Chief Economist Scott Brown discusses his monthly economic outlook.
At this point, much remains unknown about COVID-19. About 80% of people infected show minor symptoms, but 20% become seriously ill and about 2% die. That is less deadly than Severe Acute Respiratory Syndrome (SARS), which had a mortality rate of about 10% and hit South China in 2003. However, the coronavirus appears to be highly transmittable. Infected individuals showing no symptoms can spread the disease. Deaths in China have been concentrated among the elderly and about two-thirds have been men. Children appear to be much less susceptible. The theory is that they are more exposed to colds at school and have built up resistance, whereas older people’s immunity tends to fade over time. In addition, smoking is more common among men than women in China, and smokers are more prone to respiratory diseases.
COVID-19 has brought a large portion of China’s economic activity to a halt in recent weeks. China makes up about one-fifth of the global economy, but accounted for nearly a third of global growth in the last two years. Restrictions, some voluntary, have reduced travel and consumption. Supply chain disruptions have dampened production in a number of countries (for example, motor vehicle output in Japan and South Korea) and appear to have begun having an impact in the U.S. Chinese tourism has grown rapidly in recent years and the coronavirus has sharply reduced travel to the rest of the world. Chinese economic activity will eventually recover once the virus is contained, but that is now likely to be months instead of weeks.
While confirmed cases of the coronavirus appear to have slowed in China, the spread to other countries has added to uncertainty and fanned investor fears of a broader economic impact. On February 25, Nancy Messonnier, M.D., Director of the National Center for Immunization and Respiratory Diseases, said that “to date, our containment strategies have been largely successful.” The U.S. has had relatively few cases and no spread in the community. However, “as more and more countries experience community spread, successful containment at our borders becomes harder and harder – and ultimately, we expect we will see community spread in this country.” Messonnier emphasized, “it’s not so much a question of if this will happen anymore but rather more a question of exactly when this will happen and how many people in this country will have severe illness.” The coronavirus has spread to 53 countries, and the number of cases has grown in South Korea, Italy, Iran, and Japan.
Should COVID-19 spread more widely in the U.S., as anticipated, the economic consequences could be severe. Most of the damage to the economy would come through avoidance rather than the virus itself. That is, we could see sharp reductions in travel. People would avoid shopping centers, restaurants, and theatres. The economy would eventually rebound, but it may take a long time.
Doing the math, based on what we think, if half of the U.S. is infected, more than 30 million would become seriously ill and more than 3 million would die. Of course, there is a lot of uncertainty in that calculation (which may be seen as a worst-case scenario). Consumers and businesses should hope for the best and prepare for the worst. Warm weather may curtail the spread of the virus, but that’s unclear, and even if that were to be the case, we could see its return later this year. A vaccine would likely be a year or more away.
Fear of COVID-19 has sent the major stock market indices sharply lower in the last couple of weeks. The market may have been highly valued to begin with, but the downside risk to the economy is significant – and that’s what is driving the market. Bond yields have plunged to record lows, reflecting a flight to safety. We can expect volatility to remain elevated as information on the virus arrives.
On February 28, following a week of sharp stock market declines, Fed Chair Powell issued the following statement: “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”
All of that goes without saying, but the statement implies that the Fed is likely to lower short-term interest rates at the March 17-18 Federal Open Market Committee meeting. Lower short-term interest rates would do little to counter the effects of an epidemic. Monetary policy affects economic activity with a lag. The impact of lower rates would show up in a year, possibly when the economy is recovering. There’s a common belief that the Fed always reacts to stock market weakness. That’s not always the case. If the Fed cuts when the stock market is down, that’s because it’s reacting to what the stock market is reacting to (say, expectations of weaker economic growth). Still, a rate cut couldn’t hurt, especially as the Fed is missing on its inflation goal (1.6% y/y in January, vs. a target of 2.0%). Expectations of the spread of COVID-19 in the U.S. should come into focus in the next couple of weeks, just ahead of the FOMC meeting.
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