Here’s an Inconvenient Truth: The Growth Slowdown Goes Beyond the Delta Variant
By Lisa Beilfuss
The Covid-19 resurgence has undoubtedly had an impact on economic growth, but it’s far from the only reason many economists are paring their third-quarter GDP estimates. Here, a Chicago supermarket on a recent day. Scott Olson/Getty ImagesEveryone knew that economic growth was going to slow from the second quarter.
But it wasn’t supposed to happen so soon—or so sharply.
The Covid-19 Delta variant is the obvious and convenient explanation, but it’s an incomplete one.
Over the past week, economists across Wall Street have shredded third-quarter gross-domestic-product forecasts.
To name a few: Goldman Sachs cut its forecast to 3.5% from 5.25%, Oxford Economics revised its call to 2.7% from 6.5%, and Morgan Stanley lowered its estimate to 2.9% from 6.5%.
That’s as the Atlanta Fed’s GDPNow model predicts 3.7% for the quarter, down from 5.3% at the start of the month.
President Biden’s workforce vaccine mandate unveiled on Thursday highlights just how fraught the economy is.
It would be silly to say the fast-spreading Delta variant, sprung on the U.S. just as consumers and businesses thought the pandemic was over, isn’t to blame.
The Federal Reserve in its latest beige book, meanwhile, said economic growth “downshifted” across the nation in August from July, with the central bank’s latest collection of regional anecdotes attributing the deceleration in economic activity to a pullback in dining out, travel, and tourism, reflecting renewed safety concerns due to the rise of the Delta variant.
To fully ascribe the growth cliff to Delta, however, is to assume the weakness is temporary.
To the contrary, there are plenty of reasons that investors should question whether anything is transitory anymore and is instead reflective of a new economy that won’t be post-Covid for the foreseeable future.
Take ongoing supply shortages.
Thomas Simons, an economist at Jefferies, says widespread, persistent shortages are the primary reason that economic growth is hitting a falling ceiling.
But, he adds, the problems are bigger than the latest Covid wave.
“I’m not sure that, in the absence of Delta, these shortages would have been mitigated,” says Simons.
If supply chains would be just as jammed even if Delta hadn’t appeared, how can economists and investors dismiss slowing growth as a function of a temporary phenomenon?
For evidence that Delta belies deeper economic issues, we point to weekly survey data from the Census Bureau.
Last year, the bureau began collecting data to measure household experiences during the pandemic, asking consumers about everything from employment status, child-care arrangements, and household spending, and then disseminating the data in near-real time.
In the most recent week’s survey, 41% of households said they used some form of government assistance to pay usual expenses.
For the sake of a pre-Delta comparison, we backed out child tax credit payments that started in July.
That leaves the share at 31%, effectively unchanged from the share of households saying they relied on government aid to pay household bills in early June—before concerns about Delta starting rising in the U.S.
Taken together, the data suggest that economic conditions are dire for a swath of America, with or without the Delta variant.
The macroeconomic implications of emergency measures, including enhanced unemployment benefits, stimulus checks, and eviction moratoriums, are complicated, but one thing seems clear: A significant number of people have depended on the emergency money, raising questions about what happens as assistance fades.
Economists at Goldman Sachs recently downgraded their third-quarter consumption growth forecast to minus 0.5% annualized.
As they put it, “Although we expect the Delta setback to be brief, two longer-standing concerns pose challenges for consumption growth over the next few quarters.”
For one thing, the rotation to services from goods is under way, and economists say the rest of the service-sector recovery will be much slower than the easy phase that followed mass vaccinations.
More important, they note that fiscal support boosted disposable income to 9% above the prepandemic trend on average in the first half of this year.
That has already dropped off substantially, they say, setting up a situation where the so-called fiscal impulse will fade sharply through the end of 2022.
That is where a couple of big currents cross.
The Census Bureau’s household data are concerning, says Jefferies’ Simons, especially looking toward the next few months as government assistance fades.
“You wonder where those households will find positive cash flow,” says Simons.
The optimistic view?
The fact that so many people say they are barely getting by even with government aid may portend a coming boost to labor-force participation, as enhanced unemployment benefits have now fully expired for millions of workers and some eviction and foreclosure moratoriums end.
A less optimistic outcome, of course, is that workers stay on the sidelines.
Some lawmakers are pushing for a fourth round of stimulus checks, and the Biden administration’s budget package includes an expansion of the new child tax credits that some critics say are already hindering the return of some low-wage workers.
Add it all up and central bankers might be right about one thing: Growth prospects don’t look great, and in a certain way, the economy may be a little sicker than even slashed forecasts suggest.
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