There seems to be a great deal of complacency among many in the United States about the effect that the coronavirus will have on the US economy. Thus far it’s been treated as an issue that only affects China, and whose effects on the US economy will be limited. But the US and Chinese economies are so tightly intertwined that anything that happens in one country affects the other. It’s only a matter of time before the disruption to supply chains and the drawing down of parts inventories results in an economic slowdown in the US. Those who downplay the economic effects of the coronavirus seem to make some assumptions that just don’t hold up to scrutiny.
1. The US Economy Can Operate Just Fine Without Chinese Products
This just isn’t true. So much of what is produced in the US relies on Chinese inputs, from metals to electronics to auto parts. As China’s production continues to stagnate, US firms reliant on Chinese sources will either have to find other sources or shut down their own production.
2. China’s Economy Will Get Back Up and Running Soon
Even in areas where the Chinese government is attempting to coax workers back into factories, few seem willing to do so. Those who have thus far escaped the virus don’t want to go back to factories in which they’ll mingle with thousands of others and possibly risk contracting the virus. Expect Chinese production to remain low at least through the end of March.
3. Chinese Consumers Will Begin Consuming Again
Look at pictures of malls in China and you’ll notice that no one is out shopping. It will take a long time for Chinese consumers to feel confident enough to risk going back out in public again. Even then, they’ll want to minimize how much time they spend around other people. Once again, expect the first quarter of this year to be a wash, and for consumer spending not to pick up again until April at the earliest.
4. US Firms Have Sufficient Inventory to Keep Production Going
Many US companies pride themselves on their just-in-time inventory systems, timing things just right so that they can keep production flowing smoothly while not holding excess amounts of inventory. That means that even a few days of disruption to their inventories can have long-term effects on their productive ability. And once production stops, it can take days or weeks to get back up and running again.
5. Companies Have Enough Cash on Hand to Ride Out Any Disruptions
The majority of Chinese companies have only a few months of cash on hand, so the longer they’re closed or operating at reduced capacity, the more money they’re hemorrhaging. American companies are in a worse position, as many are heavily indebted and don’t have cash on hand to ride out major supply disruptions. Many businesses, both in the US and in China, could face bankruptcy in the event of serious production difficulties. Then their creditors start having difficulties, etc., until we find ourselves back in a 2008-like situation with a potential snowball of bankruptcies.
It’s amazing that with all of this as a backdrop, so many in the US are still so blasé about the effects the coronavirus will have on the economy. Even Fed officials such as Richard Clarida seem to think that the effects of the virus on the US economy will be minimal, and that there might conceivably be a case for the Fed to begin hiking interest rates again this year. They’re so blinded by their reliance on “data” that they can’t see the economy coming crashing down again all around them just like in 2008.
If you’re an investor, you should be viewing all of this with trepidation, and making plans to protect your assets. You can’t trust the Fed or anyone else to be the white knight rushing in to rescue you and restore your 401(k). If you don’t invest in gold or otherwise hedge against the real risk of a recession, you’ll likely face the possibility of your investment portfolio losing significant amounts of value, just like in 2008.