Recession Fears Resurface As Coronavirus Batters The Global Economy

Over the past week, the S&P 500 has fallen by almost 5%, the yield curve - considered a reliable recession indicator by the Fed - has inverted to its weakest level since October, and a key survey of the manufacturing and service sectors has dropped to its lowest level since October 2013. All of a sudden, the tepid economic recovery since late last year has ground to a halt. Two key factors underlie this startling new trend. The first, of course, is the emergence of the coronavirus epidemic, which has ground the Chinese economy to a halt with major knock-on effects for the rest of the world. The rapid spread of the virus in recent days to Italy and Iran, the first major outbreaks in countries not neighboring China, have in particular sparked fears that the epidemic will last longer than expected. The second factor, however, is that the US economy was in a weak structural condition even before coronavirus began affecting global markets. While swift action by the Fed likely forestalled a recession in 2019 or early 2020, growth was still forecast at 2% or lower for 2020 and manufacturing remained mired in a deep recession.

Much of this pre-coronavirus stagnation is due to the fact that, even with the phase 1 trade deal with China, Trump's trade wars are very much still alive and running. The average US tariff on Chinese imports is still today at 19.3%, compared to just 3.1% when the trade war began in March 2018 (and Chinese tariffs average 20.3% today, compared to 8% in March 2018). Furthermore, steel and aluminum tariffs are still in place on the EU and Japan, and the President continues to habitually float imposing major auto tariffs on the Europeans. As a result, if the Administration wants to cushion the likely significant impact of coronavirus on the US economy this year, it would be wise to also de-escalate its ongoing trade wars which have harmed American jobs, growth, and wages. For more on NDN's work on economic and trade policy under the Trump administration, please click here.