There are also important questions about the looming effects of the phasing out of extended unemployment benefits for millions of Americans on Monday, the recent end of a national eviction moratorium, and the impending congressional stalemate this fall over federal government funding and the national debt limit. Add to this the likely heavy economic toll of Hurricane Ida from Louisiana to New England and the possibility of a market-shaking change in the leadership of the Federal Reserve this winter.
“We’re in the middle of a flock of black swans,” said Diane Swonk, chief economist at accounting and advisory firm Grant Thornton, using the term finance to refer to unforeseen and potentially serious events. It rated the level of economic uncertainty with an 8 on a scale of 10.
The good news is that the economy is weathering this latest wave of the virus much better than any previous one. While this month’s job report fell far short of expectations, average employment growth has been strong overall over the past few months. But the rise of the Delta variant is another reminder that the road to recovery from an unprecedented pandemic continues to be potholed.
“The recovery is still ongoing, but the bloom has faded,” said Swonk. “Delta has taken the boom from its prime.”
All of this presents another major challenge to President Biden after a tumultuous August that saw the chaotic and deadly withdrawal of US forces from Afghanistan.
He admitted Friday that he was hoping for much more than the disappointing 235,000 jobs created in August, which was less than a quarter of July’s growth and half a million jobs below expectations. Biden blamed the Delta variant and promised to come up with a plan to combat it in the coming week. However, he emphasized the overall picture of a booming economy that has created an average of 750,000 jobs each over the past three months.
“Despite the impact of the Delta option … we are seeing a sustained and strong economic recovery,” said Biden.
Many economists agree.
“I think the big story is that we have this massive COVID surge … and yet we are not having the kind of economic carnage we have in 2020,” said Julia Pollak, senior labor economist at ZipRecruiter online job board. The number of active online job postings on thousands of websites nationwide rose 13 percent in August compared to July, showing companies remain optimistic, she said.
And even when he warned that labor market conditions were “tumultuous,” US Federal Reserve Chairman Jerome Powell said in a speech on May 27, some of his economic support – if not to raise interest rates – until the end of the year, if the recovery is proceeding as expected.
Zach Gibson / Bloomberg
But there are signs that Americans are getting nervous and may drag the economy down with their sentiment.
Retail sales fell significantly last month when the Delta variant took off. And a leading indicator of consumer confidence from the University of Michigan plunged to its lowest level since 2011 in August amid the surge in COVID cases as well as concerns about rising prices, lower wage increases and pessimism about future job growth.
These are among the factors that have led economists to lower their third-quarter projections from a consensus of more than 7 percent annual growth to around 6.5 percent. The economy grew at a rate of 6.6 percent for the April to June quarter, a marked improvement over pre-pandemic times, but not what is needed for a quick recovery from the deep recession.
Growth this year was fueled by $ 1,400 economic checks for most Americans who are spending part of the nearly $ 6 trillion the federal government has spent to prop up the pandemic-ravaged economy since early 2020 – an unprecedented amount of help. Much of that aid ends while the virus flares up again, and it is unclear how well the economy will grow on its own as the country still has about 5.3 million jobs behind its pre-pandemic employment.
“The risks are clearly on the downside in the face of many of the problems the economy is facing,” said Joe Song, senior US economist at Bank of America Global Research, which cut its third quarter forecast to 4.5 percent . “Usually these risks come separately … but right now all of these factors are coming to a head and that makes it a lot more complicated to look through the crystal ball.”
He remains “cautiously optimistic” that the economy will survive the Delta variant and predicts a return to 6 percent growth in the fourth quarter of the year. But Song noted, “September is going to be a very complicated month, especially in Congress.”
Legislators still have to pass funding bills to avoid a government shutdown on September 30th and raise the country’s legal debt limit to around $ 28.5 trillion, which was hit on August 1st. The Treasury Department has put in place temporary accounting maneuvers to allow continued borrowing to stave off sovereign defaults, but those options will run out sometime this fall.
The Democrats plan to tie an increase in the debt ceiling to a government funding bill. But they’ll need at least 10 Republican senators to back the move, and although they partnered with Democrats to approve the debt ceiling hike during the Trump administration, all but four signed a letter in last month to whom they have vowed not to do so under Biden. Democrats in Congress could raise the limit through the budget reconciliation process themselves, but party leaders have stated that they want an increase to be non-partisan, as in the past.
A last-minute showdown on the debt ceiling in 2011 led Standard & Poor’s to downgrade the country’s first AAA rating. The uncertainty also forced the Treasury Department to pay $ 1.3 billion more in borrowing costs this year.
Al Drago / Bloomberg
Song warned that a debt crisis would rock financial markets and further damage consumer confidence.
“You can be a little more careful about negative headlines when it comes to large expenses that you are considering,” he said.
A senior White House official who had no authority to go on record said failing to raise the debt ceiling would amount to an own goal in football and said it was particularly dangerous with so many other economic uncertainties.
One of those unknowns is Powell’s future as Fed chairman, as his four-year term expires in February. He is a Republican who was elevated to the position by Donald Trump. Although Powell has received high marks for his leadership of the economy, Liberals are putting pressure on Biden to nominate someone who is more aggressive on financial regulation and climate change.
Boston Rep. Ayanna Pressley and four other House Democrats publicly urged Biden to replace Powell on Tuesday. Senator Elizabeth Warren also criticized Powell over financial regulation.
Swonk said a change in Fed leadership could shake financial markets and the economy at a time when stability is needed.
“You don’t want to mess with something that works,” she said. “At the moment, anything that eliminates uncertainty is better than increasing uncertainty.”
Jim Puzzanghera can be reached at [email protected] Follow him on Twitter: @JimPuzzanghera.