Pricing the Economic Risk of Coronavirus: A Delay in Consumption or a Recession?

Abstract

This paper prices the probable economic risk of coronavirus, where possible outcomes range from partial delay of consumption (blip), to a full scale of recession due to disruption of supply chain and labor productivity shock. We present the lifecycle that the virus goes through (Genesis, Epidemic-pandemic, and Stasis), and suggest that the length of the life cycle determines the economic consequences. To date in the current case of coronavirus, corporations will miss original Q1/2020 earnings forecasts due to reduced or delayed consumer spending. Looking forward, there are three economic scenarios; in the first, should the coronavirus exhibit a marked decline by mid-April, then companies will have outstanding Q2 earnings, arising from the delayed blip in consumption from Q1. In the second, should the coronavirus effects continue through May, then there will be a moderate recession due to a limited labor shock. In the third, there is an extended pandemic that creates a full-scale recession. To respond to the GDP gap created by coronavirus, I propose that the optimal fiscal and monetary policy is intervention to fill in the GDP gap with infrastructure projects and unemployment benefits, up to the amount of $5 Trillion (half of it for states revenue shortfall). And to address the gap in the stock market, the Fed should purchase assets (not push on a string by cutting rates). With these policies, there would be a soft landing for the US economy and the stock market.