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I have often said that the greatest threats the US economy faces are the outside forces that we are not expecting, such as massive cyberattacks or pandemics. We are experiencing a small version of this phenomenon now — one that could get much bigger. In just a few months, the coronavirus has caused tremendous suffering and tragic loss of life. These human costs and the heroic efforts of medical professionals and others who are working tirelessly to stop its spread are clearly the most important considerations. Nonetheless, there are also economic consequences which could become substantial.
One cost of the coronavirus is that travel into and out of affected regions has halted. Airlines have stopped flights and are losing millions. Shipping is also down significantly, and major international conferences have been cancelled.
Another, larger problem is that workers in China are dealing with quarantines, and many factories have closed. The outbreak began during the travel-intensive Lunar New Year holiday, and people have been unable to return to their homes. Companies are trying to help, but it’s a difficult and slow process.
Globalization is a reality of our modern economy. Many US companies have manufacturing operations in China, where labor costs are significantly lower. Apple announced that its earnings would be negatively affected due to slowdowns with its Chinese manufacturing partners, as well as closure of its stores across China. With about 80% of the world’s smartphones manufactured in China, the problem isn’t unique to Apple. A range of products and businesses are affected, especially toys, apparel and automobiles.
The time horizon of the economic effects depends on how quickly the virus subsides. Although there have been promising signs, it could be weeks before operations return to normal. Even then, there will be backlogs to work through and shortages throughout the supply chain. Many products made in the US are being hamstrung by the inability to get needed inputs.
Another issue is the effects of quarantines and not working on the Chinese people. They aren’t likely to spend as much or travel abroad as they cope with the resulting financial challenges.
The Chairman of the Federal Reserve Jerome Powell described the coronavirus as “a very serious issue,” and noted that there is likely to be some disruption to activity in China and possibly globally based on the spread of the virus, travel restrictions and business closures. The Federal Reserve is carefully monitoring the situation and is prepared to respond.
The human costs of the disease are tremendous and could have been much worse without the efforts of health professionals and governments around the world. The economic costs are mounting, and it will take time to fully gauge the fallout.
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Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group. He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.
