Is the economy’s post-pandemic conflagration already dissipating?
Due to lingering supply-chain constraints, rising prices, and the rapid spread of the COVID-19 variety, some top analysts have decreased their blockbuster projections for this year. Add in a couple of wild cards, such as the Federal Reserve’s surprising willingness to hike interest rates sooner than predicted and the uncertain prospects for more government stimulus.
“Risks to the outlook have increased,” says Jonathan Millar, a Barclays economist.
For months, experts predicted that the COVID recovery would peak in the second quarter, or in May, as people spent their current batch of stimulus payments, which totaled $1,400 per person. Recent economic indicators, however, “suggest a somewhat greater decline in US growth and a quicker inflation rate than predicted,” according to Scott Anderson, Bank of West’s chief economist, in a letter to clients.
According to TD Economics and Barclays, vehicle sales decreased to 15.4 million in June from 17 million in May due to low inventories, rising costs, and a slowdown following stimulus-fueled purchases. Because of rising prices and limited supply, home sales and mortgage applications have slowed. And, as a result of the supply chain snafus, manufacturing and service sector activity indexes have weakened.
Anderson has lowered his economic growth prediction for the second quarter to 8.7% annualized, down from 9.6% a month earlier, and for the current quarter to 7.4%, down from 7.7%. Oxford Economics anticipates annual growth of 7% for the entire year, down from its previous projection of 7.7%. This would still be the strongest rate since 1984.
The dismal indications, as well as the risk of slower growth and inflation, have pushed 10-year Treasury yields down to around 1.36 percent from 1.7 percent in mid-May, causing the stock market to become more volatile.
These variables, together with the delta variation of COVID, have boosted the chances that the economy will stall even further in 2021, though only by a few percentage points, according to Millar.
Here are some reasons why the economy may slow faster than expected:
Inflation and supply chain snarls
Despite the fact that consumer demand has increased since the economy reopened, businesses lack many of the products and personnel they require to keep up.
Many factory employees, warehouse workers, port workers, and restaurant workers are still caring for their children, fearful of acquiring COVID or unwilling to give up their hefty unemployment benefits. Also in short supply are trucks and shipping containers.
Analysts had predicted that the shortages would lessen by the summer, but they might potentially linger until the end of the year, stifling economic activity.
“There is a lot of strong demand, but getting the goods and services to families is a challenge,” Millar adds. “At the end of the day, that’s what GDP (gross domestic product) is all about.”
The financial crisis is also causing a significant increase in inflation, which had remained latent for years. The consumer price index increased 5% from a year ago in May, the highest increase in 13 years. On Monday, the average price of unleaded gasoline was $3.15 per gallon, up from $2.20 a year ago.
Consumers may be less affected if they feel the price hikes are only transitory, as some Fed officials have suggested, but they may be more pronounced and discourage spending if they believe the increased costs will be permanent, according to Millar.
The COVID delta variant
According to Johns Hopkins University, the fast-spreading variant of the virus is causing a spike in COVID cases, which have averaged 19,455 per day over the past seven days, a 47.5 percent increase from the previous week. According to Anderson and Mark Zandi, chief economist of Moody’s Analytics, some states may reinstate business restrictions, notably in the South and West, where vaccination rates are low.
In a note to clients, Morgan Stanley economist Ellen Zentner stated that the variation appears to have already had an impact on job growth in states with low vaccination rates.
Uncertainty regarding the need for additional stimulus
President Biden proposed a $1.2 trillion bipartisan plan to repair the country’s infrastructure, as well as a package that might cost considerably more to modernize a variety of social assistance programs like childcare, home caring, and free college tuition. With a simple Democratic majority in the Senate, the latter may be passed. However, Millar believes that both blueprints could be drastically scaled back as the White House tries to appease Republicans as well as moderate and progressive Democrats. Growth forecasts in the following years would be tempered as a result.
Concerns about inflation have been raised by the Fed
For “some time,” the Fed has committed to hold its benchmark interest rate at zero until the economy reaches full employment and annual inflation exceeds its 2% target. With both growth and inflation on the rise, Fed officials forecasted two rate hikes in 2023 during their June meeting, moving the first boost from 2024 to 2023. According to Millar, the central bank’s shift has alarmed some investors. Higher inflation could force the Fed to hike rates sooner than expected, slowing the recovery even further.
End of housing, student loan aid
According to Zandi, the government halted foreclosures on homes with government-backed mortgages as well as evictions from rental properties and allowed Americans to defer mortgage and student loan payments. The foreclosure and eviction moratoriums are slated to expire at the end of the month, and the payment deferrals are set to expire in September, he says, after multiple extensions.
Despite the fact that the number of Americans at danger is decreasing, Zandi believes the deadlines offer a “significant threat to my positive baseline outlook.”
However, unlike some other economists, Zandi believes that the dangers to a historic rebound will be overwhelmed by a tremendous wave of pent-up household demand. He believes, “The economy’s prospects are solid, and it would take a lot to derail it.”