With hundreds dead and new cases identified every day, we at ITR Economics do not wish to downplay the very real tragedy or serious threat posed by the coronavirus outbreak. However, our roles as economists require us to apply an impartial rationality to all that we assess.
While it is certainly possible that the virus could spread across the globe in a worst-case scenario, that would constitute an abnormal, black swan event. We will know soon enough; until then, we at ITR will assess the potential economic impact, both to the US and the world. For now, the coronavirus’s macroeconomic impact is minimal, mostly amounting to mild noise within equities and commodities markets.
While the S&P 500 had a soft close to the month in January, the most acute pain seemed concentrated in commodities, particularly Oil Prices. US Crude Oil Futures endured a punishing January, declining 15.6% from $61.06 per barrel at the outset of the month to $51.56 to close it. It was the sharpest month-to-month decline to open the calendar year since January 2007.
Interestingly, Oil Prices fared similarly during the Severe Acute Respiratory Syndrome (SARS) outbreak in 2003. The World Health Organization (WHO) issued the first global alert for SARS on March 12, 2003, and the crisis and associated fear continued to build throughout that month and into the summer (the SARS outbreak was officially declared contained on July 5). Oil Prices cratered during the initial phase, dropping all the way from $36.79 at the start of March to $28.61 per barrel at month-end, a 22.2% decline. It was the most severe month-to-month decline posted for March since at least 1983.
Oil Prices stabilized in April, regaining some ground, and spent much of 2003 near $30 before longer-term ascent took hold late that year. This historical comparison is obviously imperfect, but it is a good reminder that we have been here before and seen similarly anomalous months in financial markets responding to health scares.
Negative microeconomic impacts are likeliest to first present themselves in heavily affected industries in China (tourism, for example), or those tied to commodities, should this dampen pricing for an extended period. If depressed Oil Prices were to linger beyond early 2020, it would pose the greatest near-term risk to those involved with or selling into upstream oil markets.
As always, we prefer to stick to the leading indicators for more telling trend lines, and the initial results from two of our marquee indicators are encouraging. January data points for both the raw ITR Leading Indicator™ and the US ISM PMI (Purchasing Managers Index) 1/12 rate-of-change were up from the prior month, in both cases a continuation of prior ascent. Additionally, despite the stumble to close out January, the S&P 500 maintained its upward cyclical momentum. February’s data points will be more compelling, as the coronavirus crisis did not have much momentum until the second half of January, but the freshest month-end data points are heartening.
As it stands, the US economy is still on track to shift into a higher gear during the second half of 2020, in line with our forecast. Later this month, we will get readings from more global leading indicators for initial signals of the threat the coronavirus may pose to the global business cycle. We will bring you up to speed as we know more.
Connor Lokar
Economist