The U.S. economy caught fire in the spring and it’s still running pretty hot this summer, but a new strain of the coronavirus is threatening to cast a chill over the recovery.
Worries about the so-called delta strain sent a shiver through investors last week after the number of people catching the virus quickly climbed from a pandemic low. The stock market
posted its biggest decline in almost 10 months before recovering and bond yields also fell.
Although the U.S. Covid caseload is still quite low, the delta variant has introduced new uncertainty into the economic outlook and forced households, businesses and government to consider how to respond.
The reaction so far? Not much. Los Angeles County recommended that residents wear masks again, but it’s one of the few governments to do so.
By and large, the delta variant has drawn a wait-and-see reaction. Just look at the stock market. The Dow Jones Industrial Average recovered all of its losses in just a few days and was back at an all-time high.
A chief reason for the optimism, it seems, is that the White House and Federal Reserve will do whatever it takes to keep the economy propped up.
“As long as the government and the Fed keep pumping things up, it is hard to see how the markets can stay down for an extended period,” said chief economist Joel Naroff of Naroff Economic Advisors.
Massive government financial stimulus played a huge role in what’s expected to be a very strong U.S. economic performance in the second quarter. Economists polled by The Wall Street Journal estimate that gross domestic product soared at a 9.1% annual rate in the period stretching from April to June.
That would be one of the strongest American growth rates ever and help compensate for the devastating economic losses early in the pandemic. GDP, the official scorecard for the U.S. economy, will be released on Thursday.
More important, of course, is what happens next. GDP is mostly a look in the rearview mirror.
Other reports next week are likely to show the U.S. sustaining its recent momentum. Consumer spending data and orders for manufactured goods in June are also expected to point to underlying strength in the economic recovery.
Households are spending freely and businesses just can’t keep up with demand. One of their biggest problems is finding enough workers.
What about the delta strain?
So far most people who are catching it are unvaccinated. So-called break-though cases among the vaccinated, meanwhile, are not inducing many severe reactions or deaths.
So it seems the prognosis for broader economy — not to mention the health of the public — is still pretty good with more than 68% of the adult U.S. population having received at least one shot.
Yet if there’s one thing that’s been learned during the pandemic, nothing can be taken for granted. The virus could mutate again, for instance, or individuals, businesses and government could adopt defensive measures that take some steam out of the recovery.
Perhaps the most realistic danger for now is that the delta variant will spread more rapidly around the world and further disrupt global suppy chains that have been strained by the pandemic.
These supply-chain problems — a notable example is a shortage of computer chips — could exacerbate the surge in U.S. inflation this year and further raise costs for consumers and businesses alike.
Already higher inflation is hurting Americans financially and undermining confidence in the recovery. A key inflation report next week, known as the PCE price index, due on Friday, is expected to show another large increase.
The Fed, for its part, is likely to try to reassure consumers and investors next week that the spike in inflation is just temporary after its latest big meeting on the economy. That’s been the Fed’s mantra for months.
Yet the central bank badly underestimated how much prices would rise this year and even some top Fed officials are starting to get worried.