Why the Fed cut: The coronavirus is taking aim at consumer spending, the heart of the American economy

Why the Fed cut: The coronavirus is taking aim at consumer spending, the heart of the American economy, by Rex Nutting.

With the Federal Reserve dramatically cutting interest rates [an emergency cut of 0.5% last night], we need to stop assuming that the coronavirus outbreak will have only a minor impact on the U.S. economy. …

Over the weekend, medical researchers punched a big hole in the rosy scenario that the outbreak would be contained, saying it’s likely that the highly transmittable virus has been spreading in Washington state for weeks without anyone knowing. …

What’s the big change in their assumptions? A big hit to consumer confidence and spending on top of the supply-side disruptions to global trade.

A worst-case scenario — a global pandemic — is becoming more plausible as efforts to contain the virus appear to have failed. …

As the virus spreads in your town,  … quarantines, voluntary or mandatory, would be essential. That means discretionary activities — such as traveling, dining out or attending entertainment, sporting, religious and political events — would grind to a halt. Business travel and entertaining would dry up. Schools and day-care centers would close. Public transportation ridership would plunge.

About 10% to 15% of U.S. gross domestic product consists of consumption of services that could be curtailed, Goldman economists wrote in a note to clients Sunday. Another 16% of GDP consists of non-food goods consumption that could be at risk if consumers don’t want to go out shopping.

If no one goes out, then millions of people could lose their jobs. …

If layoffs followed the same arithmetic, nonfarm payrolls would drop by about 16 million — a mind-blowing number that’s about twice the number who lost work in the 2008-2009 Great Recession. It would be the largest percentage decline in jobs since the Great Depression of the 1930s. Layoffs of that magnitude sound absurd, but it shows you just how many people are vulnerable to a pullback in consumer spending. …

Nothing is certain about this contagion. The worst case is not inevitable, but it’s growing more likely by the day. The economy is likely to get more than the sniffles from this coronavirus.

And to think we could have dodged much of this foreseeable chaos and death merely by closing the borders. Might be too late already. Oh the lack of competent leadership is going to cost us dearly on this one.

hat-tip Stephen Neil