My last blog post talked about the effects of the coronavirus that appeared on Sunday, before Monday’s fall in the market. Now, I want to look at the impact if the coronavirus comes to the U.S., as the CDC expects.

 

Slowing the Spread

Listening to a virologist today, he said that if the virus comes, the way to slow the spread is:

  • Stay home if you are sick;

  • Keep kids at home if they are sick;

  • Avoid unnecessary travel; and

  • If it gets worse, stop large gatherings of people, i.e., sporting events, conferences, and church congregations.

  • Also, firms should look at ways to allow workers to telecommute.

All of these suggestions are fine in principle but unlikely to be effective immediately due to the nature of the U.S., namely:

  • No social net, so people are unlikely to stay home if sick. Under many changes to SNAP and other programs, people who don’t work are ineligible for benefits, so they will keep working as long as they can.

  • Inadequate health insurance for many due to the current administration’s rollback of the Affordable Care Act regulations and allowance of so-called “junk plans” in the market, with the result that many poor people will not get tested due to the costs;

  • No security net for parents whose kids are sick and cannot afford to stay home and look after them. They will send their kids to school because their children need food and they need to work.

  • No security net for many gig workers, i.e., Uber drivers, who are will see a fall in income as travel decreases. If the virus transferable through surfaces, this will be even worse.

  • No social net for many workers in the travel industry, i.e., hotel employees, wait staff at restaurants, and those at conference venues as travel expenditure falls.

Therefore, sick people will stop working only when companies shut their doors. Many firms are unlikely to institute testing due to cost concerns; thus, I expect many firms to operate until the number of sick people is so high that the firm has to close.

Thus, I see the spread being higher and faster than in China and Italy, which have instituted significant measures to stop human contact. If the government does implement the type of action that China and Italy have, we can expect a fall in incomes, an increase in bankruptcies, and more social unrest.

 

Supply Chain Disruption

A virus in the U.S., for the reasons above, would further disrupt the supply chain as iI discussed in my previous post and by others. Companies would get into issues, due to:

  • No Products due to a lack of raw materials, a lack of workers to build products, or in the travel industry, no customers.

  • No Sales. The end customer may no be purchasing as they cannot use the products as they have too much inventory or just a reduction in demand as workers stay home.

The effect of this would be to slow sales, but more importantly, slow down cash flow and thus cause far more significant damage. Companies don’t go out of business because they lose money; they go out of business because they run out of cash. Several articles have mentioned the precarious financial position of low credit corporate borrowers. If cash flow dries up, we can expect many of these companies to fail, leading to a domino effect on healthier ones, as we saw in 2008. Also, many over-leveraged companies would have to implement drastic measures to survive; thus, we can expect more layoffs and fewer purchases. None of this bodes well for the economy. Given that Goldman has dropped its GDP forecast to 1.2% for the quarter, we could be negative territory as global demand slows, and more disruption of global supply chains continues.

 

The Effect on the Medical Establishment

Overall, from what I have read, I don’t see many people dying given the fatality rate of coronavirus. However, if there is a widespread infection, hospitals would be overwhelmed due to a lack of investment and preparedness in them over the decades. Also, with many insurance policies providing limited coverage, the medical facilities could face significant uncollectable expenses, further damaging them. Leading to a further deterioration in the medical establishment, especially in rural areas.

None of this bodes well for slowing the spread or helping the economy recover quickly. However, if there is underinvestment in medical facilities, cuts to emergency pandemic response teams, and no security nets for the poorest in the economy, as we saw in 2008, the bill always comes due, and we hate paying it.

 

Copyright (c) 2020, Marc A. Borrelli