Expect US Economy to Move from Solid to Shaky Ground
Ahead of Friday’s February U.S. Non-Farm Payrolls report, it’s important to note that so far this week, data has shown the U.S. economy is on solid footing even with mounting coronavirus fears. Furthermore, the Fed even acknowledged the strength of the economy as they unexpectedly slashed interest rates 50 basis points earlier in the week, and are widely expected to trim 25 another basis points at their regularly scheduled monetary policy meeting on March 17 – 18.
However, the moves by the Fed are pre-emptive strikes against what could happen to the economy if the coronavirus continues to spread, putting the global economy into recession.
The economy’s solid fundamentals were also underscored on Wednesday when a report on private payrolls increased more than expected in February, in part as unseasonably mild weather bolstered hiring at construction sites and in the leisure and hospitality industry. This could change drastically in the upcoming months because the leisure and hospitality industries are expected to take a hard hit due to the spreading coronavirus.
A report from the Fed described the economy as growing at “a modest to moderate rate over the past several week,” but noted rising concerns over the coronavirus. Once again, investors should note the time period of the survey since conditions have changed drastically since then.
Going into any potential coronavirus slowdown, the economy is in good shape so there is a little cushion in place to soften the hit.
The Institute for Supply Management (ISM) said its non-manufacturing activity index increased to a reading of 57.3 last month, the highest level since February 2019, from 55.5 in January. Economists polled by Reuters had forecast the index falling to a reading of 54.9 in February.
Don’t expect this number to remain above 50, the line that represents expansion or contraction, once we get a clear assessment of the damage inflicted on the travel industry with hotels, airlines, cruise ships and resorts shutting down.
The ISM said services industries remained “positive about business conditions and the overall economy,” but also noted that “most respondents are concerned about the coronavirus and its supply chain impact.”
From Solid to Shaky Ground
Over the near-term expect the U.S. economy to move from solid to shaky ground. We join other investors in expressing fear the coronavirus epidemic could derail the longest U.S. economic expansion in history, now in its 11th year, through disruptions to supply chains and exports.
The damage to the services sector is expected to come mostly through the transportation and tourism industries. On Thursday, the International Air Transport Association flagged a potential $113 billion hit to global airline travel, sending the S&P 1500 Airlines Index down 8.1%. Furthermore, Carries Southwest issued a revenue warning, while United Airlines and JetBlue Airways cut flights and implemented cost controls.
Economists expect the coronavirus to restrain economic growth in the first half of the year to around 1.0%. The economy grew 2.3% in 2019.