Financial markets and economic forecasters are warning of rising risks for the U.S. and global economy, which were improving before the novel coronavirus spread from China around the world.
A buoyant U.S. job market had fueled strong consumer spending and cushioned the economy through choppy waters created by the trade war with China, a manufacturing contraction and weakening momentum abroad. But markets flashed warning signals this past week showing investors see dangers ahead, particularly in the bond market, with Treasury yields tumbling to historic lows, and in commodities, with crude prices on Friday logging their worst day since the financial crisis.
The U.S. labor market remains a bulwark, with employers adding a robust headcount of 273,000 last month, the Labor Department said Friday. But that will be tested as the virus spreads and governments try to contain it. China and Japan, the world's second- and third-largest economies, are already flirting with recession from the coronavirus shock. The U.S. is the largest world economy.
"The good news is the U.S. has a lot of momentum heading into this," said Diane Swonk, chief economist at accounting and advisory firm Grant Thornton. She expects the economy to slow sharply in the first half of 2020 but avoid a recession. "The risk is this mutates into a more vicious cycle."
Ms. Swonk projects U.S. economic growth to cool to a 0.5% annual pace in the first half--a marked slowdown from last year's 2.3% expansion, which itself marked an easing from a more robust 2018. She expects layoffs at restaurants, hotels and airlines, and for the unemployment rate to edge up from a half-century low.
The widening impact of the spreading virus, including into financial markets, caused Oxford Economics economists to cut their global economic growth forecast further to 2% in 2020. "The effects of financial market weakness and the disruption to daily life around the world will trigger lower consumer spending and investment on top of the disruptions to the global supply chain," said Ben May, Oxford's director of global macro research, in a note to clients.
The Organization for Economic Cooperation and Development said this past week its "best case" scenario would be for global economic growth to slow by a half-percentage point this year due to the epidemic.
The business sectors where demand could suffer the most initially include air transportation, conference venues and hotels.
Southwest Airlines Co., which primarily flies domestic U.S. flights, said Thursday it has experienced "a significant decline in customer demand" and an increase in trip cancellations. United Airlines Holdings Inc., Germany's Deutsche Lufthansa AG and Hong Kong-based Cathay Pacific Airway are encouraging employees to take unpaid leave at a time when airlines are reducing their flight schedules.
Restaurants, entertainment and retail--industries that rely on discretionary spending and foot traffic--also are at risk.
"Businesses that are primarily dine-in businesses may need to close temporarily if things get really bad," said Erik Herrmann, head of restaurant investment at CapitalSpring, which invests in and owns casual-dining restaurants. Mr. Herrmann expects drive-through services to benefit if the coronavirus spurs hesitancy among customers to eat inside restaurants.
Companies in vulnerable industries are adjusting. United and Hyatt Hotels Corp. plan hiring freezes. General Motors Co. and Nestlé SA are restricting employee travel. Events such as South by Southwest, a two-week tech, film and music festival in Austin, Texas, have been called off.
A sign is seen on the door of a temporarily closed Starbucks Reserve location after an employee tested positive for coronavirus in Seattle, Washington on Friday. REUTERS
Facebook Inc. and Amazon.com Inc. have announced office closures in Seattle. While those high-tech workers can operate from home, Uber drivers and sandwich shops that served them could suffer.
"Workers can't all work from home, and you'll see lost output that can never be made up," Ms. Swonk said. "You can't attend a canceled sporting event later and you won't buy a sweater you wanted in March in late April."
One question for the U.S. is whether the impact spread to other business sectors. Manufacturers are reporting supply disruptions due to an extended shutdown of Chinese factories. Small businesses are concerned about whether they will have access to financing to bridge a slowdown in demand. And a temporary economic slowdown could put some heavily indebted firms at risk of default.
Before the recent market volatility, the U.S. economy was on a solid footing. In February, unemployment returned to a 50-year low and wages rose, the Labor Department said in its Friday report. Other recent readings showed layoffs at historic lows, steady consumer spending, low inflation and rising household income.
Then came the coronavirus. While the extent of economic harm isn't yet clear--with damage contingent on how long it lasts, how widely it spreads and how people respond--initial signs are already showing up.
Business activity by service providers contracted in February for the first time since October 2013, private data firm IHS Markit said Wednesday. Surveyed firms reported declining client demand and new business from abroad. The University of Michigan's gauge of consumer sentiment rose for all of February, but a fifth of respondents in the survey's closing days raised concerns about the coronavirus. The Institute for Supply Management said manufacturing activity cooled in February, as coronavirus effects rattled supply chains.
Products coming from China are facing backlogs, which weigh on U.S. sales. Keith McGee, owner of Black Sail Market LLC, said wait times for orders in China have recently grown to six weeks from two. Mr. McGee buys components from China and then assembles them into lights for the cannabis industry.
"I'm definitely starting to worry about it," he said. "I can't afford to be running out of inventory for a month. It basically means I have no revenue."
Crude prices notched the largest one-day decline since the recession on Friday after Saudi Arabia and Russia, two of the world's biggest oil producers, failed to agree on whether to reduce global supply in the face of the coronavirus's effect on demand. Lower oil and gasoline prices could be a boon for U.S. consumers, though the impact would be lessened if fewer commute and travel. However, plunging prices could hurt parts of Texas and the Midwest where the local economies are increasingly tied to energy production.
Policy makers in the U.S. and abroad took steps this past week to blunt the impact of the spreading virus, including an emergency half-percentage-point rate cut by the Federal Reserve and rate cuts in Canada and Australia. The Bank of Japan, which already has negative short-term rates, offered to lend 500 billion yen ($4.6 billion) to financial firms.
The Fed has signaled it could cut rates further, but officials also have called for more U.S. government fiscal stimulus measures.
Boston Fed President Eric Rosengren said Friday that a stronger fiscal-policy response is the "obvious alternative" to constrained monetary policy in the current low-rate environment. "Somewhat surprisingly, there seems to be little movement" to implement those steps, he said.
Officials from the Group of Seven countries said this past week they stand ready to cooperate on actions, including fiscal-stimulus measures to guard against economic risks from the virus.
In the U.S., President Trump signed an $8.3 billion emergency spending bill Friday to combat the virus, funding efforts to develop a vaccine and assisting local and state responses.
A much larger fiscal response may be needed to safeguard the U.S. economy, said Megan Greene, an economist at Harvard University's Kennedy School of Government. Those steps could include reducing payroll taxes and providing more direct support to businesses and individuals, including steps such as loans and increased food-assistance payments.
White House economic adviser Larry Kudlow on Friday said the administration was considering "timely and targeted" measures aimed at helping workers and sectors affected by coronavirus. That includes measures such as deferring taxes for the industries hardest hit by the virus--primarily hospitality and travel, an administration official said.
"There should be a pretty sharp drop off in economic activity," Ms. Greene said. "How long it lasts depends on epidemiology--and we don't have any answers to that."
Sarah Chaney and Austen Hufford contributed to this article.