Odds of a Recession Just Went Up

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  • Heading into 2020, Allegiant expected U.S. economic growth to slow. While weak manufacturing was the root cause, now American businesses are dealing with adverse impacts from the coronavirus outbreak. 
  • To date, the coronavirus outbreak is mostly a China story. However, the likelihood of the virus spreading throughout the world has increased.
  • Global supply chains are feeling the pain. Businesses are shutting down production; inventories are declining; and now service businesses are also feeling the impact.
  • Even if only temporary, the economic shock from the coronavirus outbreak could push the U.S. economy into a technical recession. 

The Allegiant Investment Research team expected U.S. economic growth to slow in 2020. Grappled with a weak manufacturing sector, the economy was poised to run slightly above stall speed. As such, the odds are higher that a negative trigger event could push the economy into recession. Could the coronavirus outbreak be that trigger event?

By most accounts, the coronavirus outbreak has been a China story. While cases are being reported in many other countries, the lion’s share reside in mainland China. However, as China tackles the spread, economic activity is stalling, at least in the short-term. With global supply chains dependent on China, the impact is being felt throughout the world. As the saying goes, when China sneezes, the world catches a cold. 

U.S. businesses are beginning to disclose the negative impact of the coronavirus. That trend will continue. As revenue and earnings numbers come down, equity prices look more expensive. For a stock market void of any corrections in the last decade, this could be its due time.

However, all it would take to send stocks higher is a sustainable reduction in new coronavirus cases. Any sign of containment would be an instant positive. That’s what everyone is looking for. 

While the problem won’t go away overnight, the trend in new cases is an important predictor of how much this problem will spread. If the U.S. skirts away without much direct impact, we may only see a weak quarter or two, followed by a rebound. However, if the spread is not contained soon, we risk this becoming a bigger global problem, one that could send the U.S. economy into a technical recession.

What would a coronavirus recession look like? 

Unless the coronavirus becomes a global pandemic, most likely any recession caused would be mild. Eventually the virus will be contained. In the aftermath, economic activity will ramp back up to offset the supply gap that emerged during the slowdown. 

Most of this is conjecture, of course. While it is impossible to predict the total impact coronavirus will have on the global economy, the Allegiant Investment Research team continues to look for signs that the economy has stalled. The Allegiant Economic Dashboard, while currently in the weakest position in years, does not yet show the negative economic signs we expect during times of recession. So, we are not there yet, and we may not get there this time around.

Whether the coronavirus is the trigger event or not, it is a great reminder of the risk we currently see in the economy. When the economy is running slightly above stall speed, any negative event, even if relatively mild, could cause the next recession.