“This virus doesn’t have to hold you back any longer. It doesn’t have to hold our economy back any longer. But the only way we put it behind us is if more Americans get vaccinated,” President Biden said Monday.
As the vaccination campaign progressed through the spring and summer, the White House touted predictions that the U.S. economy would roar back to life as consumers quickly returned to pre-pandemic spending. Biden has repeatedly stressed that the economy is set to grow at its fastest pace in almost four decades.
But the delta variant may challenge those heady expectations, threatening the recovery along several dimensions. The ongoing pandemic could dampen consumer spending if fears reemerge about the safety of returning to some activities. The variant’s proliferation abroad has already hurt U.S. supply chains, and shortages could exacerbate inflation by increasing the price of production. And a jump in hospitalizations and deaths among the unvaccinated poses a particular challenge for the Biden administration in more conservative parts of the country, where resistance to new restrictions is strong and federal relief aid is starting to expire.
These tensions played out in public on Monday, with Biden emphasizing his infrastructure package — the White House’s first big non-coronavirus legislative priority — amid headlines showing financial markets getting clobbered by renewed fears about the virus.
“Our economy has come a long way over the past six months. We can’t slow down now,” Biden said.
Monday’s 726-point decline in the Dow Jones industrial average was the worst one-day retreat in 2021. The S&P and Nasdaq also fell sharply. Among the hardest hit were sectors of the economy sensitive to virus-related concerns, such as hospitality, leisure and travel.
Fears are in particular intensifying over whether the delta variant will hurt the global economy, which could in turn complicate the U.S. recovery. Indonesia faces a “catastrophic” surge in the virus threatening to overwhelm its medical system. British Prime Minister Boris Johnson went back into quarantine after his health secretary tested positive. Iran’s government announced a week-long shutdown in its capital. Cases globally have risen markedly since June.
“The global economy is barely surviving on life support, and another wave of infections may spur lockdowns that could signal the death knell for the tenuous recovery,” said Peter Essele, head of investment management at the Commonwealth Financial Network.
Other leading analysts are also beginning to get nervous. “It’s a serious threat, no doubt about it,” said Mark Zandi, chief economist at Moody’s Analytics and one of the economic voices most trusted by the White House. “I haven’t marked down my forecast yet, but I’m on the cusp of doing so.”
Economists diverge on the extent to which the delta variant poses a danger to the U.S. economy.
Just under half of Americans are vaccinated, and the evidence is overwhelming that the vaccines prevent hospitalizations and deaths. Few people expect there to be the political appetite for renewing the kind of shutdowns that put the economy into a deep freeze at the pandemic’s outset. That will probably limit the amount of damage the delta variant can inflict on the economy.
Even with the renewed concerns, many economists stressed that the U.S. economic growth outlook is stronger than it has been in years. Federal policymakers poured trillions of dollars in federal aid into the economy, including Biden’s $1.9 trillion relief plan — funding that is now propelling higher demand from consumers eager to resume normal life.
One senior Biden administration official, speaking on the condition of anonymity to discuss internal thinking, said officials still see key economic indicators — such as frequency of flights and restaurant spending — climbing back to pre-pandemic levels.
White House press secretary Jen Psaki said Monday that 99.5 percent of people who are being hospitalized or dying of covid-19 are not vaccinated, and she continued to urge more Americans to get the shots. She stressed that the administration remains confident in a swift economic recovery.
“We certainly have seen the movements in the stock market; we also know that unemployment is down, economic growth is up, job creation is up,” Psaki said. “We can assure people we are still at war with the virus, even if we have made progress over the last several months.”
Still, major concerns persist. Already, orders are delayed for months on furniture, appliances, microchips, and other home-building and manufacturing supplies. U.S. home builder confidence fell to an 11-month low in July, largely because builders are struggling to get the materials they need. The delays aren’t just causing headaches, they are forcing some builders to halt construction, putting business and jobs at risk in the United States.
There is unlikely to be any supply chain relief until early next year at the soonest, said Phil Levy, a former George W. Bush administration economist who is now chief economist at freight company Flexport. Containers that were supposed to ship this spring are still sitting in many Asian ports.
A recent coronavirus outbreak at the popular Yantian port in China caused a massive backlog of containers. More disruptions from the delta variant or another version of the virus could be even more problematic because the shipping industry is about to hit its peak time to move goods so they arrive in time for the all-important holiday shopping season.
“There’s not relief right around the corner,” Levy said. “This is rush hour all the time for moving goods around. A little accident during rush hour has even bigger effects.”
Jason Furman, a former Obama administration economist, noted that the delta variant’s spread across Europe did not appear to lead to major declines in mobility trends, a gauge of consumer patterns.
“The rise of delta is potentially a human tragedy; I don’t expect it to be hugely consequential macroeconomically,” Furman said. “The U.S. economy is going to grow strongly every quarter this year. Will it be a little less strong because of this? Maybe. But I still expect economic growth to be above its pre-pandemic [level] the rest of this year, and I don’t think that changes that fundamental fact.”
Dean Baker, a liberal economist, agreed that the impact of lingering coronavirus concerns would probably amount to “tenths of a percentage point” in terms of economic growth. But he cautioned that this would not be true should a variant emerge that the existing vaccines do not fully protect against. That possibility could upend the global economy, creating major head winds in the United States.
“We have been so cavalier about vaccinating the world, and we could have done so by now — that’s the real danger,” Baker said. “We have to take it very seriously, the priority to get the whole world vaccinated as quickly as possible.”
Brazil Set for Biggest Rate Hike Since 2003 as Economy Reopens – Bloomberg
A new front is opening up in Brazil’s war against inflation amid surging costs for services from airline fares to appliance repairs, sparking speculation that one of the world’s most aggressive central banks may this week deliver its biggest interest rate hike in almost two decades.
Australia Sticks With Taper Plan Even as Virus Dents Economy – Bloomberg
The Reserve Bank of Australia said it will stick with its planned tapering of bond purchases even as Sydney’s protracted lockdown is set to shrink the economy this quarter.
As the economy hits its peak, stock market gains could be harder to come by – CNBC
Diminishing economic returns could mean diminishing stock market returns as the U.S. transitions to a post-pandemic economy.
Wall Street increasingly is talking about peak growth in both the economy and corporate earnings as a stimulus-fueled recovery gives way to more normalized patterns.
Congress and the Federal Reserve have provided trillions in funding and liquidity measures that soon either will dry up or at least begin evaporating, leaving investors to ponder what lies ahead with their portfolios.
The market will have to handle what is likely to be a lasting bout with inflation at a time when the drivers for growth are uncertain.
“It’s a world that we haven’t had to deal with in 40-plus years, and I don’t think you can just take out your regular playbook from the last couple of decades,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “Valuations of pretty much everything are extraordinarily high, which means there’s no room for error.”
Boockvar spoke of an environment in which inflation will be higher as growth moves lower, a cycle known as “stagflation,” something the U.S. wrestled with for years from the mid-1970s to early ’80s. Practically no one thinks the current conditions will morph into something that bad, but there are similarities.
Inflation is running at 30-year highs, according to the Fed’s preferred gauge, while growth lately has been solid but a bit disappointing. Second-quarter GDP rose at a 6.5% annualized pace, but that was well below the 8.4% Wall Street estimate. Manufacturing data released Monday showed the sector still expanding, but at a lower-than-expected rate.
The factors are combining in “the classic recipe for a growth scare,” wrote Nick Colas, co-founder of DataTrek Research.
Looking at Apple Mobility and Google data that examines how people are getting around, Colas found that they are providing “a worrisome combination” though it’s too early to tell how things will shape out in the long run.
Still, he warned that investors high on the second quarter’s record-breaking pace of corporate earnings beats may find trouble ahead.
“Excellent Q2 earnings have allowed us to shake off that [growth scare] narrative every time it’s come up in recent weeks,” Colas said. “Now that the bulk of earnings season has passed, however, and seasonal volatility trends assert themselves we may see the growth scare narrative break through more convincingly.”
The trouble with optimism
The factors of higher inflation, slowing growth and waning stimulus occur amid high levels of investor sentiment as the major stock market averages hover around record highs.
In fact, that brimming optimism is flashing warning signs, according to Bank of America.
The firm’s gauge of investor sentiment that measures Wall Street portfolio allocations to stocks is the closest it’s been to a “sell” signal since May 2007, shortly before the market was about to hit record highs that soon would come tumbling down during the financial crisis.
“We have found Wall Street’s bullishness on stocks to be a reliable contrarian indicator,” Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, said in a note to clients. Higher allocations to stocks eventually end up pointing to a decline ahead, the gauge has shown.
Subramanian said the indicator’s current level is pointing to price returns in the next 12 months of just 7% compared with the average forecast of 13% since the financial crisis ended in 2009.
To be sure, a slowing economy doesn’t mean negative returns, and the current conditions may be pointing at nothing more than a cooling off for a market that has been on fire since rocketing to its pandemic low in late March 2020. After all, even though fiscal stimulus is slowing, the Fed remains committed to keeping its policy ultra-loose until it sees much more progress on employment.
“With the recovery still underway, investors shouldn’t be frightened by headlines declaring slowed momentum,” said Seema Shah, chief strategist at Principal Global Investors. “Once markets have digested the transition to a more sustainable pace of expansion, decelerating growth is usually associated with weaker, but still positive, equity returns.”
In fact, the past two peaks in earnings cycles have led to double-digit market gains over one-, three- and five-year periods, said Jason Pride, chief investment officer of private wealth at Glenmede.
“Rather than obsessing over near-term growth peaks, investors would be wise to see the bigger picture,” Pride said in his weekly market note.
Still, signs that growth is abating are worrisome.
The bond market in particular is pointing to a substantial slowdown ahead, with the 10-year Treasury note yielding just 1.18% Monday afternoon. The benchmark yield below 1.25% is the bond market “signaling not all is well economically,” wrote Christopher Harvey, senior equity analyst at Wells Fargo.
Boockvar, the Bleakley investment chief, said the current economic environment could cause problems for a market that has relied on investors willing to pay consistently at higher valuation multiples.
“One of the characteristics of the equity market in the 1970s was one of multiple compression,” he said. “A lot had to with the sharp rise in interest rate. But it becomes a more challenging environment with a bout of stagflation, even if it’s stagflation-lite.”
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