'Gains will be harder to come by' for US economy hit by Delta variant

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Fri, Aug 20, 2021, 2:06 AM2 min read

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Friday, August 20, 2021

More signs of a summer swoon for economic growth

On Thursday morning, we noted that challenges were emerging for the health of the economic expansion, mostly due to the still-raging COVID-19 pandemic.

Those signs continued into the end of this week.

After highlighting that at least two Wall Street firms had either cut or cautioned on their economic growth forecasts, the team at Goldman Sachs followed this week with a reduction in its third quarter gross domestic product (GDP) outlook.

Goldman's economics team led by Jan Hatzius said in a note to clients third quarter growth should come in at an annualized rate of 5.5%, well below the 9% the firm was previously forecasting.

The team at Oxford Economics also published its latest weekly recovery tracker, which showed a decline for the week ending Aug. 6. Nearly all of the index's components cooling off.

"Economic momentum remains strong, but contractions in five of the six subcomponents signal that gains will be harder to come by as we move past peak growth," the firm said.

"Greater consumer caution weakened demand and mobility, which fell to multi-week lows," according to the firm. "Employment soured, production retrenched, and the health tracker fell on surging Delta variant contagion. Financial conditions loosened as stocks hit new records and interest rates remained close to historic lows."

The economic recovery has stalled according to the latest data from Oxford Economics. (Source: Oxford Economics)

Over the last few trading sessions we've seen increasing volatility in equity markets, but as Oxford's data noted, the S&P 500 (^GSPC) is still less than 3% away from a record high.

And while there are indications that investors are worried about growth — the decline in oil prices and the underperformance of cyclical sectors like Materials (XLB) and Financials (XLF) stand out over the last few sessions — if we've learned anything about the stock market in the last year and a half, it is that investors are willing to look past near-term concerns related to COVID.

Moreover, this short-term deceleration and challenge to the economy as we exit summer isn't being viewed as setting back the entire post-pandemic recovery we've been in now since April 2020. While cutting its forecast for the third quarter, Goldman also upgraded its view on fourth quarter growth by 1 percentage point, a sign of a delayed but not derailed rebound.

Or as Ian Shepherdson at Pantheon Macroeconomics put it best in a note earlier this week: "We very much doubt that Delta is an existential threat to the economic recovery." And investors agree.

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