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The Coronavirus Is A Supply-Side Shock

John M. Mason profile picture
John M. Mason


  • Concern is growing that the spreading coronavirus outbreak will continue to spread and reach a peak later than many people had originally thought.
  • As far as the economy goes, policymakers and investors need to understand that the primary economic effect of the virus will be on the supply side of the economy.
  • Consequently, monetary and fiscal policies attempting to stimulate aggregate demand will be limited in what they can do and will need to be aimed at protecting on the down side.
  • We hope that the final outcome will be less than some are looking for now, but we still need to be prepared for things becoming a lot worse: let's hope that doesn't happen.

Nouriel Roubini, professor of economics at the Stern School of Business at New York University makes it very clear in his opinion piece in the Financial Times that the spreading coronavirus will mainly hit the supply side of the economy, however severe the impact might be.

Mr. Roubini writes “this coronavirus outbreak is mostly a negative supply shock that reduces growth and increases costs and inflation, with some side effects for aggregate demand.”

This is important for policymakers and investors to understand.

Supply-side effects on the economy must be looked at and dealt with in a different way than demand-side problems.

I have argued many times over the past several years that the growth rate of the United States economy, especially in the manufacturing areas, has been as slow as it has been due to the fact that supply-side factors have been such that the economy just cannot grow much faster if it is stimulated by fiscal or monetary programs.

One can point to the fact that the December 2017 tax reform act passed by the US Congress had so little impact on the actual growth rate of the country. Yes, the tax cuts provided some added growth to the total, but when one hears that maybe up to two-thirds of the tax cut went into stock buybacks and even more of the benefits failed to find a way into physical capital expenditures, one can understand why fiscal policies might not be very effective in this era.

Furthermore, as Mr. Roubini notes in his article, “Monetary policy cannot resolve this.” That is, monetary policy cannot overcome slow economic growth created by supply-side factors. This is true in general, but it is also true through supply-side impacts that are created by a health crisis spreading throughout the world.

And, this is just

This article was written by

John M. Mason profile picture
John M. Mason writes on current monetary and financial events. He is the founder and CEO of New Finance, LLC. Dr. Mason has been President and CEO of two publicly traded financial institutions and the executive vice president and CFO of a third. He has also served as a special assistant to the secretary of the Department of Housing and Urban Development in Washington, D. C. and as a senior economist within the Federal Reserve System. He formerly was on the faculty of the Finance Department, Wharton School, the University of Pennsylvania and was a professor at Penn State University and taught in both the Management Division and the Engineering Division. Dr. Mason has served on the boards of venture capital funds and other private equity funds. He has worked with young entrepreneurs, especially within the urban environment, starting or running companies primarily connected with Information Technology.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (10)

Lets hope summer comes soon.
Salmo trutta profile picture
Pent up demand.
A friend just flew in from London to Washington DC, there were less than 10 passengers in the economy class. Households & corporations are avoiding non-essential travel.
Airlines, Cruise liners, Energy, Luxury goods, casinos, gaming, transportation , clothing retailers, real estate & construction, hotels are directly impacted by demand side contraction. Commodities, Auto parts, Banks, Oil, etc. are impacted by supply side disruption in China & Far East... hope this horror show ends soon....
Salmo trutta profile picture
A negative supply side shock is exactly what Dr. Scott Sumner says should be handled through an increase in N-gDp (without regard to a change in inflation).

"A supply shock is an event that suddenly increases or decreases the supply of a commodity or service, or of commodities and services in general. This sudden change affects the equilibrium price of the good or service or the economy's general price level.
In the short run, an economy-wide negative supply shock will shift the aggregate supply curve leftward, decreasing the output and increasing the price level." -- Wikipedia

Sumner: "Increased probability that monetary policymakers will not be aggressive enough to prevent a recession, and if the recession occurs then demand will still be rather sluggish in January 2023 because the Fed will be too hawkish in the recovery...In other words, we need adequate NGDP in 2023, and if we don’t get it then it will be the Fed’s fault."

Scott Sumner is exactly right.

Dr. Nouriel Roubini is nearly correct.

“If its output shrinks just 2 per cent in the first quarter, that is an annualised contraction of 8 per cent. A V-shaped rebound would therefore require the same annualised growth, which exceeds the 6 per cent that China managed before the virus”

There becomes an elongated “sweet spot” in monetary flows, volume times transaction’s velocity , where inflation is interrupted for an increased period of time. The Fed should take this opportunity to ease its money policy. It should lower the remuneration rate on interbank demand deposits.
razvanone profile picture
There is a crisis of overproduction in many areas. This will be a great opportunity to clean inventories. There might be a supply side problem for goods that are produced without buffer inventories - so the most efficiently administered companies might have a problem with the supply. Many others will be able to liquidate inventories.
As the coronavirus spreads across the global and the US, many US zombie companies existing on a debt binge will be in trouble, as they try to finance their BBB or lower bonds with limited revenues.

There will be a few rounds of "defaults and bankruptcies" in Corporate America, given the unsustainable debt on their balance sheets.

Retailers, Oil and Gas companies, and even a few tech companies will be in trouble.

Good Luck !
The coronavirus is a sideshow. Fast forward 5 years. Coronavirus?? Huh? What?
Quite possibly but it shows how much very low rates and heavy hands of printed money leave the market saying what now, i.e. a crises out of a can of worms helps with price discovery perhaps.
Polyhedron profile picture
I, too, feel supply side shock is the real risk. Furthermore, stagflation may force the Fed to actually raise interest rate instead of lower.
g23riel profile picture
No raises until the election, that would be a major no-no.
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