Coronavirus Sets Up Short-Term Pain, Long-Term Gain
Companies have been drawing down inventories. Growth should snap back once the outbreak ends and they start restocking.
Lock down.
Photographer: Getty Images AsiaPacWhat might throw the U.S. economic expansion off course?
One possibility has to be inventory shortages, at least in the first half of 2020. Stockpiles already had already been reduced in 2019 by businesses wary about the trade wars; they now face the possibility that they will be unable to replenish them for the foreseeable future because of Chinese factory shutdowns related to the coronavirus outbreak. This may mean higher prices -- inflation already is ticking up in China -- and reduced output in the short term, but also may lead to a surge in output later in the year when companies have both the means and the will to restock.
Inventory reductions in the last three quarters of 2019 were the biggest culprit in a disappointing year for U.S. business investment. Between the second and fourth quarter of 2019, gross private domestic investment subtracted an average of 0.8% of gross domestic product per quarter. Almost all of that can be traced to a reduction in inventories. This was the right decision for businesses to make as the trade war was accelerating and the scale of the economic fallout seemed to be mounting. Better to halt expansion plans, sell the products already in stock and hold a little extra cash until the dust settles.