Virus News Worsens, Analysts Ponder ‘Severe’ Scenarios For US Economy

As you can imagine, the coronavirus situation worsened materially over the weekend, although it’s not clear what “materially” even means at this point.

Total infections rose above 101,000 and deaths hit 3,400.

In Italy, Nicola Zingaretti said he has the virus. He’s the head of the Democratic Party. The country has the fourth-highest infection total in the world and, at the risk of speaking in absolutes, will almost surely fall into a technical recession this quarter. Output contracted sharply in Q4, putting Italy’s fragile economy on shaky footing even before the outbreak, which has now taken 197 lives.

The Italian government is prepared to spend €7.5 billion euros to help prop up the economy as quarantines and lockdowns cripple the tourism industry. Consider these passages from Reuters:

Italy is set to lock down its wealthiest and most populous region, which includes the financial capital Milan, as part of tough new measures expected to be approved on Saturday to try to contain the coronavirus outbreak.

The new rules include telling people not to enter or leave Lombardy, which is home to some 10 million people, as well as 11 provinces in four of Italy’s 19 other regions, according to a draft decree seen by Reuters.

All museums, gyms, cultural centers, ski resorts and swimming pools will be shut in the targeted areas, according to the decree, which is due to come into force from Sunday.

The data in the following chart is constantly changing, and I can’t guarantee its accuracy — all I can say is that it’s collected from government sources and reputable news outlets, then rolled up into a spreadsheet.

In Iran, cases rose to 5,823. Fatemeh Rahbar – a conservative lawmaker – died Saturday from the disease at just 55 years old.

In the Philippines, Rodrigo Duterte declared a state of emergency.

In another sign that domestic travel is slowly grinding to a halt in the US, Amtrak said Saturday it’s nixing nonstop service between New York and Washington. The reason: Lackluster demand. That comes on the heels of warnings from United and Southwest last week.

Officials in the US said a total of 312 cases have been documented. 17 people have died so far, with Florida reporting its first deaths. The infection total doesn’t count the 21 people who’ve tested positive on the Grand Princess, off California’s coast.

Analysts are adjusting their forecasts for growth, not just in China, but across economies. Nomura, for example, wrote the following on Thursday of the US economy:

The worsening COVID-19 outbreak in and outside of the United States has already prompted a 50bp inter-meeting rate cut from the FOMC. In our updated base case, we now anticipate a larger impact on travel services, notable supply chain disruptions that result in production cuts, and some degree of social distancing and weaker consumer spending growth for services. In our new “bad” case, a wider and more prolonged outbreak leads to a material decline in aggregate demand. In this case, we expect a substantial portion of the US labor force to miss work for some time. In the “severe” scenario, we assume a US pandemic that has an economic impact at roughly half the magnitude of the 1918-19 flu pandemic, reducing real GDP by roughly 2.2% below its base case. Figures 12 and 13 show alternative paths for real GDP growth (q-o-q, saar) and the level of real GDP under these different scenarios.

Clearly, that “severe” scenario would be a real test of the Trump administration’s crisis response capabilities, which have been – how should I put this? – questionable over the course of various natural disasters, including devastating hurricanes and wildfires.

In addition, any kind of scenario that finds the US falling into recession (or really, even growth flatlining for a quarter) would be highly undesirable for the president in an election year, although one assumes voters would cut him some slack due to the unforeseen nature of the problem.

Friday’s jobs numbers and this week’s ISM non-manufacturing gauge suggest things were still going along fine in February, although I would point to the suddenly wide gap between ISM’s measure of the services sector and Markit’s gauge as a possible red flag:

In any case, it simply isn’t possible to expect the economy to perform at the same level it was performing at previously under various lockdown scenarios and considering the proliferation of social distancing measures.

On Friday, Austin canceled South by Southwest, in a high-profile example of what will almost surely be an array of efforts to curtail large, public gatherings.

Of course, none of this means we should take Rick Santelli’s advice.