The trade war put the economy in trouble. The coronavirus will be much worse

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Would the coronavirus paralyze the US economy? 1:53

Editor's Note: Mark Zandi is a chief economist at Moody's Analytics. He was an advisor to the presidential campaign of John McCain in 2008 and supported Hillary Clinton in the 2016 elections. The opinions expressed in this column belong exclusively to the author.

(CNN Business) - The coronavirus is an existential threat to the record expansion of our economy. The Centers for Disease Control and Prevention (CDC) ensures that COVID-19 is likely to result in a worldwide pandemic. And if the warning of this entity is fulfilled, then the recession will be difficult to avoid.

This is also the evaluation of global investors, who have lowered stock prices in recent days, while greatly increasing the likelihood of a recession. The stock market was overvalued and, therefore, vulnerable to any turn or change that does not meet those expected. The downturn in stocks - around 11.5% - has swept the staggering wealth of $ 3.4 trillion from shareholders.

China's experience provides a good case study on how COVID-19 could cause chaos in our own economy. Travel, tourism and commerce will be significantly affected, if not suspended. Airlines and hotel chains are already dealing with cancellations. Workers will not be able to get to their jobs if they are sick or in quarantine, and if schools and kindergartens close, parents will have to stay home with their children and work fewer hours.

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Without employees, companies will produce less and those who are not working will buy less. This adds to lower profits, or even losses. And that is what makes stock investors especially nervous. Most companies will have few different alternatives to be more cautious and keep the line in investments and hiring. While those who receive the hardest blow will have no choice but to lay off workers.

And even worse, companies were already at the limit before the coronavirus appeared in China. The trade war between the United States and China was especially disconcerting. It caused significant damage to the global economy. Here, in the US, it has basically pushed manufacturing, agricultural and transportation industries into recession. President Trump signed a "first phase" trade agreement with the Chinese earlier this year, just in time to avoid a recession under full rule, but the companies remain restless. They estimate that the president will double his trade war if he is re-elected.

The trade war put the economy on its knees, and it would not take much effort to knock it back. The COVID-19 can be more like a full body punch.

Even more complicated is the problem that public policy makers will have to respond adequately to the economic consequences of the virus. Before the stock market closed a historically unfavorable week on Friday, Federal Reserve President Jay Powell issued a statement saying the Fed would soon lower interest rates. And, indeed, on Tuesday, the entity made an emergency rate cut, the first since the financial crisis of 2008.

Reducing rates is the right measure, but these are already extraordinarily low. The federal funds rate - which the Fed controls directly - now ranges from only 1% to 1.25%. This is because the Federal Reserve was forced to reduce rates three times last year to compensate for the harmful effects of the trade war. If the virus attacks as the CDC warns, the rate of funds will quickly drop to zero and the Fed will not be able to do much more.

The Trump administration and Congress could meet and pass legislation that provides a fiscal stimulus to the economy: temporary tax cuts financed by the deficit and increases in government spending. Such a stimulus was implemented in the midst of the financial crisis when the Obama administration reached an agreement with the Senate. That worked, and the recession ended a few months after the stimulus started working. But it is difficult to imagine President Trump, who continues to attack the Democrats of Congress who have criticized the government's response to the virus, reaching such an agreement, at least not in the short term.

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The American consumer is the one who ends up acting as a wall between continuous economic growth and a recession. Unlike companies, consumers have felt quite good. Encouraged by low unemployment and (so far) record share prices, all consumer surveys show that our mood has rarely been so optimistic.

However, our perceptions are volatile and can change rapidly, perhaps now faster than ever. The huge generation of baby boomers is by far the largest owner of shares, with more than half of all stocks, according to Moody's Analytics. The members of this generation, in their 50s and 60s, have actions that make up the bulk of their retirement savings. When stock prices rise, they feel great. But if the prices of those shares remain low after the current fall, and that bet is contracted, you can imagine how they will feel and act. The consumer wall will collapse.

There is no good time for a worldwide pandemic, but this is a particularly bad time.

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