Delta-related economic downgrades are on the rise: Morning Brief

·Head of News

Thu, Aug 19, 2021, 2:05 AM5 min read

In this article:

This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Thursday, August 19, 2021

The pandemic remains a part of the economic story

In June 2020, Federal Reserve Chair Jay Powell said at a press conference, "The extent of the downturn and the pace of recovery remain extraordinarily uncertain and will depend in large part on our success in containing the virus. We all want to get back to normal, but a full recovery is unlikely to occur until people are confident that it is safe to reengage in a broad range of activities."

In the year-plus that has followed, the economy has enjoyed a very strong recovery.

But the current spread of the Delta variant throughout the U.S. now has economist cautioning that the pandemic is again throttling the speed at which the economy is bouncing back.

Following Tuesday morning's retail sales report, the team at Bank of America said third quarter gross domestic product (GDP) is currently tracking for growth of just 4.5%, well below the firm's current forecast for 7% growth in the current quarter. Last month, retail sales fell 1.1% against expectations for a 0.3% decline. This drop was, however, less than the 2.3% drop Bank of America's data suggested could be coming.

Over at Pantheon Macroeconomics, chief economist Ian Shepherdson on Wednesday took his forecast for third quarter GDP growth down to 7%, from 10%, citing a downgrade in his view of consumer spending.

"The downshift in our forecast is primarily a response to the impact of the Delta variant on real-time indicators like restaurant diner and airline passenger numbers, and mobility data for the hard-hit Southeastern states, but yesterday's July retail sales numbers are part of the story too," Shepherdson wrote.

"Usually we are very reluctant to change our quarterly forecasts so early in the quarter, but the impact of the Delta variant has no parallel in the ebb and flow of normal business cycles, and we have to take account of it now," Shepherdson added. "That said, we remain of the view that the Delta hit will not be endless."

But between disappointing retail sales data and the sharp drop in consumer confidence recorded this month, there is growing evidence the recovery is facing a stress test as we hit the midpoint of the third quarter.

Some economists also note, however, that Delta may not be the primary culprit behind the current slowdown we're seeing from consumers, given the broad loss of momentum Tuesday's report indicated has taken place among consumers.

"It’s tempting to pin the blame on the rapid spread of the Delta variant, but the breakdown of retail sales shows the weakness in July came despite a 1.7% rise in spending at bars & restaurants, while online sales fell sharply," wrote Andrew Hunter, chief North America economist at Capital Economics.

"The more likely explanation is that spending is being weighed down by the hit to real incomes from the fading of fiscal support and the more recent surge in consumer prices. With the saving rate now not too far above its pre-pandemic average, there is less scope for consumption to run ahead of income growth over the coming months," the economist added. (Emphasis ours)

And yet this concern from analysts regarding the health of the economy has not been featured as prominently in earnings updates from major retailers that have rolled out this week.

Walmart (WMT) said Tuesday that its comparable store sales growth increased each month of its most recent quarter, with July serving as the quarter's strongest month for sales growth.

Target (TGT) CEO Brian Cornell, meanwhile, told analysts on Wednesday that the company is still seeing "a very optimistic consumer, certainly shopping with caution and they're wearing masks more and more across the country. But we're seeing tremendous resilience in the consumer today. And our traffic patterns, I think, represent that, as we see this consistent flow of traffic into our stores."

And this concern about the economy also comes as the stock market continues to trade near record highs.

All of which is a reminder that two things can be true at once. The economy can be losing some momentum as fiscal stimulus fades and the pandemic continues to spread widely. And investors can remain confident that future growth and profit opportunities for America's biggest companies remain robust.

By Myles Udland, reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland

What to watch today

Economy

8:30 a.m. ET: Initial jobless claims, week ended August 13 (364,000 expected, 375,000 during prior week)
8:30 a.m. ET: Continuing claims, week ended August 7 (2.800 million expected, 2.866 million during prior week)
8:30 a.m. ET: Philadelphia Fed Business Outlook, August (24.2 expected, 21.9 in July)
10:00 a.m. ET: Leading index, July (0.8% expected, 0.7% in June)

Earnings

Pre-market

6:45 a.m. ET: Estee Lauder (EL) is expected to report adjusted earnings of 51 cents per share on revenue of $3.74 billion
6:45 a.m. ET: Tapestry Inc. (TPR) is expected to report adjusted earnings of 68 cents per share on revenue of $1.55 billion
6:55 a.m. ET: Macy's (M) is expected to report adjusted earnings of 20 cents per share on revenue of $5.00 billion
7:00 a.m. ET: Kohl's (KSS) is expected to report adjusted earnings of $1.20 per share on revenue of $4.01 billion