This is how the coronavirus could cause a severe slowdown or recession in the United States

New York (CNN Business) – The largest economic expansion in the history of the United States has survived an unprecedented trade war, a catastrophic tsunami in Japan and a severe collapse in oil prices. The fast-moving coronavirus poses another serious test.

The emerging health crisis threatens to mitigate the brightest part of the US economy, if not the world: American wallets.

Flexible consumer spending is the only thing that kept the United States out of recession during the height of the U.S.-China trade war in 2019. Although manufacturing collapsed and commercial spending declined, Americans continued to buy.

The risk is that fear for health issues in the United States will change that formula, giving another blow to the fragile world economy and threatening the expansion in the country.

It’s easy to imagine how an outbreak of coronavirus like South Korea and Italy could make Americans take shelter, limiting visits to restaurants, shopping centers and crowded airports.

Such a threat has scared investors around the world, causing the Dow to register a crash of about 2,000 points, or 6.5%, so far this week.

“The American consumer is the firewall between an economy that is growing and one that is not,” Mark Zandi, chief economist at Moody’s Analytics, told CNN Business. “If the American consumer loses faith – and the coronavirus will be a true test of faith – then a recession will occur.”

In light of the fear for health, Zandi raised this week his probability of a recession in the United States during the first half of 2020 from 20% to 40%.

“If this is a pandemic and it comes here, I don’t see how we avoid a recession,” he said.

Apple, Coca-Cola and MasterCard warn about problems

For American companies, the coronavirus could represent a double blow. Not only are US companies experiencing costly disruptions in carefully calibrated supply chains, but they are preparing for weaker demand.

Apple warned of the possible shortage of the iPhone and Coca-Cola said its artificial sweeteners from China could be scarce. United Airlines said the demand for flights to China has been reduced to zero. And MasterCard is on alert for a smoother expense.

Until recently, health officials and economists thought that the coronavirus was mainly contained in China. And the image in China seemed to be improving, although gradually. But the coronavirus has since spread to major economies, such as South Korea, Italy, Japan and Iran.

On Tuesday, US health officials warned that the spread of the coronavirus to the United States seems inevitable.

“If you have an outbreak in a mall, a conference, the behavior will change radically,” said David Kotok, president and chief investment officer of Cumberland Advisors.

Kotok said such an outbreak could trigger a global recession, a risk that financial markets are just beginning to quote.

“Today, Americans do not see this as an internal problem of the United States. I hope, for the good of our country, it won’t explode here, ”said David Kotok, president and chief investment officer of Cumberland Advisors. “But two weeks ago, South Koreans and Italians didn’t think it was a problem.”

The trade war has already weakened the world economy

The risk of a new outbreak is increased by the fact that the global economy is already reeling, largely due to the persistent damage of the US-China trade war.

During the fourth quarter, Japan, the third largest economy in the world, suffered its biggest contraction in growth since 2014.

Germany’s economic growth stopped at the end of last year.

And China, the epicenter of the coronavirus, slowed before the crisis arrived.

“The global economy was already weakened due to the trade war. And when you’re on the floor, all you need is a push to go back, ”said Zandi, the economist at Moody’s.

“Keep calm”

The good news is that the US economy has been extremely resilient. The previous shocks, including the European debt crisis of the past decade and the tsunami and the 2011 earthquake in Japan were fleeting. After each scare, the economy recovered quickly and those market crises turned out to be excellent buying opportunities for investors.

“Panic during a mass sale has never been a good move,” Bespoke Investment Group wrote in a note to customers on Tuesday. “We advise you to remain calm and not let your emotions take hold of you.”

Goldman Sachs has cut its first quarter GDP forecast, but still expects positive growth of 1.2% during the first quarter. The GDPNow tool of the Federal Reserve of Atlanta forecasts an even stronger growth of 2.6%. Both are far from recession territory.

The US health authorities have had weeks to prepare for an outbreak. They have imposed travel restrictions and other steps to prevent one.

“We are very far from this drastically affecting the American consumer. But it is a risk that people are beginning to value, and rightly so, ”said Daryl Jones, director of research at Hedgeye Risk Management.

They pressure the Fed to act. But will it matter?

The most recent evidence suggests that recent coronavirus developments do not disturb consumers much. Consumer confidence increased slightly in February from a revised January level, according to the Conference Board.

However, that could change rapidly given the latest headlines on the coronavirus and the sharp decline in the stock market from its historical highs.

The Dow collapsed more than 1,000 points on Monday, something that has only happened twice in history. On a percentage basis, it was the worst market day in two years, reflecting how poorly prepared investors were for the bad news.

“If the market continues to drop 1,000 points per day, that will scare people very quickly,” said Zandi, the economist at Moody’s.

Investors expect the Federal Reserve to return to the rescue once again with easy money. According to the CMW FedWatch tool, markets now have a price of 78% chance of at least one interest rate being reduced at the June Fed meeting. This was only 28% a month ago.

Unfortunately, central bankers are ill equipped to fight pandemics.

The Fed has already used part of its conventional ammunition by reducing rates three times last year. The central bank of the United States only has six rate cuts left before it reaches zero, a level that Fed officials have said they do not want to cross.

“It’s a very inadequate fire hose in a raging fire,” Zandi said. “If we really go into recession and this is in fact a pandemic, the Fed will run out of space very quickly.”

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