6
▼ Volunteers
waiting to pick
up people who’ve
fallen ill in Wuhan’s
Jiang’an District● What about the
wealth effect?
The stock market’s swoon is not just a symptom
of the harm the virus is inflicting on the U.S. econ-
omy, but also one of its causes. Even U.S. house-
holds that don’t directly own equities aren’t
immune to the so-called wealth effect of falling
stock prices. Retail sales tend to decelerate sharply
in the wake of market shocks because, rightly or
wrongly, many Americans view stock indexes
such as the S&P 500 as the most important indi-
cator of the health of the economy. Business confi-
dence experiences a similar impact, which usually
translates into a decline in investment. And so it’s
self-fulfilling prophecy: If both U.S. consumers and
companies dial down their spending because they
think the outlook has worsened, then it almost
certainly will.
A virus as contagious as SARS-CoV-2 is hard
to tamp down as long as people continue to con-
gregate and cough on one another. If the virus
does spread widely in the U.S., a recession is
likely to follow, says Moody’s Analytics Inc.
Chief Economist Mark Zandi. “We could be mov-
ing from a self-reinforcing positive cycle to a self-
reinforcing negative cycle,” he said on March 3.
State Street Associates, the research arm offinancial giant State Street Corp., puts the chance
of a U.S. recession in the next six months at 75%
based on early March stock prices. Actually, a
Covid-19-induced recession may already have
begun. Economic historians measure reces-
sions from the peak of economic activity to the
trough, and it’s possible the U.S. economy peaked
in February, when unemployment tied a 50-year
low of 3.5%.
If extinguishing the virus is impossible, the
next best thing is learning to live with it. Save
extreme precautions for the most vulnerable,
such as nursing-home residents, while dialing
back economy-deadening measures in other
spheres. For example, factories, offices, and
schools should generally stay open, albeit with
better procedures to limit contagion (hand-
washing, social distancing, working from home
where possible, paid sick leave). Governments
can offset the economic damage with stimulative
fiscal and monetary policies.
Walling off stricken cities, regions, or nations
doesn’t make sense if the disease is already spread-
ing outside the containment area. “In a globalized
world, there’s a question about whether the horse
may already have bolted,” says Neil Shearing,
Capital Economics’ chief economist. That sounds
defeatist. But given how damaging an overreac-
tive immune system can be, it’s simply realistic.
—Peter Coy◼ COVID-19 / ECONOMY Bloomberg Businessweek March 16, 2020