A6| Saturday/Sunday, March 7 - 8, 2020 *** THE WALL STREET JOURNAL.
BYJONHILSENRATH
restaurants.
United and Hyatt Hotels
Corp. plan hiring freezes. Gen-
eral Motors Co. and Nestlé SA
are restricting employee travel.
Events such as South by South-
west, a two-week tech, film and
music festival in Austin, Texas,
have been called off.
Facebook Inc. and Ama-
zon.com Inc. have announced
office closures in Seattle. While
those high-tech workers can
operate from home, Uber driv-
ers and sandwich shops that
served them could suffer.
“Workers can’t all work from
home, and you’ll see lost output
that can never be made up,”
Ms. Swonk said. “You can’t at-
tend a canceled sporting event
later and you won’t buy a
sweater you wanted in March
in late April.”
One question for the U.S. is
whether the impact spread to
other business sectors. Manu-
facturers are reporting supply
disruptions due to an extended
shutdown of Chinese factories.
Small businesses are concerned
about whether they will have
access to financing to bridge a
slowdown in demand. And a
temporary economic slowdown
could put some heavily in-
debted firms at risk of default.
Before the market volatility,
the U.S. economy was on a
solid footing. In February, un-
employment returned to a 50-
year low and wages rose, the
Labor Department said. Other
recent readings showed layoffs
at historic lows, steady con-
sumer spending, low inflation
and rising household income.
Then came the coronavirus.
While the extent of economic
harm isn’t yet clear—with dam-largest one-day decline since
the recession on Friday after
Saudi Arabia and Russia failed
to agree on whether to reduce
global supply in the face of the
virus’s effect on demand. Lower
oil and gasoline prices could be
a boon for U.S. consumers,
though plunging prices could
hurt parts of Texas and the
Midwest where the local econo-
mies are increasingly tied to
energy production
Policy makers in the U.S. and
abroad took steps this past
week to blunt the impact, in-
cluding an emergency half-per-
centage-point rate cut by the
Federal Reserve and rate cuts
in Canada and Australia.
The Fed has signaled it could
cut rates further, but officials
also have called for more gov-
ernment stimulus measures.
Boston Fed President Eric
Rosengren said Friday that a
stronger fiscal-policy response is
the “obvious alternative” to con-
strained monetary policy in the
current low-rate environment.
President Trump signed an
$8.3 billion emergency spend-
ing bill Friday to combat the vi-
rus, funding efforts to develop
a vaccine and assisting local
and state responses.
A much larger fiscal re-
sponse may be needed, said
Megan Greene, an economist at
Harvard University’s Kennedy
School of Government. That
could include reducing payroll
taxes and providing more direct
support to businesses and indi-
viduals, including steps such as
loans and increased food-assis-
tance payments.
—Sarah Chaney
and Austen Hufford
contributed to this article.opment said this past week its
“best case” scenario would be
for global economic growth to
slow by a half-percentage point
this year due to the epidemic.
The sectors where demand
could suffer the most initially
include air transportation, con-
ference venues and hotels.
Southwest Airlines Co.,
which primarily flies domestic
U.S. flights, said Thursday it
has experienced “a significant
decline in customer demand”
and an increase in trip cancella-
tions. United Airlines Holdings
Inc., Germany’s Deutsche Luf-
thansa AG and Hong Kong-
based Cathay Pacific Airway
are encouraging employees to
take unpaid leave at a time
when airlines are reducing
their flight schedules.
Restaurants, entertainment
and retail—industries that rely
on discretionary spending and
foot traffic—also are at risk.
“Businesses that are primar-
ily dine-in businesses may need
to close temporarily if things
get really bad,” said Erik Herr-
mann, head of restaurant in-
vestment at CapitalSpring,
which invests in and owns ca-
sual-dining restaurants. Mr.
Herrmann expects drive-
through services to benefit if
the coronavirus spurs hesitancy
among customers to eat insideContinuedfromPageOneVirus Risks
Rise for
Economies
age contingent on how long it
lasts, how widely it spreads and
how people respond—initial
signs are already showing up.
Business activity by service
providers contracted in Febru-
ary for the first time since Oc-
tober 2013, private data firm
IHS Markit said Wednesday.
Surveyed firms reported declin-
ing client demand and new
business from abroad. The Uni-
versity of Michigan’s gauge of
consumer sentiment rose for all
of February, but a fifth of re-spondents in the survey’s clos-
ing days raised concerns about
the coronavirus. The Institute
for Supply Management said
manufacturing activity cooled
in February, as coronavirus ef-
fects rattled supply chains.
Products coming from China
are facing backlogs, which
weigh on U.S. sales. Keith Mc-
Gee, owner of Black Sail Market
LLC, said wait times for orders
in China have recently grown to
six weeks from two. Mr. McGee
buys components from China
and then assembles them into
lights for the cannabis industry.
“I’m definitely starting to
worry about it,” he said. “I
can’t afford to be running out
of inventory for a month. It ba-
sically means I have no reve-
nue.”
Crude prices notched theInitial signs of the
extent of economic
harm are already
showing up.U.S. NEWS
steadily grown since the finan-
cial crisis, expanding their
mortgage books and raking in
more consumer deposits. That
means bigger hedges to man-
age risks.
JPMorgan held an average of
$215 billion of residential mort-
gages on the books at the end
of 2019, versus $143 billion a
decade earlier. Wells Fargo de-
posits climbed to $890 billion
last year from $787 billion in- Interest-bearing deposits
at Bank of America jumped
nearly 20% over two years to
$900 billion in 2019.
Partly as a result of larger
mortgage and deposit balances,
banks have grown more sensi-
tive to rate changes. JPMorgan
research analysts estimate the
expected increase in net inter-
est income for banks for a 1-
percentage-point increase in
rates is $8 billion, up from $
billion last year. Those figures
generally work in reverse when
rates fall.
In 2018, many large banks
were wrong-footed by the year-
end market meltdown that
ended in the Fed’s decision to
begin cutting rates following
several years of increases.
stocks, while investors also
punished bank shares.
Analysts and investors said a
muted response to Friday’s jobs
report, which showed employ-
ers adding more positions in
February than expected, oc-
curred because companies re-
ported their headcounts before
cases of coronavirus began
mounting. Many investors al-
ready expect the Fed to cut its
short-term benchmark rate
again by its March 17-18 meet-
ing at the latest.
While stocks garnered much
of the investing attention dur-
ing the week’s tumult, equally
dramatic moves occurred in
bond markets.
Treasury yields, which fall
when bond prices rise, plunged
in overnight trading before the
jobs report. Investors showed
they are anticipating lower
short-term rates for the fore-
seeable future as the economic
fallout from the virus spreads
with each canceled flight and
shuttered factory.
Adding fuel to the yield de-
cline: the insatiable demand of
major U.S. banks, whose hedg-
ing needs have risen with each
fresh decline in rates.
Banks need to buy around
$1.2 trillion of 10-year Trea-
surys to offset risks on mort-
gages and bank deposits, ac-
cording to JPMorgan estimates.
Commercial banks own around
$3 trillion of U.S. Treasury and
government-agency securities,
Feddatashow.
The 10-year yield, which
helps set borrowing costs on
ContinuedfromPageOne
Investors
Rush to
Treasurys
everything from mortgages to
business loans, has been
pushed lower by worries about
the virus.
The yield has declined from
1.9% at the beginning of the
year. The plunge both reflects
and intensifies commercial
banks’ efforts to manage bal-
ance-sheet risks including sen-
sitivity to interest-rate swings.
This practice, known as convex-
ity hedging, has been a signifi-
cant factor in the bond market
for years but has become even
more momentous as a result of
tighter rules adopted after the
2008 crisis.
“Convexity tends to exacer-
bate market moves—if rates are
going lower, convexity will
make the move sharper,” said
Gennadiy Goldberg, U.S. rates
strategist at TD Securities.
When interest rates fall,
many homeowners with fixed-
rate mortgages refinance to
lock in lower payments. The
owners of the relevant mort-
gages and mortgage-backed se-
curities—including the banks—
lose out on higher payment
streams. As a result, the prices
of mortgage bonds tend to riseless in any given bond rally
than Treasury securities or
some other bonds, making
them “negatively convex.”
Banks hedge their holdings
of mortgages and other assets
to limit these sorts of losses,
but doing so often entails buy-
ing new assets including Trea-
surys. Banks also use interest-
rate derivatives to offset
potential losses from changesin rates—usually swaps, in
which the bank typically ex-
changes the right to a fixed
payment for a floating payment
under specified terms.
The sharp decline in rates is
making banks even bigger buy-
ers of Treasurys, as the proba-
bility of mortgage refinancing
increases and they seek to
bridge expected income short-
falls generated when higher-paying fixed-income securities
“prepay,” as traders say when
refinancings enable a bond to
be paid off early.
The same dynamic plays out
to some extent with deposits,
which are liabilities that the
banks seek to match with as-
sets.
JPMorgan Chase &Co.,
Bank of America Corp. and
Wells Fargo &Co.,haveNetchangeinS&P
marketvalue,yeartodate*
$1.–2.–2.–1.–1.–0.00.1.trillionJan. Feb. MarchU.S.
Canada
Mexico
France
Germany
Italy
Spain
U.K.
China
Hong Kong
Japan
South Korea–8.0%
–5.
–4.
–14.
–12.
–11.
–12.
–14.
–0.
–7.
–12.
–7.Jan. Feb. March–10% 0 +10%Sources: Dow Jones Market Data (benchmark stock indexes); FactSet (market value) *As of ThursdayYTD CHG.Benchmarkstockindex,cumulativeperformance,
yeartodateThe rapid and global
spread of the deadly new cor-
onavirus caught households,
business leaders, investors
and policy makers off guard,
but health experts and econo-
mists who study pandemics
say it shouldn’t have come as
a surprise at all.
Epidemics of infectious
diseases have become a regu-
lar part of the global land-
scape in the past quarter-cen-
tury, thanks in part to
economic trends including ur-
banization, globalization and
increased human consump-
tion of animal proteins as so-
ciety becomes more prosper-
ous, these experts say.
The public needs to pre-
pare for more of them, they
add.
An old rule of thumb in
pandemic research was that
such events happened about
three times every century,
said David Finnoff, an econo-
mist at the University of Wy-
oming College of Business. So
far this century, the world
has already confronted an ar-
ray of viral scares, including
SARS in 2002 and 2003, the
swine flu (also known as
H1N1) in 2009, MERS in 2012,
Ebola in 2014 to 2016, Zika in
2015 and Dengue fever in
2016.
The incidence of infectious
disease events has more than
doubled from the 1940s to
1960s, according to EcoHealth
Alliance, a New York-based
nonprofit research group that
built a database tracking dis-
ease events globally. The rate
of such incidents surged in
the 1980s with the advent of
HIV and is now rising, says
Peter Daszak, the group’s
president.
“They’re increasing expo-
nentially,” he said.
Already this century infec-
tious disease pandemics—not
counting the common influ-
enza—have claimed more
than 300,000 lives globally,
according to Harvard re-
searchers David Bloom and
Daniel Cadarette.
Mr. Daszak estimates pan-
demics could cost as much as
$23.5 trillion over the next 30
years. That estimate includes
not just lost economic activ-
ity and property, but also the
statistical value of lost hu-
man lives.
Urbanization means people
are packing together more
tightly, making them more
prone to catching bugs from
others. Ebola is one example.
It isn’t a new disease but be-
came widespread and deadly
when it spread to large cities
in Liberia and Sierra Leone.
At the same time, globali-
zation means people are ven-
turing out farther across bor-
ders, giving bugs wider reach.
Moreover, animal-protein
consumption is putting peo-
ple in closer contact with
livestock such as pigs and
chickens, which can act as
carriers of disease from other
species. Between 2000 and
2019, global consumption of
chicken grew to 97 million
metric tons from 53 million,according to the U.S. Depart-
ment of Agriculture. And as
dense populations spread, Mr.
Daszak says, people and their
livestock are coming into
closer direct contact with
wildlife such as bats that are
direct carriers of disease.
“Urbanization, agricultural
intensification and deforesta-
tion are all part of the land-
use change variable that was
significantly correlated with
emerging infectious dis-
eases,” Mr. Daszak said.
China, the epicenter of the
latest outbreak, is also the
epicenter of many of the eco-
nomic trends giving un-
healthy viruses a wider can-
vas on which to multiply. No
country has urbanized more
rapidly in the past quarter-
century, according to World
Bank estimates. In 2018, 59%
of its population lived in ur-
ban areas, according to theWorld Bank, up from 36% in
2000 and 19% in 1980.
The U.S. has urbanized,
too, though at a slower rate.
Between 2000 and 2018 its
urban population increased to
82% of total population from
79%.
During the same period,
China became the center of
globalization, as multina-
tional companies built their
manufacturing bases there.
Between 2003 and 2018, air
traffic between the U.S. and
China increased to 8.5 million
passengers from fewer than
700,000, according to the U.S.
Transportation Department.
“Viruses don’t need pass-
ports,” said Michael Merson,
a professor at Duke Univer-
sity’s Global Health Institute.
Wuhan, the Chinese city
where the new coronavirus
and the illness it causes,
Covid-19, first showed up, isan example of these trends.
Between 2000 and 2018, its
population grew from eight
million to 11 million. In the
process, developed land in
the city more than tripled
from about 210 square kilo-
meters to 720 square kilome-
ters, according to the Wuhan
Statistics Bureau.
Wuhan opened a subway
system in 2004 as a single
line with 10 stations, the
Communist Party-run Peo-
ple’s Daily reported at the
time. By December, it had
grown to nine lines with 228
stations that handled 1.2 bil-
lion trips last year, according
to state broadcaster Wuhan
TV.
People have been flowing
into the city in greater num-
bers, too, aided by more and
speedier travel links. Wuhan
hosted about 20 million tour-
ists in 2000 and 288 million
in 2018. In 2009, the city got
high-speed rail service to
Guangzhou, a prosperous
megacity in southern China,
as well as its third passenger
railway station, according to
the local Communist Party-
run Changjiang Daily.
Travelers can reach 25 ma-
jor cities from Wuhan on
high-speed trains, cutting the
time it takes to get to Beijing
from 10 hours to five. Wuhan
Tianhe International Airport
replaced an older airport in
1995 and by the second half
of 2018 had flights to 52 in-
ternational destinations and
84 domestic ones, according
to the provincial government
of Hubei, of which Wuhan is
the capital.
This development in the
city coexists with trade inwildlife, a presumed vector of
infection that Chinese au-
thorities have promised to
shut down across the country.
The rise of global pandem-
ics creates a problem of col-
lective action, says Ramanan
Laxminarayan, a researcher
at Princeton University. One
of the best ways to combat
the spread of a virus is for
authorities to report their
emergence rapidly to isolate
bugs in early stages.
Individual countries, how-
ever, have an incentive to de-
lay reporting until a problem
is certain, because notifying
others comes with economic
costs, such as reduced travel
and trade. In that context, re-
porting delays in China and
Iran aren’t a surprise, Mr.
Laxminarayan said.
Mr. Finnoff said the U.S.
needs to build a stronger
health infrastructure to fight
future pandemics.
“We have a huge military
that is out there ready to be
deployed to reduce the risk to
this country from anything
that occurs. Most of the time
it is not being used, it is
waiting,” he said. The U.S.
needs to start thinking about
preparing for pandemics the
same way, he said.
Mr. Daszak said he thinks
the current crisis will prove
to be manageable, noting that
the mortality rate of Covid-
isn’t as great as SARS and the
spread isn’t rampant. “I’m
not hiding in my bunker right
now,” he said. “We’re going
to get hit by a much bigger
one sometime in the next 10
years.”
—Xiao Xiao in Beijing
contributed to this article.Global Outbreaks Are Likely to Increase
Pandemic experts say
the new coronavirus
shouldn’t have come
as a surprise at all
Percentageofpopulation
livinginurbanareas
Airlinepassengersbetween
U.S.andChinaSources: World Bank (urban population); Bureau of Transportation Statistics (passengers)1002468million2005 ’10 ’15 ’100020406080%1960 ’70 ’80 ’90 2000 ’10 ’U.S.ChinaWorldGrowingExposure
Epidemics have proliferated as people have moved closer
together and travel globally at a rising rate.P.O. Box 2195, Duxbury, MA 02331
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