Several financial institutions have scaled back their U.S. growth expectations for the third quarter. The reduced forecasts come amidst sluggish consumer spending and the country remains under the threat of measures related to the COVID-19 Delta variant. According to the Commerce Department, consumer spending at retailers fell by 1.1 percent in July when compared to June.
In a note written to clients, Bank of America (BOA) economists Michelle Meyer and Alexander Lin suggested that consumers had scaled back their spending due to fear of the Delta variant spreading throughout the country. There is an increase in “precautionary savings” by households as they’ve grown wary of the future, the bank said. In addition, constraints in supply chains have made some products either unavailable or pricey.
The economists warned that if supply remains permanently constrained, it could lead to higher inflation and a “shorter economic cycle.” If the supply returns to full capacity but only after a long time, it could “flatten the path for growth.”
In its “Global Macro Snapshot” report published on Aug. 20, BOA said that they are “very cautious” about the country’s near-term outlook.
“Head of U.S. Economics Michelle Meyer and team have cut 3Q GDP growth to 4.5% from 7.0% and overall 2021 growth to 5.9% from 6.2%. However, looking ahead to next year, the team continues to be much more bullish than the consensus due to very strong demand fundamentals and the prospect of additional fiscal stimulus,” the snapshot said.
On another note, BOA global economist Ethan Harris warns that the United States has hit a “big supply-side speedbump, traveling at 80 mph.” Job openings are setting new records, inventories have fallen, and an increasing share of nominal GDP is being absorbed in higher prices rather than higher real GDP.
Goldman Sachs also cut down its forecast for U.S. economic activity for the second half of 2021. In a note to clients, Goldman economist Ronnie Walker pointed out that during the pandemic and the beginning of recovery, consumers spent big on goods. But during normal times, consumers tend to spend more on services like dining out, concerts, and so on.
However, fears about the Delta variant had restricted services spending by consumers, thus affecting the economy. The service sectors where consumer spending has remained depressed were found to be associated with “high virus risk,” and include live entertainment, ground transportation, dry cleaners, and so on.
“While most consumers appear to be comfortable returning to high-contact services, some are still hesitant… They are likely to remain cautious for now as the spread of the Delta variant keeps Covid fears alive, delaying a full recovery,” Walker said in the note.
Goldman Sachs slashed its GDP growth projections by one percentage point for the third and fourth quarters. For the full year, the bank expects GDP growth to be around 6.6 percent. Starting next year, the growth rate is expected to be back at the pre-pandemic level of around 1.5 to two percent annually.
In a write-up at CNN, Mark Zandi, chief economist at Moody’s Analytics, notes that American consumers are “increasingly nervous” about the Delta variant. The University of Michigan’s survey of consumer sentiment declined sharply in early August and is “lower than it was during the worst of the pandemic last spring.” Inflation is also on the rise.
According to Moody’s Analytics Weekly business confidence index, sentiment has gone sideways since mid-June. The number of respondents who believe the economy will continue improving fell from over 60 percent to less than 50. Those who believe the economy will weaken rose from around 30 percent to over 40. Moody’s Back-to-Normal Index, which measures how far the American economy is from the pre-pandemic level, fell from 93.5 percent in June to 92 in mid-August.
Despite these numbers, Zandi remains optimistic with regard to the short-term and long-term prospects of the U.S. economy. Pent-up demand paired with savings people built up during the pandemic is fueling growth. In addition, support from the Federal Reserve and assistance programs from Washington is also contributing to the growth of the economy. However, Zandi also points out that his optimism is purely based on the expectation that the Delta variant does not go berserk and worsen the pandemic.
COVID-19 in America
According to a poll conducted by the Associated Press and NORC Center for Public Affairs Research, 41 percent of Americans are “extremely” or “very” worried about themselves or their family members getting sick from COVID-19. This figure is up from June’s 21 percent and is similar to data from January when America had witnessed its large major COVID-19 surge.
The 7-day rolling average of new COVID-19 cases per million has risen from 34.29 on June 21 to 445.77 by Aug. 21, an increase of 1,200 percent. Confirmed COVID-19 deaths per million have jumped from 0.75 to 3.04 during this period, a rise of 305 percent.
The increase in COVID-19 infections and deaths has occurred despite high vaccination rates. Roughly 50.95 percent of Americans are fully vaccinated as of Aug. 21 while 60.08 percent have received at least one dose of the COVID-19 vaccine. As of Aug. 19, 98.23 percent of analyzed COVID-19 sequences over the previous two weeks belonged to the Delta variant.