Ten U.S. states are expected to contract economically during the first half of 2020, according to projections by the Federal Reserve Bank of Philadelphia. This would be the most states in contraction since the Great Recession ended in 2009.
This projection was made before the world became aware of a deadly coronavirus, which arose in Wuhan, China. It has sickened many thousands of people and killed many hundreds, most of them Chinese.
The mysterious disease is a cousin of two other coronaviruses: SARS (Severe Acute Respiratory Syndrome) and MERS (Middle East Respiratory Syndrome). Vaccine research on these two earlier coronaviruses is expected to be of help in developing a vaccine for this one.
Absent such a vaccine, economists say that the new coronavirus could imperil global economic growth, particularly harming businesses invested in China and states and cities that trade heavily with the Middle Kingdom.
The U.S. states that trade most with China are California and Washington, followed by Minnesota, Tennessee and North Carolina.
China is the world’s second largest economy, exceeded only by the United States, and in 2019 accounted for 39 percent of global economic growth, according to the International Monetary Fund.
Federal Reserve officials call the coronavirus an economic wild card and say they are monitoring the implications of idled business activity in China. Economic disruptions are also likely in other Asian nations, with Vietnam, Taiwan, Malaysia, South Korea, and Thailand particularly exposed due to their supply chain linkages.
In China itself, industry faces disruptions in at least 25 provinces and the major cities of Beijing and Shanghai. Protracted factory shutdowns would threaten the global supply of personal computers, smartphones and other electronics, including Apple’s latest iPhone model.
U.S. businesses have already been trying to diversify away from China because of President Donald Trump’s trade war. But steering parts and electronics still come to the United States from China and through the global supply chain.
“If the current coronavirus crisis continues to impact production capacity in China, it will ultimately impact auto assembly plants in the United States and Mexico,” Razat Gaurav told the New York Times. He is chief executive of Llamasoft, a Michigan-based firm that handles supply chain logistics for big automakers and aerospace companies in North America.
The Federal Reserve made a similar point in a Feb. 7 report that said the new coronavirus “could lead to disruptions in China that spill over to the rest of the global economy.”
The world has virtually quarantined China to halt the spread of the disease. Mark Haefele, chief investment officer of UBS Global Management, said the isolation of China could shave 2.2 percent off Chinese economic growth in the first quarter of 2020.
The virus comes at a time when the United States is enjoying its longest economic expansion in history: 127 consecutive months beginning in June 2009 when Barack Obama was in the first term of his presidency.
Given the length of the expansion, it’s not surprising that it has run out of gas in some states.
The state identified by the Philadelphia Fed as the one expected to slump the most is West Virginia, where a 2.6 percent contraction is forecast. Next is Oklahoma, with a one percent contraction. These are the only two states in which Trump carried every county in the 2016 election.
West Virginia is suffering from a loss of population and continued job losses in coal mining.
Oklahoma growth spurted in the first half of 2019, then stalled because of problems in the energy sector, according to the Federal Reserve Bank in Kansas City. Natural gas prices have been too low for companies to turn a profit, leading to job losses.
Other states on the list in the order of which they are expected to contract are Delaware, Pennsylvania, Vermont, Montana, New Jersey, Iowa, Kentucky and Connecticut. All will have less than a 1 percent contraction, the Fed said.
Of these states only Pennsylvania, where the economy is forecast to contract by half a percentage point, is considered a battleground in the 2020 presidential election. Trump won the Keystone State in 2016 by 44,292 votes out of more than six million votes cast.
Pennsylvania is coping with sluggish energy prices and a manufacturing slump. Bright spots include a growing tech industry and the expansion of Facebook and Uber in Pittsburgh.
Overall, economists say, there are more bright spots than dark ones in the U.S. economy although the growth rate has slowed in many places.
Aware of the fragility of its corporate sectors, China has moved to stabilize its slumping financial system by cutting interest rates and adding liquidity to its banking system.
“The next couple of weeks will be critical for assessing these measures’ effectiveness,” Haefele wrote UBS investors. “The longer production facilities in China remain shut the greater the risk of supply disruptions to the global economy.”
The world has been through this before.
In 2003 an outbreak of SARS spread swiftly from continent to continent. It resulted in more than 8,000 infections in 20 countries with approximately a 10 percent mortality, and a devastating effect on local and regional economies.
Laboratories in three countries, including the Centers for Disease Control and Prevention (CDC) in Atlanta, identified a coronavirus as the cause of SARS.
The coronavirus is named for the crown-like spikes that protrude from its surface. It infects both animals and humans, and can cause a range of respiratory illnesses, from the common cold to more dangerous conditions such as SARS or the new coronavirus, which Chinese officials have named Novel Coronavirus Pneumonia, or NCP.
The number of new NCP cases has stabilized in recent days, but World Health Organization (WHO) officials cautioned against reading too much into this, saying that Hubei province and Wuhan, which is its capital, are in the midst of a “very intense outbreak.” Earlier the WHO proclaimed the new virus a global crisis.
“China’s grim new reality is that everything, including economic policy, revolves around beating this virus,” the Economist said.
U.S. reality is outwardly brighter. With a boost from warm weather, the U.S. economy added a better-than-expected 225,000 jobs in January. Most U.S. equity markets rose significantly during the first ten days of February, although some investors have since shifted to lower-risk U.S. Treasury bonds.
Urging calm at a news conference after the Fed held interest rates steady, Fed Chairman Jerome Powell reminded reporters that 85 percent of the U.S. economy is domestic.
That’s why the expected economic downturn in the 10 states identified by the Fed may have more long-term consequences than the new coronavirus. The gross national product (GDP) grew only 2.3 percent in 2019, the slowest pace of any year of the 11-year boom.
No recovery, not even this one, lasts forever.
-- Lou Cannon
Some States’ Economies Could Slump This Year
The Federal Reserve Bank of Philadelphia projected last month that the economies of ten states would contract in 2020, according to a report by Bloomberg Businessweek. The Philadelphia Fed’s forecast didn’t take into account the coronavirus outbreak in Wuhan, China in December, which could hurt the economies of other states, including California and North Carolina, that trade heavily with that country.
Source: United Press International, US News & World Report