5 parts of the economy most at risk from coronavirus

The growing threat of a coronavirus pandemic is raising fears about the toll it could take on the U.S. economy.

Public health officials say the risk of contracting coronavirus in the U.S. remains low, but economists expect the international scramble to contain the spreading illness to weaken global growth.

An outbreak within the U.S. could also seriously dampen American economic activity and consumer confidence, according to economists, posing threats to a record stretch of prosperity.

Analysts say it’s difficult to predict the extent of the damage coronavirus can do to the U.S. economy. The typical lags in obtaining economic data coupled with the virus’s long incubation period and frequently mild symptoms make any projection highly uncertain.

“The usual things that are supposed to be happening in a normal economy are getting disrupted, and they’re getting disrupted in ways that we don’t fully understand because it’s a health event,” said Paul Gruenwald, global chief economist at S&P Global Ratings.

Even so, there are key sectors of the U.S. economy that stand to suffer the most from a widespread outbreak. Here are the five things to watch as officials work to combat the virus.

Financial markets

U.S. stocks have suffered their worst week since the depths of the 2007-08 financial crisis as investors flee for safety. All three major U.S. stock indexes have dropped at least 10 percent from their most recent peaks, abruptly ending a climb to new record highs.

Roughly 55 percent of Americans hold stocks, according to a Gallup poll from September 2019, including through their retirement accounts. A steady stock market rout could also damage broader consumer confidence and had already boosted pressure on the Federal Reserve to cut interest rates.

Fed Chairman Jerome Powell said in a Friday statement that the bank “will use our tools and act as appropriate” to protect the economy. The statement employed language the Fed used last year to preview a series of rate cuts.

But Powell’s comments did little to soothe Wall Street amid another brutal day of losses. The Dow Jones Industrial Average had lost more than 800 points, a 3 percent drop, while the S&P 500 and Nasdaq composite were down 2.6 percent and 2 percent, respectively, within half an hour of the Fed chief’s statement.

That’s also likely to lead President Trump, who frequently touts the markets as a barometer of the health of the economy, to increase pressure on the Fed to aggressively cut rates.

Retail

The steep drop in equity prices may also take a toll on consumer confidence and spending, which drives more than two-thirds of U.S. economic growth.

Twenty percent of respondents to the University of Michigan’s consumer sentiment survey queried between Monday and Tuesday cited the coronavirus market sell-off as a factor in their outlook on the economy, said Richard Curtain, its chief economist.

“While too few cases were conducted to attach any statistical significance to the findings, it is nonetheless true that the domestic spread of the virus could have a significant impact on consumer spending,” Curtain said.

The ailing retail sector could face serious losses if the coronavirus leads to steep declines in discretionary spending.

Economists say a broad U.S. outbreak could accelerate the shift in consumer sales from jilted brick-and-mortar stores to online sellers, threatening jobs in one of the few service sector industries with no employment growth in 2019.

“Going forward, spending on all but necessities is at risk,” said Diane Swonk, chief economist at Grant Thornton, in a Friday research note. She added that the full extent of the losses may not be known until March data is released in April.

Travel and hospitality

Fears of a pandemic have already prompted businesses, nonprofits and other international institutions to cancel conferences and meetings, likely leading to a sharp decline in global travel and tourism.

Airline stocks have taken a battering as carriers, especially those with international routes, have been forced to cancel flights and reduce capacity on routes.

Economists say those travel and tourism losses could extend to concert and sports venues, casinos, restaurants, and other businesses that depend on people voluntarily assembling in close contact.

The NCAA, for example, on Thursday said that it is monitoring the situation and preparing for possible impacts on its annual March Madness tournament.

“Regardless of exactly how the outbreak manifests, we would expect the reduction in aggregate supply to correspond to less spending on recreational activities, shopping, eating at restaurants and other economic activity,” wrote economists at Japanese bank Nomura in a Thursday research note.

Technology
A coronavirus outbreak in the U.S. could weaken demand for nonessential goods and services that help power the economy. The widespread shutdown of factories in China and its neighboring countries has already restricted the supply of crucial technology products and parts.

Close to 80 percent of small and medium-sized industrial plants in China remain closed, according to a Friday report from the nonprofit Center for Global Development.

Economists from Nomura added that because “the computers and electronics industry relies on inputs from China … a prolonged production halt or partial shutdown of factories in China should materially impact US production.”

Last week, Apple said that it was cutting its sales projections for the quarter. Apple’s sales of its popular iPhone rely heavily on parts from China as well as the country’s large consumer market.
Microsoft followed suit on Wednesday, saying that it also expected lower sales this quarter.

Beyond sales figures, the coronavirus outbreak has left tech companies scrambling, with offices closed overseas and restrictions on employees traveling to affected countries. On Thursday, Facebook canceled its annual developers conference because of the virus, saying its priority was “the health and safety” participants.

Automobiles

A shortfall in supplies and intermediate parts from China could also hurt a U.S. auto industry already struggling under the weight of President Trump’s metal and industrial tariffs.

“Once parts from China can’t supply factories in North America, Japan, Korea, and Europe, the virus impacts global auto production,” said David Whiston, an auto industry analyst at the investment research firm Morningstar, in a Friday email.

Whiston added that North American plants for Ford, Fiat Chrysler and General Motors are likely to be less exposed to threats from abroad than Toyota’s domestic factories.

“But if you are missing one part the line still has to stop,” he said.

The Wall Street Journal reported Thursday that suppliers are warning that some parts could be out of stock in weeks. Some manufacturers have already begun flying in parts to avoid any future slowdown.