How Would a Second Stimulus Check Impact Markets?

The $1,200 stimulus check sent out to individuals had mixed impacts on our economy, based on academic research, including by the University of California-Davis. For recipients with $3,000 or more in their bank accounts, there was no positive impact on the economy. However, for recipients with bank account balances up to $500, they spent 44.5 percent of their check, on average, within 10 days of receiving the stimulus check.

The first stimulus check was part of the CARES Act, which guided how the checks were issued:

The IRS began with those who filed 2018 and/or 2019 taxes, and looked at their adjusted gross income (AGI) as a starting point.

  • For “eligible individuals,” they received a full $1,200 check if they earned up to $75,000. If they earned between $75,000 and $99,000, the payment would be reduced by $1 for every $20 earned beyond $75,000. If they earned $99,000 or more, they would not be eligible for a stimulus check.
  • For “head of household filers,” they would get a $1,200 check for earnings up to $112,500. For earnings up to $136,500, the payment would be reduced by $1 for every additional $20 earned. If they earned $136,500 or more, they would not be eligible for a stimulus check.
  • For “married couples filing joint returns,” they would get a $1,200 check for earnings up to $150,000. For earnings up to $198,000, the payment would be reduced by $1 for every additional $20 earned. If they earned $198,000 or more, they would not be eligible for a stimulus check.

Depending on the filer, if they had a qualifying child 16 years or younger who they claimed on their tax return, each child could qualify for $500 in additional stimulus funds.

While the language is still subject to change because there’s no legislation passed and signed into law, uncertainty still exists regarding proposals for a second stimulus check/plan.

One proposal includes increasing the payments for dependents to $1,000 from $500. Another proposal includes casting a wider net for dependents – college students and/or older parents who reside in the same household, giving $500 for this category.

A September report by the National Bureau of Economic Research (NBER) shows how consumers across the income distribution levels handled their stimulus checks.  

The NBER study found that once a stimulus payment was received, the typical individual spent $250 per day, compared to $90 a day before stimulus checks were available to recipients. Within 10 days, more than 20 percent of each dollar was spent. However, the report found different activity depending on the respondent’s income level and job security.

The study found that for recipients with checking accounts with more than a $4,000 balance, only 11 cents of stimulus money was spent in the month following receipt of their check. Looking a month out from when a stimulus check was received, those who had more assets were far less likely to spend their check quickly. However, for respondents with bank account balances of less than $100, more than 40 percent of their stimulus check was spent within one month.

These consumer expenditures offer a good indicator of how spending from another stimulus check would impact the economy. As the U.S. Department of Labor and U.S. Bureau of Labor Statistics show for 2019, there are different spending trends for each quintile or income strata (20 percent per quintile) for different income levels.

During 2019, each quintile increased, with the bottom quintile’s income growing by 6.6 percent, compared to the top quintile’s income growing by 6.7 percent. Quintiles two through four saw increases of income between 3.2 percent and 4.9 percent.

For reference, the 2019 “lower income bounds” are as follows:

  • Second quintile: $22,488
  • Third quintile: $43,432
  • Fourth quintile: $72,234
  • Fifth quintile: $120,729

“Average annual expenditures” for 2019 were $63,036 for “all consumer units,” or 3 percent more than 2018. A consumer unit is defined as either a family, an individual living on his or her own, and/or sharing costs with others or maintaining a residence with other individuals, but retaining the financial means to take care of themselves.

During 2019, while every quintile increased spending, the bottom quintile spent 8.6 percent more, versus the second quintile increasing their spending by 1.3 percent. All quintiles saw growth in spending for food at home, housing, transportation and cash contributions. Except for the second quintile, healthcare expenditures increased. For the food away from home category, the first, third and fifth quintiles increased spending. For apparel and services, the first, third and fourth quintiles saw increased spending.

Based on analysis conducted after stimulus checks were issued to individuals and families, sending out an additional stimulus check to those in the lower to mid-quintiles, along with promoting job growth and a strengthening job market, looks like the best way to help the economy recover. 

Examining Fed’s New Targeted Inflation Policy

Looking back to 2012, the Federal Open Market Committee (FOMC) – a collaboration of the 12 regional Fed banks and the Federal Reserve Governors in Washington – came together and published a Statement on Longer-Run Goals and Monetary Policy Strategy.

This officially rang in the FOMC’s public commitment to maintain inflation at 2 percent. It is based on a yearly change in the Personal Consumption Expenditures (PCE) price index, and is in accordance with The Federal Reserve’s “mandate for maximum employment and price stability.”

Guided by three events in the economy, according to the Brookings Institution, the FOMC was prompted to take a second look at 2012’s existing framework. The first factor, an approximation of the “neutral level” of interest rates, or interest rate levels correlated “with full employment” and inflation targets, kept dropping globally. The “lower neutral rate” is achieved when short-term interest rates, which are controlled by The Fed, stay at levels closer to zero versus higher levels. When this occurs, The Fed has little room to further lower interest rates, and therefore stimulate the economy. The next factor involves inflation rates and anticipation for future inflation rates to stay below The Fed’s 2 percent target. The last factor was unemployment falling to a five-decade low.

The FOMC’s Aug. 27 update reveals that the inflation rate has been lower than the 2 percent inflation target in recent years, despite housing, food, and energy increasing in price for consumers.

When there’s too little inflation, as The Fed explains, it can negatively impact the economy. If inflation remains below The Fed’s “longer-run inflation goal,” it can propel a self-fulfilling prophecy of further declining inflation levels.

As originally explained in 2012 and updated in August, the FOMC’s purpose is to “promote maximum employment,” keep prices stable, and “moderate long-term interest rates.” It also guides individuals and business owners with more information to make decisions, promotes greater “economic and financial certainty” and increases “transparency and accountability.”

The Fed, based on their FAQ section, has said that when inflation runs below 2 percent for an extended period of time, monetary policy will adjust to run above 2 percent for a period of time. Therefore, the FOMC is hoping to ensure that “longer-run inflation” will average at 2 percent.

The FOMC’s monetary policy is a big determinate in keeping the economy stable when the economy and financial systems are put out of balance due to factors such as inflation, long-term interest rates, and employment. The FOMC accomplishes its monetary policy via the “target range for the federal funds rate.”

Looking at the “level of the federal funds rate consistent with maximum employment and price stability over the longer run,” this rate has dropped compared to past average rates. With this in mind, the federal funds rate is generally expected to remain on the lower end of the rate spectrum more so now, versus years back. With interest rates closer to the bottom end, the FOMC believes that inflation and employment perils are more likely to stay depressed.

Based on comments from The Fed in August, the FOMC clarifies its Congressional Mandate regarding price stability and maximum employment, along with determinations on its short-term interest rate and other monetary policy considerations.

Following up on its Congressional mandate for The Fed to ensure maximum employment and price stability, the first thing to focus on is price stability or inflation.

Before, The Fed had a price stability target of 2 percent inflation, based upon the Personal Consumption Expenditures price index. The FOMC called this price stability “symmetric,” meaning that inflation above or below the target is equally concerning.

However, its new stance will now focus on attaining “inflation moderately above 2 percent for some time” after an ongoing time period of tame inflation. Based on comments from Fed Chair Jerome Powell, this is a flexible form of average inflation targeting.

This end goal of average inflation targeting suggests that when inflation is below the 2 percent target over an extended period of time, the FOMC will adjust its policy to encourage inflation above the 2 percent target to attain balance. However, The Fed didn’t give details regarding the time frame for its new averaged 2 percent inflation target, nor did it specify what actions it will implement to achieve it.

The Fed also made noteworthy changes to its “maximum employment” mandate. When it comes to this measurement, it originally compared the projections of “the long-run rate of unemployment” to the unemployment rate. According to the Brookings Institution, this also can be referred to as “the natural rate of unemployment or the non-accelerating inflation rate of unemployment (NAIRU).”

Since live estimates of the NAIRU can be unreliable, it’s no longer being considered. While the Summary of Economic Projections will still include estimates of unemployment statistics by FOMC members, it will unofficially take the place of the NAIRU readings. However, these FOMC members’ long-run estimates of unemployment will have less impact on monetary policy decisions.

How Do Interest Rates Looking Going Forward?

With these two changes to The Fed’s Congressional mandates, many expect monetary policy to be quite loose over the coming years, according to the Brookings Institution. By permitting hotter than normal inflation and low rates of unemployment, there’s a remote chance The Fed will increase interest rates prior to inflation running north of 2 percent for a measurable time period. 

How Will Monetary Policy Impact Markets Going Forward?

With gold hitting $2,000 an ounce in recent days, coupled with the Federal Reserve’s monetary policy creating a lot of liquidity, how will markets perform for the rest of 2020 and beyond?

Based on a reading from the Federal Reserve’s minutes from its July 28 to July 29 meeting, the Fed remarked that the ongoing pandemic would continue to put a strain on the economy, slowing expansion and causing additional damage to the country’s monetary framework.

The Fed highlighted the nation’s GDP drop by 32.9 percent in the second quarter. While Q3 growth is expected to be positive, that was not quantified. Additionally, the Federal government’s debt has grown by $3 trillion since the onset of COVID-19, reaching $26.6 trillion. The release of these minutes sent stock prices downward and helped the U.S. dollar gain.

Forward guidance or communication to the general public and business owners of the Fed’s goals for inflation and unemployment target figures could be upgraded, but no time frame was given. More details on how the target range for the federal funds rate’s path would be appropriate at some point, per the Federal Open Market Committee’s (FOMC) minutes. How the target range of the federal funds rate evolves is outcome-based or based upon meeting certain economic goals before rates see further movement. For now, The Fed’s mandate is to ensure full employment and price stability.

The FOMC is expected to keep the current overnight borrowing rate between 0 percent and 0.25 percent until the U.S. economy has emerged from its current situation and on course to achieve the Committee’s maximum employment and price stability goals.

The July meeting kept short-term interest rates at near-zero because the economy is still not at its pre-pandemic economic activity levels. Given that COVID-19 has already impacted the jobs picture, the value of the U.S. dollar, and how well the economy is functioning already in the near term, the FOMC see the pandemic continuing to impact economic growth in the medium term.    

The Fed remarked that the U.S. Congress needs to pass another economic stimulus plan, especially when it comes to renewing unemployment insurance that recently expired. The FOMC meeting also noted that the Fed is not expected to purchase bonds to control yields on government bonds. However, it did speak to how it has played a role in buying bonds on the open market to support liquidity during the COVID-19 pandemic. 

The meeting also determined that bond purchases by the Fed grew by more than $2.5 trillion, increasing to $7 trillion – up from $4.4 trillion over the course of the coronavirus pandemic. While skepticism by the Fed’s FOMC members regarding the use of purchasing bonds to manipulate the government bond yield curve wasn’t given much consideration, it’s still noteworthy to explain this versus what many refer to as quantitative easing or QE.

If the Fed’s efforts to bring down short-term interest rates, the rate that banks earn on overnight deposits, to zero with no positive economic effects, another tool the Fed has is Yield Curve Control (YCC). Whatever longer-term rate the Fed has in mind, YCC would involve an ongoing campaign of buying long-term bonds to maintain rates below its target rate by increasing the bond’s price and lowering the bond’s longer-term rates.

This is in contrast to QE, where the Fed purchases a fixed amount of bonds from the open market. It’s done by central banks to increase the money supply in hopes of spurring spending and investing by Main Street. It’s an important tool that central banks rely on when rates are at or near zero. This helps banks with their reserve requirements, giving them more liquidity to provide more loans to consumers and commercial borrowers.

Quantitative Easing Considerations

As central banks increase the money supply, it can create inflation. If it does create inflation, but there’s no measurable economic growth, this can lead to stagflation.

It is noteworthy that QE and the resulting lending attempt to stimulate the economy is effective only if individuals and commercial operations take loans and use them to spend and invest in the economy.

QE also can devalue the currency. It can help domestic manufacturers export goods (because the currency is cheaper), and anything that’s imported is more expensive. Consumers are hit with higher prices for imported goods, along with domestic producers using higher-priced imported raw materials for their final products.

With the economy still facing the headwinds of the COVID-19 pandemic, the Fed has played a major role in stabilizing the economy. While the increase of liquidity has certainly provided a lifeline for the markets, the price of gold can be seen as a hedge against this liquidity – with inflation as one potential outcome. For the rest of 2020, The Fed will be ready and able to assist the markets but will leave lingering questions about the value of the U.S. and other global currencies. 

How Will the Market Price in Q2 Earnings?

Q2 Earnings 2020The New York Fed Staff Nowcast predicts a negative 14.3 percent (-14.3 percent) growth of real GDP for Q2 of 2020 and a positive 13.2 percent growth of real GDP for Q3 of 2020. Clearly, the Fed is expecting a rebound in the second half of 2020.

This forecast, presented in the July 17, 2020: New York Fed Staff Nowcast, attributes better than expected results for industrial production, capacity utilization, and retail sales data categories, resulting in the upward revision.

For June 2020, the forecast for the Industrial Production Index was 2.48, but the actual figure was 5.41. As the Board of Governors of the Federal Reserve System defines it, this index gauges the real output in the U.S. economy’s industrial sector on a month-over-month basis as a percentage change.

For June 2020, its Capacity Utilization measure was 3.54, versus the original forecast of 1.84. Coming from the Board of Governors of the Federal Reserve System, this measures the percentage of resources consumed by businesses to create goods for all domestic production.

Also for June 2020, the U.S. Census Bureau reported a figure of 7.50, compared to the forecast of 2.17, for the month’s retail sales data, on a month-over-month basis as a percentage change. It looks at the sales from more than 12,000 retailers with paid workers, including food.

While there’s no definitive way to determine how each community, state, or region will be affected, the Brookings Institution did an analysis that provided an interesting insight into how and why certain areas may be more impacted economically than others. It looked at sectors more prone to interruption by COVID-19, resulting in less business, more closures and layoffs. It found that areas reliant on energy and in the southern part of the country were more likely to be negatively impacted.

Brookings found that by looking at 2019 employment figures for these industries, there are approximately 24.2 million jobs that are ripe to be disrupted. Looking to Moody’s, Mark Zandi found that the following five industries are most vulnerable: mining/oil and gas, transportation, employment services, travel arrangements, and leisure and hospitality.

Conversely, Brookings found that more mature manufacturing locales, agricultural centers, and already economically challenged areas are less prone to negative impacts. However, it’s noteworthy that because of the proliferation of technology, which has seen an uptick in computer sales and IT/cybersecurity due to increased remote working and learning, the potential for a rebound will be easier.

While the COVID-19 pandemic has the world in its grip, it’s noteworthy to discuss how past pandemics and infectious disease outbreaks have impacted markets. Over the past 40 years of global epidemics, according to FactSet and Charles Schwab, there have been mixed results when it comes to the impact of disease outbreaks on market performance, using the MSCI World Index as a reference.

In June of 1981 during the HIV/AIDS outbreak, the index fell 0.46 percent during the first month; falling 4.64 percent over the three months after the start of the outbreak, and down 3.25 percent six months after the initial outbreak.

As for the 2006 avian flu outbreak, the index dropped 0.18 percent one month after the start; then the index was up 2.77 percent three months after the outbreak; and up 10.05 percent six months after the outbreak. 

Looking at these figures, it shows that more often than not, these types of events are short to medium term pullbacks, presenting investors with buying opportunities.  

According to Zacks & Nasdaq, Q2 earnings’ projections for the S&P 500 is a negative 43.7 percent, with a drop of 11 percent in revenue. While Q2 is expected to be the worse, Q3 and Q4 are expected to experience smaller, but still noticeable drops in earnings due to the coronavirus. The transportation sector is expected to decline by 152.4 percent; autos is expected to decline by 224.2 percent; and energy is projected to drop by 138.4 percent, on a year-over-year basis.

While these were some serious declines for Q2, the one bright spot was technology. The technology sector declined by only 13.2 percent year-over-year, with a drop of 1.2 percent in revenues. However, it’s noteworthy that, much like technology has seen shallow losses along with the medical sector, it’s projected that in 2021 the technology sector will earn 8.8 percent more while the medical sector is expected to grow its earnings by 12.8 percent in 2021.

The coronavirus is unique in that there’s been mass stay-at-home orders and closures. However, based on past disease outbreaks, the economy and markets generally seem to find a way to balance themselves out.

How Likely Would a Second Coronavirus Wave Negatively Impact the Stock Market?

As Johns Hopkins University of Medicine’s Coronavirus Resource Center revealed a recent increase of coronavirus cases in the Southern and Southwestern United States, the VIX ticked up. With fears of the outbreak curve not flattening, how will this impact markets?

The Volatility Index (VIX) was established by the Chicago Board Options Exchange in 1993 to gauge volatility in the financial markets. Referred to colloquially as the “fear index”, it measures the next 30 days of anticipated volatility for the U.S. Stock Market via S&P 500 options. For reference, during the peak of the 2008 financial crisis, it topped out at 89.53. During periods of relative calm, it’s not unheard of to trade below 10. On March 16 of this year, the VIX reached 82, thus demonstrating how volatile investors expected markets to be due to the uncertainty of the coronavirus.

On February 12, 2020, the Dow reached 29,551.42 and the S&P 500 rose to 3,379.45. But by the end of February, these major indices experienced their greatest fall since 2008, ushering in a market correction.

Coronavirus and its Impact on the Markets

Starting in early March, the COVID-19 pandemic began taking a negative toll on stock markets worldwide, the worst since 2008. On March 9, the Dow fell 2,158 points, or 8.2 percent, during the day’s lows. Other major U.S. markets were not spared – the S&P 500 fell 7.6 percent and the Nasdaq dropped 7.3 percent.

On March 12, the U.S. stock indices dropped more. The S&P 500 fell another 9.5 percent, along with the Dow falling 2,353 points, almost 10 percent lower. For the Dow, it was the worse one-day performance since Oct. 19, 1987’s drop, bringing it back to 2017 levels. While there was hope of a sustained rally beginning on March 13, it was dashed when the Dow Jones fell nearly 13 percent or 2,997.10 points, and the S&P 500 dropped nearly 12 percent on March 16.

Factors Contributing to the Crash

While the stock market crash in 2020 was directly attributable to the coronavirus outbreak worldwide, many experts, including the International Monetary Fund (IMF), view the coronavirus as speeding up a global slowdown that was already in the works.

Despite the St. Louis Fed’s data that showed the United States had an unemployment rate of 3.6 percent in late 2019, the nation’s industrial output peaked in 2017, and experts noticed a declining trend at the start of 2018. The IMF also believed the United States-China trade war made global growth more challenging going forward.

There were other concerning factors about economic growth domestically and internationally, causing fear a worldwide recession was beginning. March 2019 saw the U.S. yield curve inverting – which means longer-term debts yield less than shorter-term debts. The ISM Manufacturing Index fell below 50 percent in August 2019, dropping to 48.3 percent in October 2019, and remaining below 50 percent through 2019.

When it comes to rising COVID-19 cases, the state of California saw 4,515 new cases over 24 hours, as reported on June 21. Florida’s reports on June 20 and 21 saw the number of cases increase by 4,049 and 3,494, respectively. Other Southern and Western states, such as Nevada, Missouri, and Utah, reported one-day records in increases of coronavirus cases as well.

With Georgia, Alabama, Florida, and California, among others, showing concerning trends for increased coronavirus infection rates, analysts at Deutsche Bank expressed concern about how the virus may keep spreading. According to the same research, there’s some trepidation on how it may negatively impact economic growth. Depending on the overall hospital capacity to handle a resurgence in severe COVID-19 cases, how well the medical infrastructure responds will influence how the economy functions going forward.

With the number of increasing cases shifting from the Northeast to Southern and Western states, it’s feared that there will be another panic on Wall Street as reopening the economy is postponed, further stunting economic activity.

Research from Jefferies Financial Group found that even though coronavirus cases are increasing, it’s not the only or the biggest worry. Jefferies’ research found that for investors, the biggest concern is how well and how fast the economy bounces back.

Analysts believe that there needs to be more than just action by The Federal Reserve to inspire market confidence. The research found four main concerns, which included the effects of COVID-19:

  • 6.6 percent of respondents said the upcoming election is the most important factor
  • 12.1 percent of respondents said a second wave of COVID-19 is the most important factor
  • 31.1 percent of respondents said The Federal Reserve’s decision is the most important factor
  • 50.2 percent of respondents said the shape of the recovery is the most important factor

As the economy reopens and medical experts become more knowledgeable and better prepared to deal with COVID-19 through therapies and equipment for hospitalizations, it seems that investors will be taking a more holistic investing approach.

Are Dividends Becoming a Luxury During the Coronavirus Pandemic?

According to the futures market, Chicago Mercantile Exchange contracts are forecasting a drop of 27 percent in dividends over 24 months for the S&P 500 index. Dividends are projected to fall to $42.05 in 2021, a drop from 2020’s dividend of $47.55 and 2019’s high of $58.24. Looking forward to 2026, according to CME’s futures contract, the dividend is expected to recover to $56.65. While the latter years are not as likely as what’s up next, it’s worth taking note.

Although these dividend levels have already been announced, the future doesn’t look much brighter. According to Goldman Sachs, Q2 economic growth is expected to drop by 34 percent. Even though the COVID-19 economic crisis is expected to be worse, we can get an idea of how bad by comparing it to the financial crisis of 2008. From 2007 to 2009, the S&P 500 dividend dropped by 25 percent; it took 48 months to recover from this drop. Based on this historical look-back, chances are it’ll take longer to get back to par this time around.

It’s noteworthy to highlight companies that suspended their dividends in April 2020, and when they last suspended their dividends, historically speaking. Dine Brands Global (DIN) initially paused its stock-buyback program. This was followed up with a suspension of its quarterly dividend of 76 cents. Royal Dutch Shell lowered its dividend by two-thirds to 16 cents per share, the first time since 1945. These examples illustrate just how dire the economic situation is for companies around the world.    

Cash Dividends Explained

A cash dividend is money distributed to stockholders according to a corporation’s present earnings or amassed profits. Dividends are declared and issued by a board of directors that determines whether they’ll remain the same, increase or decrease. 

Understanding the Need to Reduce or Cut Dividends

A dividend cut often results in a drop in a company’s stock price since it indicates a weakened financial position. Oftentimes, dividends are cut because earnings are dropping or there’s less money available to pay the dividend, which can be due to increasing debt levels.

The point here is that dividend cuts are a poor sign for a company that is facing financial difficulties due to reduced revenue, with the same overhead still needed to be paid (rent, wages, insurance, debt servicing). While dividends can be cut for short- or long-term reasons, such as buying their own stock back or buying out another company, with the ongoing coronavirus situation the majority of businesses aren’t doing it for positive reasons.

While reducing or removing a dividend from a company’s stock can divert cash for ongoing operations or debt servicing, it also can tell the markets things aren’t going well financially. This is illustrated by looking at AT&T. In December 2000, the company reduced its dividends by 83 percent, lowering it to 3.75 cents, versus the expected 22 cents by shareholders.

One of the first signals that a company can’t pay dividends, or won’t be able to in the near future, is to look at the company’s earnings trend and its payout ratio.

Looking at a Historical Example

During the second half of the 1990s, AT&T’s stock faced more and more competitors as deregulation went into effect. According to the company’s income statements from 1998 to 2000, annual earnings per share dropped by 50 percent.  

This data is according to AT&T’s 10-K, which shows that its yearly earnings dropped from $1.96 in 1998; to $1.74 in 1999; and finally to $0.88 in 2000. With this precipitous decline in earnings and the financial pressure it put on AT&T, a reduction in dividends came next. Based on this data and some analysis, we can explain how the Dividend Payout Ratio works.

Understanding the Dividend Payout Ratio

Using this ratio can help investors gauge how likely a company’s dividend will be cut or removed altogether.

Dividend Payout Ratio = Dividend Payment per Share / Earnings per Share

Looking at AT&T’s 10-Q report for Q3 of 2000, AT&T earned 35 cents per share and gave shareholders a dividend of 22 cents a share. Based on the dividend payout ratio formula, the resulting ratio was 0.63. This ratio means that 63 percent of AT&T’s earnings were given to shareholders via dividends. When companies have challenging earnings seasons, the payout ratio gets closer to 1 because whatever the company earns is eaten up by the dividend. Therefore, the closer the ratio gets to 1, the more likely the dividend will be lowered or suspended.

While there’s no predicting what the economy will do in the future, looking at past trends can give investors insight into what companies will do with their dividends when the economy faces new headwinds.

Coronavirus: Black Swan or Buying Opportunity?

According to the World Economic Forum (WEF), the spread of the coronavirus will impact the world’s economy. Whether it’s a Reuter’s poll from economic experts projecting growth in China slowing to 4.5 percent in Q1 of 2020, in contrast to China’s Q4 GDP of 6 percent; or the International Energy Agency (IEA) saying world desire for oil will be lower due to the coronavirus; or global companies reducing or temporarily closing their Chinese factories, change is on its way. Based on this data, what does the global economic outlook entail?

In order to understand how the coronavirus might impact global economies, it’s important to put this in context of other global events. Based on a February 2020 Monetary Policy Report from The Federal Reserve, there’s a mixed outlook for recent and projected economic activity. While the Fed notes that oil prices have increased over the past six months of 2019, in part due to OPEC members cutting production and brief tensions with Iran in January 2020, The Fed attributes more recent drops in oil prices to the coronavirus and associated lowered global demand.

Due to China’s already slowing economy, the IEA is projecting 435,000 fewer barrels of oil on an annual basis during Q1 of 2020, the worst in a decade. Looking at statistics from the United Nation’s International Civil Aviation Organization (ICAO), airlines are expected to see revenue losses of between $4 billion and $5 billion in the first three months of 2020. With the coronavirus impacting China, thereby reducing outbound travel to Japan and Thailand, losses could be as big as $1.29 billion and $1.15 billion for each respective country.

The Fed explains that in 2019, manufacturing has been challenged both globally and domestically. Citing the industrial production (IP) index, the first six months of 2019 saw declines in both domestic and global activity. For 2019, U.S. production dropped by 1.3 percent for durable and non-durable goods. This is attributed to trade issues with China, soft economic growth worldwide, less than aggressive investment from businesses, declining oil prices that lower continued production by crude producers and production issues with Boeing’s 737 Max airplanes.

However, despite the manufacturing slowdown in China, the United States’ manufacturing base shouldn’t see the same impact from the coronavirus. The Fed says that factoring in purchasing materials for production on the input end, and transporting, wholesaling and retailing products post production, the drop of 1.3 percent on the industrial production index equates to a 0.5 percent drop in U.S. GDP. For context, compared to the U.S. manufacturing employing 30 percent of workers 70 years ago, it presently employs 9 percent of workers.

One way to see how the coronavirus might play out is to look at how SARS impacted China in 2003. Based on data from the National Bureau of Statistics in China, it took three months, during Q1 of 2003, where China’s economic growth dropped to 9.1 percent, from 11.1 percent. While a much smaller economy, on a global scale, in future quarters China was able to grow at an annualized rate of 10 percent, per Refinitiv. However, economists note that if SARS didn’t impact China, there could have been another 0.5 percent to 1 percent increase in annual growth.

Another comparison with SARS is China’s retail sales. Refinitiv shows that May 2003 retail sales dropped to 4.3 percent. This is compared to between 8 percent and 10 percent for retail sales figures in March 2003 and July 2003, showing how serious the impact SARS made, but also China’s resiliency.

While the Chinese economy impacts the global economy today more than when SARS hit, it also has a more responsive economy and a larger middle class. Only time will tell as to the coronavirus’ impact, but based on past experience, it should only be a matter of time before China’s (and the global) economy bounces back to greater economic output.