You Decide: Could a Virus Take Down the Economy?

By Dr. Mike Walden

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 China could send the world – and the U.S. – 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. There’s also an ongoing concern that viruses could be used as part of biological warfare between countries.

Actually, 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 (late-February), 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.

There have also been rapid responses to the infection. People in China’s regions where cases have occurred are being isolated from the rest of the population to contain the virus’ spread. China has rapidly built new hospitals to treat those with infections. Travel to and from China has been restricted. Also, people arriving in the U.S. from China have been quarantined for several days to ensure they are not infected.

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. 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. 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.

We saw this happen with the SARS (severe acute respiratory syndrome) virus in 2003, which resulted in 700 deaths worldwide. 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. In fact, the measure increased in both December and January. Granted, this could change when the February reading is released, but it appears consumers are more focused on jobs, incomes and gas prices than on the latest world virus.

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. 

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.