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Flu presents little threat to U.S. economy

The U.S. economy, which was showing tentative early signs of a recovery, faces a potentially grave new threat: swine flu.
Swine Flu
A passenger waits in line before checking in at the Mexicana Airline counter wearing a mask at Ohare International Airport in Chicago before flying to Mexico on Monday.Paul Beaty / AP
/ Source: The Associated Press

The U.S. economy, which was showing tentative early signs of a recovery, faces a potentially grave new threat: swine flu. A widespread outbreak could batter the tourism, food and transportation industries in particular, deepening the recession in the U.S. and possibly worldwide.

With the U.S. and the global economy already fragile, another severe blow could reverse any progress made in easing the recession.

The European Union advised against nonessential travel to the United States and Mexico. And worried Wall Street investors pounded stocks of airline companies, hotels, cruise operators and some food firms on fears that the flu would crimp consumer demand.

But at least three major airlines said their operations are proceeding normally and have not canceled any flights to Mexico.

Brian Bethune, economist at IHS Global Insight, said, "You can argue that the swine flu amplifies the downside risks to the economy."

The U.S. economy could end up shrinking a bit more than now expected. But most experts don't think a swine-flu outbreak by itself would eliminate many U.S. jobs or severely worsen the economy.

Simon Johnson, former chief economist to the International Monetary Fund and a professor at the Massachusetts Institute of Technology's Sloan School of Management, envisions only a "small hit" to economic activity in the United States — just a few tenths of 1 percentage point.

But if the problem persists for months, spreads broadly and leads to widespread flu cases, or even deaths, in the United States, the damage could be more severe. It could delay an economic recovery well into 2010, said Mark Zandi, chief economist at Moody's

"Consumer confidence is already frayed, and something like that would push it over the edge," Zandi said.

Sherry Cooper, chief economist at BMO Capital Markets & BMO Nesbitt Burns, said: "The last thing we need is additional reason to cut spending, eliminate travel and introduce trade restrictions."

In a worst-case scenario, Bethune says the U.S. economy would contact by an extra 0.3 percent this year, on top of his prediction of a 3.5 percent drop. That amounts to a roughly $50 billion loss of economic activity, he said. The IMF already has predicted the U.S. economy will shrink 2.8 percent this year.

Both Bethune's and the IMF's estimates would mark the worst showing since an 11 percent plunge in 1946.

One big fear is that spooked consumers will cut back spending on travel, restaurant meals and trips to shopping malls.

Even so, the impact on the U.S. unemployment rate, which is expected to hit 10 percent by year's end, is likely to be small. Bethune said a serious swine flu outbreak might end up raising the jobless rate a few tenths of a percentage point.

The unemployment rate is now at a quarter-century high of 8.5 percent. Companies have laid off so many workers in the recession that they are already lean, analysts said.

Why do analysts expect only limited economic damage?

The world is now better prepared to deal with health crises, given the experience of SARS (severe acute respiratory syndrome) in 2003 and then the threat of the bird flu, Johnson and other economists said.

Vaccines can be rolled out fairly quickly. And many big companies now have contingency plans to keep essential operations going if employees can't make it to work.

"On the one hand, it's a terrible and traumatic thing — a flu pandemic," Johnson said. "On the other hand, it almost certainly will not have a significant effect."

White House spokesman Robert Gibbs said it's a "little too early to determine the economic impact" but that the Treasury Department and agencies are "monitoring the situation and looking into it."

The swine flu outbreak started in Mexico and has spread to the United States and elsewhere. The European Union advised against nonessential travel to the United States and Mexico. But Dr. Richard Besser, acting head of the Centers for Disease Control and Prevention in Atlanta, called that unwarranted.

"At this point, I would not put a travel restriction or recommendation against coming to the United States," he said.

China, Taiwan and Russia, meanwhile, considered quarantines, and several Asian countries scrutinized visitors arriving at airports. President Barack Obama said the threat of spreading swine flu infections is cause for concern but "not a cause for alarm."

Still, investors sold off stocks of companies involved in the travel and some food industries on fears the swine flu would crimp demand.

Starwood Hotels and Resorts Worldwide Inc. fell nearly 11 percent, Cruise operator Carnival Corp. 13.5 percent and Delta Air Lines Inc. 14.3 percent.

Some airline passengers have changed or canceled their plans to fly to Mexico.

"The loads are a little bit less than they normally would be for this time of day, but we are not seeing mass bookings away," said Michelle Mohr, a spokeswoman for US Airways.

American Airlines spokesman Tim Smith said his carrier has not seen large numbers of requests for travel changes, though there have been some.

Delta spokesman Anthony Black said: "We have seen minimal changes to customer bookings."

The airlines said their flights are operating as usual, with their normal slate of trips to Mexico.

Online travel agencies Orbitz Worldwide Inc. and Expedia Inc. are both waiving fees to change or cancel reservations for trips to Mexico. Inc. said it is matching the policies of its suppliers.

"If the supplier is waiving our fee, we're waiving our fee," said Priceline travel expert Brian Ek. "It will depend on which carrier you're using."

The chief executive of The Cruise Outlet said his travel agency, which focuses on cruises, hasn't seen a rise in cancellations or calls from concerned passengers. Neither Carnival nor Royal Caribbean said it plans to change its itineraries.

The flu could hurt the $5 billion export market for U.S. pork. China, Russia and Ukraine banned imports of pork and pork products from Mexico and three U.S. states that have reported cases of swine flu, and other governments were increasing screening of pork imports.

Shares of Smithfield Foods Inc., the nation's largest hog producer and pork processor, fell more than 12 percent.

Even though it's safe to eat pork (swine flu viruses don't spread through food), analysts still fear that consumers could shy away from eating pork and shift to other meats like chicken or beef.

"Though there is no evidence that swine flu can be obtained by eating pork, the fear generated by a disease named after hogs cannot be good for pork consumption," said JPMorgan analyst Ken Goldman.

Grocers have begun to face questions from concerned shoppers about any dangers of eating pork, Goldman said.

The industry-funded National Pork Producers Council launched a public relations effort to reassure consumers, saying the flu has not been detected in any U.S. swine herds. The group said cooking pork would kill any traces of the virus and the sickness is spread only from human-to-human contact.

Tyson Foods Inc., the nation' second-biggest pork producer, was somewhat shielded from a drop in pork demand because the company also sells beef and chicken products and could benefit from an increase in demand for them.