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GDP Forecasts Are on the Decline, and COVID-19’s to Blame

The rapidly spreading coronavirus has muddied U.S. GDP estimates for 2020, as some economists hold back from factoring in potential damage from a domestic outbreak that hasn’t yet occurred.

And President Trump on Wednesday downplayed fears, noting that so far the situation is “controlled” in America and minimizing federal health officials’ exhortations to prepare as a “just in case.”

That hasn’t stopped World Health Officials on Friday from raising the risk assessment of the coronavirus, now identified as COVID-19, to “very high” global. By Friday morning, the virus had spread to 49 countries and the number of cases outside of China is now greater than new infections within the Asian nation where the outbreak first occurred in the city of Wuhan.

There are “linked epidemics of COVID-19 in several countries, but most cases can still be traced to known contacts or clusters of cases,” Tedros Adhanom Ghebreysus, WHO’s director-general, said in a press briefing at the agency’s Geneva headquarters.

“We do not see evidence as yet that the virus is spreading freely in communities,” he added. And just as Trump tried to stave off American panic on Wednesday, Ghebreysus said that even though the virus has the possibility of becoming a pandemic, the country’s “greatest enemy” is not the contagion itself but “fear, rumors and stigma.”

Federal Reserve response

Global markets this week have been reacting to fears that the coronavirus outbreak will worsen as it’s spreading to other nations. U.S. equity markets have already relinquished their 2020 gains, and the Dow Jones Industrial Average lost more than 3,500 points in just this past week alone.

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Hoping to quell investor jitters, Federal Reserve Chairman Jerome H. Powell on Friday said the U.S. central bank is “closely monitoring developments and their implications for the economic outlook.” While he said that U.S. economic fundamentals remain strong, Powell also reaffirmed that the central bank will use its tools to “support the economy.”

As the Fed monitors developments with the coronavirus outbreak, it could possibly cut interest rates to mitigate economic fallout. The Fed is slated to meet in mid-March, though a rate cut isn’t guaranteed at that time. A rate cut could lower borrowing costs, which in turn is expected to aid business owners reeling from a steep slowdown in spending by consumers who may suddenly need to stay home for extended periods.

US GDP estimate and global growth forecast

Bank of America’s economics team this week lowered its U.S. forecast by another tenth to 1.6 percent for the year, which factors in the coronavirus impact. “We expect three quarters of a ‘growth recession,'” Michelle Meyer, BofA’s U.S. economist, said, adding that “broken supply chains will deplete inventories and delay investment.” The bank’s economics team is more concerned about an “adverse feedback look between consumers and markets,” she added.

The adverse feedback loop based on Bank of America credit and debit card data appears centered on consumers pulling back on spending on Asian airlines. While there’s no broad-based fear yet, Meyer believes consumers are sensitive to big market moves. The impact on confidence is more than just a negative “wealth effect” because consumers view the “stock market as a gauge of the health of the economy and the state of their personal finances,” she said.

Meyer believes the virus will drive two distinct impacts: global supply chain disruptions and consumer “confidence shock.” She expects global supply chain disruptions for U.S. multinational firms will continue into the summer, while the confidence shock is already playing out as investors spurred sizeable sell-offs in the equity markets this week.

Separately, the economics team at BofA cut its 2020 global growth forecast to 2.8 percent, which would represent the lowest reading since 2009 if that forecast bears out. Growth momentum was soft even before the coronavirus shock, they noted, and now there’s the expected spillover from supply-chain and tourism disruptions, as well as the spread of the virus outside of China. The Eurozone GDP forecast is now 0.6 percent, down 40 basis points, although the team maintained its projections of 1.1 percent growth in 2021.

NRF’s U.S. retail forecast

The National Retail Federation, a retail trade body, forecasts a 3.5 percent to 4.1 percent growth rate in U.S. retail sales, which it expects will reach $3.93 trillion to $3.95 trillion.

Those projections do not include possible impact from the coronavirus, Matt Shay, president and CEO, said.

NRF has been in frequent conversation with its members on supply chain disruptions, the impact on the workforce in China and the cascading effects on logistics and transportation in the supply networks, Shay said at a press briefing earlier this week.

Encouraging news has emerged out of China, he added. “At the moment, there appears to be a recovery in the supply chain in China,” Shay said, noting “a tail that lasts for a period of time that goes into the future.”

Shay said NRF’s economic projections are based on “current economic factors,” and the organization declined to speculate on what could happen in the U.S.

Should a U.S. outbreak occur, it’s impossible to “predict now when that would happen [or] what the implications will be between now and then,” Shay said. NRF’s retail members will be “prepared as well as they can be,” he added.

Addressing the underlying market fundamentals heading into 2020, Shay said the “consumer sector continues to support overall consumer spending,” and cited job growth, low unemployment and wage growth at the bottom of the scale as factors buoying U.S. GDP, projected at 1.9 percent. That guidance is lower than prior 2019 forecast of 2.3 percent for 2020.

“Looking ahead to 2020, our view is that the record long economic expansion that we’re experiencing will continue,” Shay said.

NRF expects unemployment should stay within the 3.5 percent range, with a jobs gain of between 150,000 to 170,000 each month.

The strong labor market has translated to consumers having healthy balance sheets where they are seeing gains in wealthy and not debt, Jack Kleinhenz, NRF’s chief economist, said, noting that savings has increased from 6.0 percent in the early recovery to 8.5 percent. “Consumers have a buffer for their needs. They’re not overly leveraged,” the chief economist concluded.