By Rex Nutting, MarketWatch
We need to stop assuming that the coronavirus outbreak will have only a minor impact on the U.S. economy. With the virus that causes COVID-19 now spreading in communities around the country, it’s becoming more likely that the epidemic will slam consumer spending, at least for a few months.
A recession cannot be ruled out. That’s the message of the Federal Reserve’s emergency rate cut on Tuesday.
Most of the economic analysis on the virus had assumed that the biggest impact on the U.S. economy would come from disruptions to global supply lines snaking from China and the rest of East Asia, leaving U.S. manufacturers and retailers without the goods they need.
In other words, it would hit only the supply side of the economy, but not the demand side.
But that assumption is so last week.
The Fed cut its benchmark interest rates by half a percentage point on Tuesday to address the mounting economic and financial risks of the outbreak. Other central banks in G-7 are expected to follow suit.
Unfortunately, aside from calming stock markets /zigman2/quotes/210599714/realtime SPX +1.95% /zigman2/quotes/210599024/realtime GDOW +0.16% , there’s not much that monetary policy can do to restore global supply chains, and its ability to stimulate demand is hampered by the fact that fighting the outbreak requires a temporary economic slowdown as people quarantine themselves.
Simply: To keep the virus from spreading throughout the population, lots of people will need to stay home.
The virus is spreading
Over the weekend, medical researchers punched a big hole in the rosy scenario that the outbreak would be contained, saying it’s likely that the highly transmittable virus has been spreading in Washington state for weeks without anyone knowing.
That’s both good and bad news, because it means the disease may be less deadly than thought. But the bad news is that it’s easier to spread than hoped. That would mean that the outbreak is probably not going to be contained, as the Centers for Disease Control quietly telegraphed last week.
And contrary to all the reassurances by the political leaders inside the Trump administration.
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If the virus should spread easily through the United States, Europe and the rest of the world, the rosy scenario of a modest economic impact would be wrong.