Macroeconomic headwinds started to build throughout the summer, which was also when the surge of the highly contagious Delta variant started to take a toll. Many businesses reluctantly delayed office re-openings and in some parts of the country, indoor capacity restrictions were reinstated. The travel and hospitality industry largely reported that bookings hit a soft patch.
Meanwhile, supply chains have not helped – product shortages, ballooning shipping costs, and backups at U.S. ports have hampered inventory restocks and snarled production at factories globally. Everything from cars to toys to Christmas decorations is in tight supply and starting to experience price pressures.
The effect on U.S. growth was palpable – consumers trimmed spending on hospitality services and travel in July, and supply constraints led many economists to trim GDP growth estimates for Q3. In one notable recalibration, the forecasting firm IHS Markit lowered their Q3 GDP forecast from 7.8% in July to 3.6% by late September.1
Taken together, the persistent pressures on the global economy have led many investors to increase inflation expectations while lowering growth expectations, and for some, the outlook for the U.S. economic expansion has soured. I’ve even noticed the more frequent use of the term “stagflation” in the news lately, which describes the scenario of high inflation and low or negative growth. I think these worries are overblown.
Households have a record $142 trillion in net worth, wages are on the rise, and there are still roughly as many job openings as there are unemployed Americans. Consumers are paring spending on big-ticket items, like vehicles and furniture, but they are spending more in areas like retail and services. According to one estimate, households have still only spent about 25% of 2021’s stimulus payments.
In a sign that spending and growth remain in an upward trend, personal outlays on goods and services rose 0.8% in August compared to July, according to the Commerce Department. As you can see in the chart below, U.S. consumer spending has not missed a beat.
Source: Federal Reserve Bank of St. Louis2
August also saw companies report a strong increase in new orders for durable goods, such as appliances, computers, TVs, and home furnishings. Even though a late-summer lull may have seen consumers hit the ‘pause’ button on economic activity, businesses are still largely reporting a struggle to meet demand in the marketplace.
Source: Federal Reserve Bank of St. Louis3
Finally, I remain optimistic about the economic expansion because of further labor market improvements I see in the coming months. September was the first month that the expanded federal unemployment benefits expired, and school re-openings should pull some workers off the sidelines. There is, of course, no shortage of jobs waiting for those who re-enter the workforce – as I mentioned previously, the number of job openings in the U.S. roughly equals the number of unemployed Americans. Wages are also higher.
Bottom Line for Investors
If there is one thing I’ve learned about economic expansions over the years, it is that analysts are always looking for reasons to doubt the expansion’s resilience. July’s weak retail spending, which showed sales at retailers and restaurants falling -1.1%, was enough for many to start calling into question whether growth would last. A short period of weak growth coupled with largely expected high inflation readings was enough to declare stagflation.
I disagree. In addition to the fundamentals detailed above, I would also point out that the economic drag from the latest Covid-19 surge was far more tempered than previous surges, which to me indicates the economy and businesses have learned and are adapting. In my view, aggregate demand and future growth were not lost as a result of the Delta surge but were merely delayed by a few months. I’m adjusting my growth expectations higher for Q4 2021 and 2022, accordingly.