US economy grew at 2.1% rate in Q4 but virus threat looms

WASHINGTON — The U.S. economy grew at an annual rate of 2.1% in the final quarter of last year, but damage from the spreading coronavirus is likely depressing growth in the current quarter and for the rest of the year.

The overall pace of growth in the October-December quarter was unchanged from its initial estimate a month ago, though the components were slightly altered, the Commerce Department said Thursday. A slowdown in business restocking was less severe than first believed. But a cutback in business investment in new equipment was more of a drag on growth than initially thought.

Economists have been downgrading their forecasts for the first quarter of this year as fears of the impact of the virus has escalated. Stock markets have plunged this week on news that the number of coronavirus cases worldwide has now topped 81,000.

That decline resumed on Thursday with the Dow Jones industrial average down sharply in early trading. All major U.S. markets tumbled into correction.

The virus, which started in Wuhan, China, has spread to more than 30 countries, including the United States, Italy and South Korea.

Vital supply chains from China that companies in the United States and elsewhere depend on have been disrupted, and that problem is expected to worsen. Microsoft and Apple have warned about adverse impacts from the supply chain disruptions.

U.S. companies with sizeable operations in China are being impacted directly. McDonald’s has closed hundreds of stores there. Starbucks has closed more than half of its locations. While it’s begun to open stores in China where the outbreak has abated, it is now spreading faster outside of China.

In a report to investors Thursday, Goldman Sachs said the fallout from the virus would likely wipe out all the earnings growth it had been predicting for 2020 if the virus continues to spread. David Kostin, a strategist for the firm, said his baseline estimate is now for zero growth in S&P 500 earnings per share this year, down from an earlier forecast of 5.5% earnings growth.

The rising fears about the economic damage the virus can do have inflicted the worst losses on U.S. stocks in two years, less than a week after Wall Street was hitting record highs. To try to demonstrate the government’s resolve to deal with the spread of the virus, President Donald Trump announced Wednesday that he was appointing Vice-President Mike Pence to take the lead in co-ordinating U.S. actions.

But economists are warning that if the virus turns into a global pandemic, the impact could be severe enough to push the global economy and the U.S. economy into recessions.

“The global economy was already very weak because of the trade war, and it would not take much to shove it on its heels,” said Mark Zandi, chief economist at Moody’s Analytics.

Zandi said his baseline forecast, which optimistically assumes that the outbreak remains largely contained in China and dissipates by spring, projects that global growth will slow to 2.4% this year — 0.4 percentage point lower because of the virus.

He expects the annual pace of U.S. growth to slow to 1.3% in the current quarter, down by 0.6 percentage point because of the virus. He said for the year, he is forecasting U.S. growth of 1.7%. That would be the slowest annual growth of the Trump presidency and far below the 3%-plus growth that Trump had promised to deliver during the 2016 campaign.

Because of the market turbulence and the rising potential of adverse effects from the virus, expectation of interest rate cuts by the Federal Reserve have risen. The CME Group tracker of investment sentiment has put the possibility of a quarter-point cut as early as March at 37%, up from just 7% a week ago.

Diane Swonk, chief economist at Grant Thornton, said the possibility of two rate cuts this year “has gone up dramatically” because of the virus threats.

Until recently, many economists had expected that the Fed could keep rates unchanged the whole year after three rate cuts last year, when it was struggling to cushion the impact of Trump’s trade war with China and a slowing global economy.

The estimated 2.1% annual growth pace in the October-December quarter followed an identical gain in the third quarter. For 2019 as a whole, the economy grew by 2.3%, the slowest pace since a 1.6% increase in 2016.

Trump is counting on a strong economy to propel him to re-election in November. But for each year of his presidency, economic expansion has fallen below the levels he had promised to deliver during the campaign, when he derided the growth rates achieved under President Barack Obama.

While growth did jump to 2.9% in 2018, propelled by the 2017 tax cut and increased government spending, it returned last year to near the average achieved by Obama.

Thursday’s report from the Commerce Department was its second of three estimates of economic growth for the October-December quarter. It showed that consumer spending, which accounts for 70 per cent of economic growth, grew at a 1.7% annual rate in the fourth quarter, down from an initial estimate of 1.8% growth.

Business investment on new plants and equipment was also lower, falling at a 2.3% rate, worse than the initial estimate of a 1.5% drop. These weaker numbers were offset by more business restocking of store shelves and upward revisions to residential investment and federal government spending.

Martin Crutsinger, The Associated Press