If you see a fleet of fire trucks go by with sirens blaring, you can take it as good news. All those firefighters and all that equipment are available and ready to do the job they exist for. But it's really the bad news that is more relevant. They wouldn't be racing out if there weren't a big, destructive fire blazing.
The Federal Reserve's decision last Tuesday to slash interest rates by half a point is likewise a very mixed blessing. It's good that the Fed is acting quickly and decisively to mitigate the effects of the growing coronavirus epidemic. But it is acting only because the danger is large and immediate.
When Chairman Jerome Powell says, "The virus and the measures that are being taken to contain it will surely weigh on economic activity, both here and abroad, for some time," his careful words have the sound of a hundred smoke alarms. They explain why the Fed suddenly made the biggest single cut since the 2008 financial crisis.
The scary indicators are abundant. The stock market plunged last week — and fell again in the hours after the Fed announcement. Commodity prices have declined as well, reflecting sagging worldwide demand.
China, the world's biggest manufacturing country, is in a manufacturing contraction. Many factories there shut down to combat the coronavirus, and quarantines will delay full resumption of operations.
U.S. companies that buy from China, sell to China or operate in China are all suffering as a result. Travel within China, as well as in and out of the country, has been curtailed.
Japan has closed its schools for a month, and professional baseball games are taking place in stadiums without spectators. Italy has imposed a quarantine on 11 towns. France and Switzerland have banned large gatherings of people.
Hundreds of trade fairs and conventions have been canceled in Europe. In Chicago, the International Housewares Association scrubbed a March show that would have brought 2,200 exhibitors from 45 countries.
Harvard epidemiologist Marc Lipsitch estimates that between 20 percent and 60 percent of adults worldwide will contract the disease. In the U.S. alone, the death toll could reach into the millions. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, told Politico, "I think that this is going to be one of those things we look back on and say, 'Boy, that was bad.'"
Aside from the immense human toll, there would be serious harm to the U.S. economy. People who are sick or quarantined won't be buying as much and won't be going to work. A stock market slump may cause consumers to pull back even more.
Airlines, restaurants and hotels will lose customers. Companies whose workers are out sick will have to cut production — and will have more trouble getting the materials they need to operate because their suppliers will have the same problem. Layoffs could occur, dragging growth down further.
Two bleak scenarios loom. One is that the federal government will take drastic steps to curb transmission, as China, Japan and others have done, disrupting business activity and suffocating growth. The other is that it won't, in which case the coronavirus could spread rapidly, wreaking economic havoc.
Last week, Kevin Hassett, former head of President Donald Trump's Council of Economic Advisers, told CNN, "If people are able to spread it outside of the flu season, then this has legs through the summer and you're absolutely looking at a recession globally." As for the U.S. economy, The New York Times reports, "Most analysts expect zero or negative growth in the second quarter, with some forecasting a potential recession before year's end."
At this point, the question is not whether we will enter a downturn or a full-fledged recession, but why we would be able to avoid it. Real GDP growth has been running around just 2 percent, which means any slowdown could push the economy into negative territory.
The Fed can try to help, but with interest rates already very low, its capacity to juice growth is modest at best. Fiscal stimulus aimed at bolstering demand, even if Congress and the president could quickly agree on it, would be little help against the potential supply shock.
Maybe the alarms will prove false or overblown. But a recession could very well be coming, and it would be wise to get ready.
Steve Chapman blogs at http://www.chicagotribune.com/news/opinion/chapman. Follow him on Twitter @SteveChapman13 or at https://www.facebook.com/stevechapman13. To find out more about Steve Chapman and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.