Gabriel Ehrlich, director of the research seminar in quantitative economics at the University of Michigan in Ann Arbor, says the economy is expected to decline due to the coronavirus, but a recession is not expected.
While the economists are not epidemiologists, the team modeled the economic impact of a coronavirus epidemic based on effects from the flu epidemic in the U.S. in 1918-1919 and some milder pandemics that broke out in 1957 and 1968. These were three of the most severe outbreaks of diseases in the U.S. over the past 100 years, and the modeled scenario was between the levels of severity.
“We’ve seen a lot of movements in the asset market, the Dow has been tumbling,” says Ehrlich. “One thing to keep in mind is that the stock market is not the economy. Don’t get me wrong: It’s definitely not good news how far the Dow has been falling and what we’ve been seeing in the asset markets. But asset markets are more volatile than the underlying economy.”
The epidemic is expected to cause the most disruption in sectors that require social interaction such as travel, accommodation and food services, retail, entertainment, and manufacturing. However, the economists don’t expect major or systematic shutdowns. While many education facilities are shut down, educators are expected to still get paid. However, working parents could face complications with childcare.
The disruptions could affect lower income employees disproportionately because they have less paid time off, sick leave, or vacation leave. Food and retail workers also can’t work from home.
“I think what has surprised us the most is how quickly the stock market and public officials are reacting to something you don’t see in the hard economic data yet,” says Ehrlich. “In the past, you really needed to see a slowdown or a disruption showing up in the data before you saw a reaction, for instance, from the Federal Reserve, whereas with this epidemic, we’re seeing government officials, businesses, and other actors in the economy getting out ahead of the curve. Partly that’s because we’ve already seen the disruptions are so severe in other countries that have been hit by the disease first.”
Because today’s economy is more globally interconnected than it was 100 years ago, the disease can spread more easily. The service sector is also a bigger part of the economy than it was 50-100 years ago, when manufacturing and good production were more important. Ehrlich says the biggest demand drops are expected to be in the service sector.
The economy is more robust in professional and business services, in which white-collar jobs can be done from home, and the manufacturing supply chain, which is leaner and more flexible than it was 100 years ago.
Ehrlich says the modeling doesn’t show that the epidemic will cause a recession, which is typically thought of as two quarters of falling gross domestic product. There is expected to be a drop off in economic activity, and the effects will depend on the course of the epidemic. The effects are expected to be short-lived enough to not meet the official definition of a recession, but Ehrlich says it could be a close call. Growth is expected to start bouncing back in the third quarter.
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