The coronavirus, thought to be one of the most significant global health emergencies of the decade, is affecting more than just public health. Businesses across the globe are coping with wild swings in the stock market, and because quarantine orders have forced many Chinese factories to delay production, U.S. manufacturers are having difficulty sourcing key materials. The havoc wreaked by this particular strand of coronavirus (COVID-19) cannot yet be quantified, but many worry it will have an effect on our economy that may be more powerful than what followed the SARS pandemic. SARS, or severe acute respiratory syndrome, was a respiratory illness caused by a different strand of coronavirus (SARS-CoV) that spread to over 25 countries in the early 2000s. Because China’s influence was still on the rise during the outbreak, SARS was estimated to cost the world economy only $40 billion, an altogether unimpressive number. The International Monetary Fund reported that China’s share of global gross domestic product during that time was only 8.5%. Today, as the figure approaches 20%, the coronavirus pandemic is likely to have a much stronger financial impact on businesses.
Supply Chain Disruptions
COVID-19 is undoubtedly upsetting supply chains, but the reasons why are not yet clear. Some believe it is an issue with supply, and others are blaming demand. Supply shock is certainly a concern. Some factories in China are unable to fulfill orders. Much of China’s manufacturing sector is labor intensive, so when workers are kept home for illness or mandated quarantines, output suffers. Factory owners in the U.S. who rely on Chinese parts or materials have already experienced delays, and many believe supplies will be pinched even more severely going forward.
Demands for Chinese-made goods are also changing. High profile organizations like Hyundai, Apple, and Google recently announced plans to move production away from China in the short term. This move diversifies their supply chain and gives them greater flexibility should they experience shortages down the road. However, business leaders’ fears also play a role. Manufacturers that rely on Chinese imports worry that future production delays will affect their bottom line, so they are preemptively making supply chain changes to head the issue off at the pass.
As business owners’ anxieties are mounting, public fears have already taken their toll on the U.S. economy. Since the outbreak was reported in mid-February, the S&P 500 has dropped 12 percent and interest rates were slashed by half a percent. When Federal Reserve Chairman Jerome Powell announced the rate decrease, he admitted the Fed may drop borrowing rates even further if other G7 countries follow suit.
Manufacturing companies in the U.S. are being affected by market strains from multiple angles. While they are struggling with their supply chains and recovering from the U.S.-China trade wars, they are losing private-sector investment as investors are keeping their dollars close to their chest.
Many of the negative market effects can be attributed to fear, but the threat to U.S. manufacturers is real. Supply chain shortages and drops in investment are already taking their toll. It is important for manufacturers to develop plans now to mitigate the situation should conditions worsen. If you have questions about the information outlined above or need assistance with a tax or audit issue, Barnes Dennig can help. For additional information call us at 513-241-8131 or click here to contact us.