The outbreak of coronavirus (COVID-19) has brought China to a standstill. What used to be bustling factories are now empty. The manufacturing sector has come to a halt and this is having a damaging effect on U.S. supply chains.
Isaac Larian is the Chief Executive of MGA Entertainment, a Chatsworth-based business that sells toys made in China. The entire supply chain has been running smoothly with no issue until recently when COVID-19 broke out in the Asian nation. Production of toys fell drastically by 60 percent. If a retailer wants 100,000 pieces, MGA is now only able to provide 20,000 or so, at best.
Workers at the plant had gone to their homes to celebrate the Chinese New Year that fell on January 25. However, these workers are now stuck in their homes due to state quarantine and are unable to return back. “Some of the factories that did open can’t get raw materials, like fabric and plastics, to make the products. And if they can make products, they can’t get them on the road to the ships because the quarantines mean you can’t travel from one area to another,” he said to the Los Angeles Times.
Apple’s manufacturing partners have quarantined workers, a move that has stopped manufacturing activity in their factories. The production delays are expected to hit Apple’s iPhone sales. Apple has also made an official statement, warning investors that it will be missing the revenue guidance for Q1, 2020.
The production of over 1 million vehicles now stands disrupted. For American businesses that used to depend on components from China, they are now desperately paying extra money to secure the necessary items from the U.S. in order to prevent a complete halt.
IHS Markit flash services sector Purchasing Managers Index fell to 49.4 this month, which is the lowest since October 2013. Given that services account for about two-thirds of the American economy, this is definitely bad news. In fact, the sector is contracting for the first time since 2016. The manufacturing sector gave a reading of 50.8, the lowest since August last year. The composite index that tracks both sectors registered 49.6, which is also the lowest during the past 76 months.
Dun and Bradstreet, a commercial data and analytics company, estimates that “there are around 22 million businesses — or 90 percent of all active businesses in China — within the regions impacted by the new coronavirus, now formally named COVID-19. This, in turn, would impact at least 56,000 companies around the world with suppliers either directly or in the first and second tiers,” according to CNBC.
Janet Yellen, the former Fed chief, believes that the impact of coronavirus could push the U.S. into a recession. She predicts the Fed to provide support to consumer spending and financial markets. The organization might also use fiscal policy in case the economic effects are serious.
In a recent report, Goldman Sachs argues that American companies will produce zero earnings growth this year as the virus becomes more widespread. “The trajectory of the U.S. and the global economy is highly uncertain at this time… a more severe pandemic could lead to a more prolonged disruption and a U.S. recession,” the company said in the report (CNN). Goldman Sachs foresees S&P 500 earnings for the year to slide by 13 percent.