Market Insider

Economic growth looks even weaker this quarter, with virus now a wild card

Key Points
  • Economists had expected first-quarter growth to dip below 2% due to the hit from the Boeing production shutdown, but now they see further potential downside from the impact of the coronavirus.
  • The Chinese economy is expected to see some impact, but it is too early to say how much and what the impact could be on other economies.
  • U.S. growth in the fourth quarter was 2.1%, the same as the third quarter, but the number masked a downshift by consumers and soft business spending.
Boeing Co. 737 fuselage sections sit on the assembly floor at Spirit AeroSystems in Wichita, Kansas.
Daniel Acker | Bloomberg | Getty Images

Coming off the slowest year of growth in three, the economy in the first quarter of 2020 is expected to slow down even more due to the impact of Boeing and now the potential wild card of the coronavirus.

Fourth-quarter GDP growth was 2.1%, in line with economists' expectations. GDP grew 2.3% for the year, the slowest pace since 2016.

The GDP report, released Thursday morning, revealed continued weakness in business spending and more sluggish consumer spending, with consumption up just 1.8%, down from 3.2% in the third quarter. Residential spending was strong, supporting GDP by 0.2%.

"The key number is really the final sales to private domestic purchasers. That number shows growth of 1.4%. That's basically telling you domestic demand has slowed a lot since the middle of the year," said Jonathan Millar, Barclays U.S. economist. "Consumer spending has slowed a lot in the last couple of quarters. Business spending remains weak … [business fixed investment] was negative for the third consecutive quarter. That's a bit worrisome."

Millar expects first-quarter growth of just 1.5%, but that includes the anticipated half a percentage point hit from Boeing's production cuts. That should reverse by the third quarter, when he expects growth of 2.5%, following 2% in the second quarter, he added.

"Residential investment was a bright spot, and so were net exports, but that's only because you saw a big drop in imports. ... Net exports added 1.5 percentage points to GDP, the most since 2009," said Marc Chandler, chief market strategist at Bannockburn Global Forex. "Inventories were the other thing that was a big drag, partly because of the auto sector."

Coronavirus effect

So far, economists see an immediate impact on travel but they do not see a big impact yet on economic growth from the coronavirus, which now has infected more than 7,900 people, mostly in China. But it may have some impact, and it is difficult to quantify the impact of the rapidly spreading virus.

"We've got the hit from Boeing coming and the uncertainty is how much of a blow will the coronavirus have on manufacturing. How much of a direct impact will it have on demand in China and the spillover effect for the rest of the world? It looks like we'll get less than 2% growth in the first quarter.," said Diane Swonk, chief economist at Grant Thornton. "The problem is how much below 2% is in the mostly unknown parts of the equation." She said clearly the virus will have some impact on the service sector in the U.S., since airlines are already cutting back on flights and people are curtailing travel.

Top White House economist Larry Kudlow said he doesn't see a material effect on the economy from the virus. Kudlow, director of the National Economic Council, said the NEC is studying it in relation to SARS and other past viruses.

Fourth-quarter GDP was slightly better than her forecast of 1.7%. "At first glance, the number masked the underlying domestic demand weakness, and housing is the silver lining, where the Fed has had the biggest impact. The good news is rate cuts work, but the bad new is it's uneven. It wasn't enough to turn the ship around for business investment," Swonk said.

By the end of the first month of the fourth quarter, the Fed had delivered the last of three rate cuts that began in the summer. Fed Chairman Jerome Powell on Wednesday indicated the central bank remains on hold, but he noted the Fed is watching global developments, including the coronavirus and the Fed statement pointed out that consumer spending was moderating.

"The virus is certainly going to create a hit to Chinese growth. It's fluid how big that's going to be," said Millar. China has clamped down on travel from a number of cities, impacting about 50 million people, and airlines have canceled flights to the country.

"It's going to have a hit on Chinese spending," said Millar, adding it's too soon and uncertain to see an impact on the U.S. economy. "We may see more of it in the U.S. but we just don't know at this point. It's very uncertain."

U.S. multinationals that do business in China are feeling the impact already. Starbucks and McDonald's have both closed locations in China, and technology companies are concerned about the supply chain.

Millar said the Boeing impact also risks being bigger than forecast, since it will also affect airplane maker's suppliers and ripple out from there.

"We are assuming that Boeing's production stoppage for the 737MAX reduces Q1 GDP growth by an annual rate of roughly 0.5pp, with some risks of bigger effects if there are spillovers from layoffs, etc," he noted, in an email. Millar said the stoppage cuts nominal GDP in the quarter by an annual rate of about $36 billion.