing millions, destroying businesses and almost ending civilization until heroes contain it at the last minute.
We only have to look back one hundred years to find a real example of what an unchecked virus can do. The 1918-1920 influenza pandemic, also known as the Spanish flu, killed at least 50 million people worldwide, with some estimates putting the number as high as 100 million. In the U.S., almost one of every three people became infected, and 500,000 died. Even for those who survived there were numerous cases of long-term physical disability.
To date (mid-March) the infection and death rates of the coronavirus are far below those of the Spanish flu. Still, cases and deaths are rising and medical experts are unsure of how far the virus will spread.
There has been some modest good news recently. Reports indicate the virus has been contained in Asian countries. Also, more widespread distribution of testing kits is planned in our country, thereby giving us greater ability to measure the pervasiveness of the virus and to assist those who are infected.
Yet even if the infection and death rates turn out to be relatively low, there still can be economic impacts. These economic impacts come in four forms: impacts from the reduced availability of products from other countries – importantly China, impacts from reduced sales to foreign countries, impacts from changes in consumer spending based on fears about the virus and impacts on stocks. Let me evaluate each.
The U.S. imports over $500 billion of products each year from China. The products range from cell phones and other technology, to clothing and furniture, to machinery parts. Sick people in China can’t work, and closing off parts of the country from other areas also curtails production. The reduced availability of Chinese products could slow some segments of the U.S. economy, with the computer and electronics industries being the most vulnerable.
On the flip side, U.S. firms sell over $100 billion of products to China annually, with the most important being technology products and farm commodities. These sectors have already taken a hit from the tariffs imposed by China during the U.S.-China “trade war” of the last two years. Ironically, the recent thaw in this trade war has created optimism for U.S. factories and farms that increased sales to China are around the corner. Now that corner may take longer to reach if Chinese purchases of foreign products take a dip as a result of the coronavirus.
Consumer spending drives the economy. Significant declines in consumer spending are usually the most direct cause of a recession. Consumers reduce spending if their incomes fall, for example, as a result of higher unemployment. Consumers can also reduce spending simply as a result of fear. If there are widespread worries that something very bad has a high chance of happening, that’s enough for consumers to cut back on spending, which then can trigger a recession.
We saw this happen with the SARS (severe acute respiratory syndrome) virus in 2003. Consumer confidence about the future dipped, and so did consumer spending, especially on durable products like appliances, vehicles and furniture. However, the spending dip was short-lived, and no recession resulted.
Although coronavirus related deaths already exceed SARS deaths, consumer confidence has not yet been affected. However, we don’t yet have confidence measures for March. Many experts fear it will take a plunge. More pessimism, combined with the effects of business slowdowns already happening, could cause consumer spending to fall in coming weeks.
Last is the potential impact of the virus on the stock market. One thing the stock market absolutely does not like is uncertainty. Until we have a good idea of how much the virus will spread and whether containment efforts will be successful, the market will be wobbly. We’ve already seen the market fall into “bear” territory, meaning average stock value declines of over 20%.
My assessment is the economic damage from reduced international trade, subdued consumer spending, and stock market losses related to the coronavirus should be enough to cause economic growth to slow – and possibly contract – in the first half of 2020. Whether the contraction is severe enough to be labelled a recession is yet to be seen.
Yet the good news is that the economy was in good shape before the virus hit. This suggests that once the virus passes, there should be a significant rebound in both the general economy and the stock market.
Unfortunately, we don’t yet have a playbook telling us the path and timing of this virus. This makes it exceedingly difficult for experts – as well as you and me – to decide what the future holds, including the future of the economy.