This year, the economy was poised for increased growth, probably exceeding 3% for the first time since 2005.
Growth picked up in 2017 after President Donald Trump eliminated thousands of growth-stifling and counterproductive regulations. Growth accelerated further in 2018 after Congress passed a massive tax cut.
However, in 2019 growth slowed because the Federal Reserve 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 moving to a 3%-plus growth rate.
Then the coronavirus struck. It is difficult to determine how severe the spread of the virus will be in the U.S.. So far, the number of Americans infected and the number of fatalities have remained relatively low.
To be cautious, Americans have changed 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 cancelled many activities. This has a negative effect on the companies in those industries and on the overall economy.
Later this month, consumer-confidence numbers will be released. As a result of the dramatic decrease in the value of the stock market, consumers feel less wealthy. That feeling usually results in a decline in confidence and a cutback in spending.
Consumer confidence will also decline because of the uncertainty of the final impact of the coronavirus. When confidence falls, consumers spend less, which will be a drag on growth.
Investors are also very nervous and seem to be in a panic. A small amount of negative news 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 number.
This volatility creates more uncertainty, which leads to more wild fluctuations.
Will the coronavirus derail the Trump economy?
In the short term, growth will slow. In the first quarter of 2020, most economists were forecasting growth to be in the 2% to 2½% range. Now the forecasts are for growth to be in the 1½% to 2% range. The second quarter is likely to see even less growth, perhaps approaching negative territory.
A full-blown recession will likely be avoided, however.
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 2½%. That means the housing market should be very strong this spring and summer.
The federal government is also considering a tax decrease. The most likely scenario is that the Social Security tax will be cut 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 pumped into the economy. 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 the same effect as cutting consumer taxes. This will tend to stimulate economic growth.
Often the warm weather slows the spread of viruses like the coronavirus. If that’s the case, then the 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. Growth in the third and fourth quarters of this year could reach the 3%-or-higher range.
In the long run, many companies that single-sourced their production to China may re-evaluate that decision. Already because of the trade war, some U.S. manufacturers have relocated production outside of China, often to Vietnam, Thailand or India. Many may move production back to the U.S., especially for much-needed products like medicines and medical supplies.
The reason those companies are producing in China today is that the wage rates are only a fraction of U.S. wage rates. Since Chinese workers are very productive, per-unit labor costs are extremely low.
If companies relocate production back to the U.S., the factories will have 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 requires large amounts of capital.
Fortunately, when Congress cut taxes effective in 2018, taxes were slashed for the middle class to stimulate demand and also for the upper class and corporations. This creates new capital, which is exactly what is needed to bring manufacturing back to the U.S..
The bottom line is that economic growth won’t exceed 3% this year because of the negative effects of the coronavirus. However, because of swift action by the federal government, the coronavirus won’t cause a recession.
Dr. Michael Busler, Ph.D., is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, 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.
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