In the worst scenario, if the Covid-19 epidemic continues to spread, the US economy will be seriously disrupted, causing a full-fledged recession.
As the corona-virus spreads, stock prices have been in free fall. Since its peak in February in 2020, the S&P 500 has plunged by 17%.
For sure, the performance of the financial markets isn’t necessarily an accurate indicator of the overall performance and health of the real economy. But, the kind of descent the US market has suffered can create a spillover that inflicts long-lasting economic damage.
Are the US markets overreacting, or is the US economy on the verge of taking a major hit? It depends on the extent to which the COVID-19.
According to CNN, The US economy faces two potential scenarios under the impact of the pandemic.
The scenario I: The Covid-19 epidemic is weakened and fades away
If the epidemic is well controlled and gradually disappears, it could only cause a temporary disruption along with the well-functioning economy. In this scenario, the coronavirus is contained in the upcoming weeks and mostly impacts the economy through March and April in 2020.
Spending on travel, tourism and entertainment activities account for about 7% of US GDP and may 10% drop over a three-month period, the GDP in a quarter will drop by 0.7% overall.
Starting in May or June, if the virus-related fear subsides, the US economy could enjoy a bounce-back, as consumers resume their typical spending behavior and businesses fix their supply chains. When the economic activity has a large rebound, the US economy would not take a major, long-lasting hit.
In the labor market, the impact of the Covid-19 epidemic would mostly be limited to a drop in hours worked and reduced hiring, but there would likely be no major layoffs outside the most affected industries.
Scenario II: If the coronavirus persists and spreads
If coronavirus continues to spread, the US economy suffers deep and prolonged economic disruption that continues well beyond April in 2020. This problem could cause a full-fledged recession. This scenario depends on many factors, meanwhile, the US controls only a few factors.
The US can control relies on the actions of health officials and policymakers. Specifically, the steps they take to contain the spread of the virus, like making the COVID-19 test widely available and reducing the number of sick people.
If the outbreak persists well beyond April, the number of people infected would be exponentially higher, and consumers and supply chains would not quickly recover. It had a longer period of lower spending, consumer and business confidence were decreased significantly businesses start laying workers off, and households would have less income to spend.
A full-fledged recession would be difficult to avoid. Long-term interest rates are already close to zero which severely limits the Federal Reserve’s ability to boost the US economy. The fiscal policy such as a payroll tax cut could help, though what limits consumption at this time is not lack of money but lack of willingness to spend.