How Bad Could It Get? Companies Gauge the Coronavirus Impact

on Feb29
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As the coronavirus outbreak spreads, the world’s biggest companies have begun painting a bleak picture of broken supply chains, disrupted manufacturing, empty stores and flagging demand for their wares.

The announcements by businesses like Mastercard, Microsoft, Apple and United Airlines offer a reading on how the virus is affecting consumer behavior and business sentiment. These corporate bulletins — and what executives do in response — could determine how much economic damage the outbreak inflicts and whether a recession looms.

Some companies have expressed optimism that governments will curb new infections and that consumer spending in Europe and North America will be largely unscathed. But if executives see a threat beyond the first three months of the year, they may pare planned investments and even start laying off workers. That, in turn, would further dampen economic activity.

The stock-market plunge this week, the steepest since the financial crisis, suggests that investors are bracing for a lot more bad news.

The supply-chain problems have started to affect American homebuilders as well. A senior executive at Toll Brothers said the virus appeared to have delayed the supply of lighting parts.

  • Updated Feb. 26, 2020

    • What is a coronavirus?
      It is a novel virus named for the crownlike spikes that protrude from its surface. The coronavirus can infect both animals and people and can cause a range of respiratory illnesses from the common cold to more dangerous conditions like Severe Acute Respiratory Syndrome, or SARS.
    • How do I keep myself and others safe?
      Washing your hands frequently is the most important thing you can do, along with staying at home when you’re sick.
    • What if I’m traveling?
      The C.D.C. has warned older and at-risk travelers to avoid Japan, Italy and Iran. The agency also has advised against all nonessential travel to South Korea and China.
    • Where has the virus spread?
      The virus, which originated in Wuhan, China, has sickened more than 80,000 people in at least 33 countries, including Italy, Iran and South Korea.
    • How contagious is the virus?
      According to preliminary research, it seems moderately infectious, similar to SARS, and is probably transmitted through sneezes, coughs and contaminated surfaces. Scientists have estimated that each infected person could spread it to somewhere between 1.5 and 3.5 people without effective containment measures.
    • Who is working to contain the virus?
      World Health Organization officials have been working with officials in China, where growth has slowed. But this week, as confirmed cases spiked on two continents, experts warned that the world was not ready for a major outbreak.

At the same time, Chinese consumers are buying less. Apple said the closing of stores in China would depress sales of iPhones and other devices.

Mastercard cut its growth forecast in part because people are taking fewer international trips. Fear of the virus has prompted companies like Amazon and Nestlé to suspend international travel by some employees. That drop in demand, combined with their own concerns about the virus, has prompted United and other airlines in the United States and Europe to cancel flights to cities in China and elsewhere in Asia.

On Friday, United said an investor briefing scheduled next week would be postponed until September. Citing concern over the virus, the airline said it “does not believe it is practical to expect that it can have a productive conversation focused on its long-term strategy.”

Companies may also struggle because investors are becoming more reluctant to lend them money. Appetite for new bonds, especially those issued by less-creditworthy businesses, has fallen off. Banks may also have to tighten lending standards. In a sign that investors believe the coronavirus concerns could hit banks hard, the stocks of the three largest U.S. banks — JPMorgan Chase, Citigroup and Bank of America — are all down by a lot more than the S&P 500 so far this year.

Of course, the coronavirus outbreak could end up resembling other brief shocks that have landed only glancing blows on companies and the stock market. These include the fiscal battles of the previous decade that consumed Washington and Wall Street for weeks at a time.

And as recently as Friday, some companies were predicting that their sales would hold up just fine. Volkswagen, the German auto giant, said it expected deliveries this year to be “in line” with 2019. And Apple said conditions were gradually returning to normal in China. “It feels to me that China is getting the coronavirus under control,” Tim Cook, Apple’s chief executive told Fox Business on Thursday. “When you look at the parts that are done in China, we have reopened factories.”

Some investors sit on the sidelines when they feel unequipped to assess financial risks.

A big concern is that the virus will spread quickly in Europe and the United States, forcing consumers to stay home from work, not to mention avoiding stores, restaurants or other businesses.

In that case, an economic contraction could become inevitable. Should a recession develop, the Goldman analysts said, profits of S&P 500 companies are likely to fall this year by 13 percent. Such a decline could force companies to lay off employees and put off new investment.

Even before the coronavirus outbreak, business investment was already pallid in the United States. It fell in the last three quarters of 2019. Some analysts now expect more companies could soon announce reductions in their capital spending. “I think you will see that when they report their Q1 numbers,” Mr. O’Rourke of JonesTrading said.

Niraj Chokshi contributed reporting.



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