Could a Virus Take Down the Economy?

Could a Virus Take Down the Economy?

The question is whether the coronavirus that has hit China could send the world – and the U.S. – into a recession, or worse. The worry is understandable.

To date (late-), deaths from the coronavirus have been very small, totaling under 2,500 worldwide. Most of the deaths have been in China where the virus was first detected.

Yet even if the infection and death rates are relatively low, there still can be economic impacts. These economic impacts come in four forms: impacts from the reduced availability of products from China, impacts from reduced sales to China, impacts from changes in consumer spending based on fears about the virus and impacts on stocks.

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.

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. But consumers can also reduce spending simply as a result of fear. That is, nothing actually bad has to happen. Instead, 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.

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 could be wobbly. We’ve already seen recent days when the stock market lost over three percent of its value. But good news on the coronavirus could cause just as fast of a rebound.

My conclusion is the coronavirus should be monitored, and precautions should continue to be taken to prevent its spread. A key measure to watch is the trend in the number of new cases reported worldwide. A reduction in new cases is often a sign a sign the virus is running its course. However, a jump in cases could be cause for alarm, especially if the increase is large.

Companies and industries in the U.S. having strong ties to China or other countries with major infections could be in for a rocky road ahead, but hopefully the challenges will last only weeks or months, and not years. But if U.S. consumers continue to spend, then the economy will continue to expand; that is, there will be no recession. However, continued drops in the stock market could – at the least – cause economic growth to be lower than expected.

Plan for the best, but have a back-up for the worst is advice I often hear and follow. You decide if these words are pertinent today.

Mike Walden

El Dr. Mike Walden es un profesor universitario con el distinguido reconocimiento William Neal Reynolds, el más alto honor abierto a los docentes de la Facultad de Economía Agrícola y de Recursos de la Universidad Estatal de Carolina del Norte. Además de su labor como educador en las aulas, también escribe sobre finanzas personales, perspectivas económicas, y políticas públicas.