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

Martin Crutsinger
AP Economics Writer

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 2020 as a whole.

The Commerce Department said Thursday that 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. 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 last quarter than initially estimated.

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

That fears 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 coordinating 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 he had lifted his odds of the virus spreading beyond China to become a worldwide pandemic at 40%, up from 20%.

“A pandemic will result in global and U.S. recessions during the first half of this year,” Zandi said.

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

He said the annual pace of U.S. growth will 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%, down by 0.2 percentage-points because of the virus. 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 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 expected 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.