Will the Delta Variant Ruin the Rescue?


The good economic news is that the coronavirus is putting the economy at risk in only two ways when it comes to the emerging Delta variant. The bad news: These are supply and demand.

So far, the recovery has remained intact relative to most of the data available. Real-time business activity indicators show little evidence that Americans are cutting back their economic activity in any meaningful way.

But while there is no reason to expect a repeat of the big disruption in 2020, the new variant risks the rapid recovery that has been going on for months. Just as large parts of the economy are figuring out how to get back to full function, this could mean throwing gears to neutral.

The emergence of the variant caused several shaky days on Wall Street. And Federal Reserve chair Jerome Powell will face questions about Delta’s economic impact at a press conference Wednesday afternoon after the Fed’s policy committee meeting.

Officials at the White House are watching the variant closely, but seeing no evidence that it is hurting the recovery or that policymakers will need another dose of short-term fiscal stimulus in the near future.

“Overall, the risks appear to have decreased significantly compared to the height of the crisis,” said Kathy Bostjancic, chief financial economist for the US at Oxford Economics. “But I think you should be concerned about macroeconomic risks, and our experience over the last 18 months has shown that.”

While economists and policymakers are assessing the nature of these risks, what stands out is not the prospect of a major shutdown. Instead, the concerns are the availability of workers and constraints on supply and demand for many services.

On the supply side, there are already serious disruptions in many supply chains, particularly those that rely on imported goods from Asia. These create ripple effects for the United States, such as the lack of computer chips hampering automobile production and contributing to high inflation.

Many Asian countries, especially those lagging behind in vaccinating their populations, are implementing quarantines to stop the spread of the Delta variant, which threatens to exacerbate these shortages and price increases.

“We already expected that the semiconductor shortage would continue into 2022, and this is now almost guaranteed,” said Sara Johnson, global economics director at IHS Markit. He noted that new restrictions in countries such as Vietnam, Indonesia, Thailand and Malaysia are limiting production activities.

With the US labor supply comes a more domestically focused supply-side risk.

These shortages could be exacerbated if employers complain of labor shortages and the renewed risk of disease makes even vaccinated adults reluctant to enter or re-enter the workforce.

This is especially true if schools are returning to distance learning – even for short periods of time – which will make it harder for parents to work.

“What if you have a fever?” said Mrs. Bostjancic. “You’re closing school for a week? That’s very irritating for parents who want to be back in the workforce.”

On the demand side, there is some comfort in the seemingly solid spending of American consumers, which is aligned with the savings accumulated from the pandemic, federal stimulus dollars and rising wages.

The Conference Board said on Tuesday that the consumer confidence index rose slightly in July and that the emergence of the variant has not done much to harm consumers’ willingness to spend so far.

There’s even an upside twist that could dampen the variant’s impact on demand for things like restaurant meals and concert tickets. Where vaccination rates were high, the infection rate remained relatively low. Where infections are on the rise, public sentiment tends to be overwhelmingly against anything like isolation.

Yet, as two Bank of America economists Stephen Juneau and Anna Zhou noted, Michigan saw a slump in consumer spending on services, even without formal restrictions on activity, during the rise in infections earlier this year.

“So far we have seen little evidence of the Delta variant significantly affecting economic activity or services spending,” they wrote in a recent research note. “However, the survey data points to growing hesitations about being in physical locations and concerns about the virus.”

This may be particularly relevant in the few segments of the economy that are beginning to recover most slowly from the pandemic recession.

Many white-collar employers are on the verge of bringing workers back into their offices. If these plans change due to the variant, offices and downtown streets risk being empty for longer, meaning less demand for office space and downtown restaurant dining.

A similar story exists in the business travel industry, which has outstripped leisure travel to return to health. Will conferences and trade shows return with the kind of strong attendance that many hotels, convention centers and event planners hope for?

One thing that is particularly difficult is that the solution to these potential economic fluctuations lies in the field of public health. If the recovery stalls, fiscal and monetary policy is unlikely to play a constructive role. Already, enough money is flowing through the economy to make overheating and inflation the top concern.

There can be a demand gap for very specific things, like sandwiches at a downtown restaurant or rooms at a convention center hotel. But it’s hard to argue that the risk of falling short of aggregate demand in the summer of 2021 is high.

White House officials say vaccines over the past few months—and strong support for people and businesses from the federal government—are fundamental to keeping the economy moving even as Delta expands. And they believe consumers will react differently to the spreading virus this time around.

In past waves, people worried that they would be at a higher risk of contracting Covid-19 could either assume that risk and continue their normal economic activities or cut back on spending in places like retail stores and restaurants. Officials say frightened consumers have a third option. They can get vaccinated and largely keep their typical routine – or if they’ve already been vaccinated, they can continue to spend as they are.

All this means that the policy response to the Delta variant, as it has been for Covid from the beginning, relies more heavily on achieving the best possible public health outcomes with traditional economic policy being a secondary concern.

When the story of pandemic policy finally seems to be coming to an end, in other words, it begins to repeat itself.

Jim Tankersley contributed to the reporting.


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