Trump Administration Faces Economic Test as Coronavirus Shakes Markets


If the virus spreads in the United States, the Federal Reserve might have to cut rates. But how fiscal policymakers respond is likely to be even more important.

Credit…Gabriella Demczuk for The bioreports

WASHINGTON — The global spread of the deadly coronavirus is posing a significant economic test for President Trump, whose three-year stretch of robust growth could be shaken by supply chain delays, a tourism slowdown and ruptures in other critical sectors of the American economy.

The outbreak of the virus in China has already disrupted global trade, sending American companies and retailers that rely on Chinese imports scrambling to repair a temporary break in their supply chains. Its spread to South Korea, Italy and beyond has hindered global travel. Economic forecasters say that the effects will hurt growth in the United States this year even if they do not intensify — and that if the virus becomes a global pandemic, it could knock the world economy into recession.

Stock markets have plunged this week on fears about the virus, with companies such as Apple and Microsoft among the most prominent businesses that have warned that supply chain disruptions could slow sales. Analysts said this week’s declines were on track to be the steepest since the 2008 fibioreportscial crisis.

The market’s fall presents a challenge for Mr. Trump, whose presidential success has been deeply tied to the economy and a rising stock market that is now experiencing pronounced jitters. For now, Mr. Trump has publicly played down the potential economic fallout, saying woes at the aerospace giant Boeing, a strike last year at General Motors and the Federal Reserve’s reluctance to slash interest rates have done more to hurt the economy.

“We have been hurt by General Motors,” Mr. Trump said on Wednesday. “We’ve been hurt by Boeing. And we’ve been hurt by — we’ve been hurt, in my opinion, very badly, by our own Federal Reserve.”

Health officials expect a spike in coronavirus cases in the United States, though it remains unclear how soon and how severe an outbreak might occur. Officials have warned the nation to be prepared for the virus to spread.

If the infection gains a big foothold in the United States, it could disrupt the economy, which has been expanding steadily with an unemployment rate that has hovered near a 50-year low for more than a year. In an extreme scenario where the virus severely hits the United States, it could keep workers at home and grind production to a halt, hurting revenue streams and tanking even highly leveraged corporations as they fall behind on debt payments. In the least severe case, the current slowdown in China could cause a short-lived growth blip.

  • Updated Feb. 26, 2020

    • What is a coronavirus?

      It is a novel virus named for the crownlike spikes that protrude from its surface. The coronavirus can infect both animals and people and can cause a range of respiratory illnesses from the common cold to more dangerous conditions like Severe Acute Respiratory Syndrome, or SARS.
    • How worried should I be?

      New outbreaks in Asia, Europe and the Middle East are renewing fears of a global pandemic. The Centers for Disease Control and Prevention warned this week that Americans should brace for the likelihood that the virus will spread to the United States.
    • How do I keep myself and others safe?

      Washing your hands frequently is the most important thing you can do, along with staying at home when you’re sick.
    • What if I’m traveling?

      The C.D.C. has warned older and at-risk travelers to avoid Japan, Italy and Iran. The agency also has advised against all nonessential travel to South Korea and China.
    • How can I prepare for a possible outbreak?

      Keep a 30-day supply of essential medicines. Get a flu shot. Have essential household items on hand. Have a support system in place for elderly family members.
    • Where has the virus spread?

      The virus, which originated in Wuhan, China, has sickened more than 80,000 people in at least 33 countries, including Italy, Iran and South Korea.
    • How contagious is the virus?

      According to preliminary research, it seems moderately infectious, similar to SARS, and is probably transmitted through sneezes, coughs and contaminated surfaces. Scientists have estimated that each infected person could spread it to somewhere between 1.5 and 3.5 people without effective containment measures.
    • Who is working to contain the virus?

      World Health Organization officials have been working with officials in China, where growth has slowed. But this week, as confirmed cases spiked on two continents, experts warned that the world was not ready for a major outbreak.

Economists at Goldman Sachs already expect to shave 0.8 percentage points off the United States gross domestic product in the first three months of 2020 because of slumping tourism from China and trade slowdowns. But they expect a quick rebound in the second quarter that will help to make up for the downturn.

Other economists, including those at Moody’s Analytics, foresee more drastic fallout if widespread infections appear in other countries. A global recession “is likely” if the virus “becomes a pandemic, and the odds of that are uncomfortably high and rising with infections surging in Italy and Korea,” Mark Zandi, Moody’s chief economist, wrote on Wednesday.

Chang-Tai Hsieh, an economist at the University of Chicago’s Booth School of Business who tracks Chinese economic data, said in an interview Thursday that the effects on American growth will be “huge” even in a best-case scenario with the virus. Chinese business activity, he said, is running at about 20 percent of normal levels.

“The economic consequences are, everything is down” in China, he said. “Everything is down tremendously.”

As forecasts worsen, investor expectations of a Fed cut are quickly increasing. As of Thursday, investors were betting on a March rate cut, a move that seemed highly unlikely as recently as a week ago. Many now expect two cuts by June, market pricing suggests.

Democrats on the House Fibioreportscial Services Committee sent a letter on Thursday to Jerome H. Powell, the chairman of the Federal Reserve, asking for more information about whether an outbreak of the virus in the United States could cause a recession and what tools the central bank had to combat a supply shock to the economy.

Central bank policymakers said on Thursday that they were closely monitoring viral developments, though they did not yet signal a coming cut.

“It really depends on: What are the medium-term implications for the U.S. economy?” Loretta Mester, the president of the Federal Reserve Bank of Cleveland, said in an interview. “If people are temporarily staying home, not traveling, not interacting and purchasing things, that could be a short-term hit. Or it could develop into something broader — and that’s the kind of calculus you have to do when you’re thinking about monetary policy.”

But rate cuts may have a limited effect: They work by stimulating demand, which could help if consumers and investors get spooked and stop spending. But cuts will do little to restart factories and correct supply problems.

“We’d absolutely expect to see a response from the Federal Reserve, not least to shore up confidence,” said Paul Ashworth, an economist at Capital Economics, a research consultancy. But he pointed out that monetary policy worked on the economy with a six- to nine-month lag, and “it doesn’t deal with the supply-side impact of, say, one-third of your work force catching this.”

The more critical response may come from Congress and the Trump administration, which have done little thus far to script a fiscal response.

Perhaps the most important thing the government can do to insulate the economy is to stem the outbreak, keeping Americans on the job and spending. If that fails, though, fiscal responses are an option; Hong Kong and China, both hit hard, have rolled out packages to help bolster growth. Tax and spending policies might also encourage demand more than fixing supply, but they can also work more quickly than monetary policy.

House Speaker bioreportscy Pelosi of California and Senator Chuck Schumer of New York, the Democratic leader, on Thursday morning called for Congress and Mr. Trump to fashion a spending bill meant to “address the spread of the deadly coronavirus in a smart, strategic and serious way.” A response should include interest-free loans for “small businesses impacted by the outbreak.”

Such a program would represent targeted relief but not an effort to dramatically increase consumer demand in the economy.

But such a plan seems far-off, if not improbable. Democratic and Republican leaders in Congress have not opened talks with the White House or between the House and Senate over any possible package of tax cuts and spending increases that would be meant to stimulate the economy in the event of a virus-related downturn. Top Senate aides said on Thursday that it was too soon for such conversations, with Mr. Trump’s allies noting the persistence of low unemployment and continued economic growth.

Michael Zona, a spokesman for the Senate Fibioreportsce Committee and its chairman, Charles E. Grassley of Iowa, said on Thursday that “at this point, the coronavirus has not had a broad impact on the U.S. economy, and its effects have been limited.” But Mr. Zona said Mr. Grassley and the committee were “ready to consider appropriate tax relief responses if that becomes necessary and the extent of the problem can be determined.”

Mr. Trump’s economic advisers had already been working on a package of tax cuts intended to serve as a centerpiece of his 2020 campaign. That package, which is still in flux and probably months away, could include new tax cuts for the middle class and for start-up businesses, along with extensions of some expiring provisions of the 2017 tax cuts. Tax experts who have spoken with the administration do not see the effort as an immediate stimulus package, but more as an attempt to build on the 2017 law and offer voters a contrast between Mr. Trump and his Democratic opponent.

On Thursday, the White House added Treasury Secretary Steven Mnuchin and Larry Kudlow, the director of the National Economic Council, to the president’s coronavirus task force. Both officials have been working on the tax plan. The Fibioreportscial Banking and Information Infrastructure Committee, chartered under the president’s Working Group on Fibioreportscial Markets and chaired by Treasury, is in regular communication and is also monitoring the economic fallout from the virus.

With Democrats controlling the House, there has been little expectation of major tax legislation before the November election. There was no sign on Thursday, from inside or outside the White House, that the coronavirus had changed that.

“The bipartisan consensus on Capitol Hill is that substantive tax policy is not happening before the lame duck” session after the election, said George Callas, the managing director at Steptoe & Johnson LLP, who was tax counsel to former House Speaker Paul D. Ryan of Wisconsin. “I haven’t seen that change in thinking happen yet.”

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