At the beginning of 2020, the US economy was poised for increased growth, probably exceeding 3% for the first time since 2005. But between the potential oil glut recently promised by Saudi Arabia and the growing coronavirus epidemic — just today declared a pandemic by the World Health Organization (WHO) — can the robust Trump Economy survive not one but two potential global economic catastrophes?
Looking back, it’s easy to see that economic growth picked up in 2017 after President Trump eliminated thousands of growth stifling and counter-productive regulations. Growth accelerated further in 2018 after Congress passed a massive tax cut. However, in 2019 growth slowed because the Federal Reserve (Fed) decided to raise interest eight times from the end of 2016 to the end of 2018.
Fortunately, in 2019, the Fed cut rates three times, setting the stage for increased growth in 2020. January and February saw very positive numbers for wage growth, income growth and employment. The economy was indeed moving toward a 3% plus growth rate.
Enter the coronavirus epidemic
Then the Coronavirus epidemic struck. It is difficult to determine how severe the spread of the virus will be in the US. Or how life-threatening and economically damaging it might be. So far, the number of Americans affected and the number of fatalities have remained relatively low. But could this coronavirus epidemic overwhelm the thriving Trump Economy?
To be cautious, Americans have already altered their lifestyles. Americans are staying away from large groups of people. We are also curtailing travel plans. The result is that some industries have been hit hard. The airline industry, cruise lines, sporting events and conferences have canceled many activities. This has an immediate, negative effect on the companies in those industries and on the overall economy as well.
Later this month, consumer confidence numbers will be released. As a result of the dramatic decrease in the value of the stock market, consumers already feel less wealthy. That usually results in a decline in confidence and a cutback in spending.
Consumer confidence may also decline due to uncertainty regarding the final impact of the Coronavirus epidemic. When confidence falls consumers spend less. This can cause a drag on growth, jeopardizing the mighty Trump Economy.
Like consumers, investors are also increasingly nervous and seem to be in panic mode, given the latest disastrous market performance Wednesday. Even a small amount of negative news or rumors now results in the Dow Jones Industrial Average dropping hundreds or even thousands of points. Good news, even the very next day, results in the Dow rising by a similar amount. This tremendous price volatility creates more uncertainty, which leads to more wild fluctuations.
Will the Coronavirus derail the Trump economy?
In the short term, growth will slow noticeably late in the first and throughout the second quarter. In the first quarter of 2020, most economists were forecasting growth to be in the 2% to 2 ½% range. Now the forecasts estimate growth in the 1 ½% to 2% range. The second quarter is likely to see even less growth, with numbers potentially approaching negative territory.
However, America will likely avoid full-blown recession.
The Fed, after cutting interest rates by a total of ¾% last year, just dropped rates another ½%. That means mortgage rates will hit historic lows. We will likely see the 30-year fixed rate drop to near 3% and the 15-year rate dropping to about 2 ½%. That means the housing market should be very strong this Spring and Summer.
The Federal government is also considering another tax cut or temporary decrease. The most likely scenario might have Congress and the Administration cutting the Social Security tax from 6.2% to 4.2%. This immediately gives wage-earners an extra 2% of wages (about $25 per week for the average worker) that will be spent. This will tend to stimulate economic growth.
Because of geopolitical forces worldwide, the price of oil has fallen substantially. That means gasoline prices could fall to less than $2 per gallon. This has largely the same effect on the economy as cutting consumer taxes. Thus, while hurting oil companies early on, it may also tend to stimulate economic growth by putting more money back into consumers’ pockets.
Another plus. Often the warm weather arriving with spring slows the spread of viruses like the Coronavirus. If that’s the case, then the incoming economic downturn could be very short-lived. As long as the virus is contained by summer, the economy should be able to avoid a full-blown recession, media mavens to the contrary. Growth in the third and fourth quarters of this year under such circumstances could reach the 3% or better range.
Silver lining: Positive long term benefits.
In the longer term, many companies that single-sourced their production to China may re-evaluate that clearly flawed decision. Already, because of the US-China trade war, some US manufacturers have relocated production outside of China, often to nearby Vietnam, Thailand or India. Many may ultimately move production back to the US, especially for critically-needed products like medicines and medical supplies.
The reason those companies are producing in China today is that wage rates there are only a fraction of US wage rates. That’s because Chinese workers are very productive, meaning per unit labor costs are extremely low.
If companies relocate production back to the US, the factories will need to be capital intensive rather than labor-intensive. That means using robots, other smart machines and artificial intelligence instead of human labor on the production lines. This, in turn, requires large amounts of Capital.
Fortunately, when Congress cut taxes effective in 2018, they also cut for the middle class to stimulate demand. That included stimulus for the upper class and corporations as well. Taken as a whole, this kind of tax-cutting creates new capital. And that’s is exactly what this country needs in order to bring manufacturing back to the US.
The bottom line is that economic growth won’t exceed 3% this year due to the negative effects of the Coronavirus and perhaps the Saudi-Russia oil tiff as well.
But because of swift action by the Federal government, the Coronavirus likely won’t cause a recession on its own in any event.
Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years.