Coronavirus And The Economy
Matthew Peddie: There’s a growing threat of a global COVID-19 pandemic, what impact is it having on the US economy?
Hank Fishkind: Well, there are direct effects on US GDP that comes through tourism and exports and indirect effects that come through our financial markets.
MP: And what about the direct effect of the COVID-19 virus on the US economy?
HF: Well, even with or despite the recent policy changes in China, COVID-19 is weighing heavily on the global economy and in the first quarter and maybe longer. Estimates by Moody’s Analytics, which expects the drag to be at least 1% on the US economy in the first quarter, the primary hit will be visible in tourism, because that’s counted as an export of services. But the risk is on the downside. There’s so much exposure to a larger drag coming through supply chain disruptions. And this has the potential to be a drag on consumer spending, which has been the stalwart support for the economy, and it will depress business investment in manufacturing, and GDP is only growing by about 2%. It doesn’t take much to tip us into a recession. Matthew.
MP: Okay, so what about us financial markets? How could COVID-19 impact those?
HF: Well, the pandemic fears have already slashed the value of US stocks significantly, you know, the Dow is down over 1000 points in just the last two trading days. And high price stocks are particularly vulnerable and down much more than that. And the 10 year US Treasury fell below 1.4% yesterday, and that’s lower than the yield on the three month US Treasury note. So that means that the yield curve has again become inverted, with longer rates higher than shorter rates and that’s really a bad sign Matthew. Inverted yield curves almost always signal the impending of a recession. And Moody’s rates the odds of that recession at nearly 40% this year, and regrettably I have to agree.
MP: So you’ve told us that the Florida’s economy is vulnerable and that central Florida is, kind of, particularly vulnerable to this kind of economic contraction. Why is that?
HF: Well, as we know, one of the direct effects of COVID-19 is the drop in tourism. Now, direct tourism from China totaled about 3 million in the US as a whole, but most of them visit California, New York, only about 300,000 come to Florida.
MP: Even with Disney World?
HF: Yeah, even with Disney World. But the big risk is that it could become a problem here in the United States or even a fear of a problem. Last week, the Centers for Disease Control and Prevention warned that although the agency’s taking historic measures to slow down the introduction to COVID-19 into the United States, the country needs to prepare for the possibility of community spread, as we’ve seen in China and in neighboring Asian countries, and now in Italy. And last week, 300 people who were quarantined on the [cruise ship] Diamond Princess were repatriated into the United States over the objections of the CDC. You know, this transmission vector through cruise ships is a significant risk for us directly here in Florida, because we have so many cruise ships that originate and dock here. Now, fortunately, very few of them cruise to Asia. But you know, this is a risk factor. And while the direct risk to Florida is relatively low, so far, there aren’t any reported cases in Florida, the risk of a pandemic or even the fear of a pandemic would be devastating for our economy.
MP: I mean, it sounds like if you look at what’s happening in China, if you’re talking about the kind of mass quarantine of folks, everything just grinds to a halt, right? It’s really hard to keep things running when everybody just has to stay in place.
HF: Yeah, absolutely. And even if that doesn’t happen, we don’t have a mass quarantine in New York, just the fear of it will cause tourists to be reluctant to come to Florida. I mean, even assume that there’s very few cases in Florida and very few cases in the United States, if the disease continues to spread globally, the potential for a US recession rises even if there’s not this problem that we discussed directly with the tourism sector. Florida’s economy is closely linked with the US economy, so a US recession will beget a sharp slowdown or worse here in Florida, even without additional COVID-19 in this country. Matthew.
MP: Hank Fishkind, thanks for your time.
HF: You bet.