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The outlook for the US economy looked good until the Delta variant skyrocketed

The U.S. economy grew rapidly in the second quarter and exceeded its pre-pandemic magnitude, but the outlook suddenly clouded over due to the rapidly spreading delta coronavirus variant.

Virus cases are rising again, especially in parts of the country where vaccination rates are still low. The Centers for Disease Control and Prevention this week recommended that vaccinated people mask what some local governments and corporations restrict activity indoors in places with high or substantial transmission of coronavirus.

Apple Inc.,

for example, said workers and customers are required to wear masks in more than half of its retail stores, and Google delayed its plans to return to the office until mid-October. Several private and public employers have announced that workers need to be vaccinated or regularly tested for infections.

All of this has increased uncertainty as to whether consumers and workers will pull back like last year. Right now, forecasters generally don’t expect Delta’s spread to have a huge impact on the US economy, in part because businesses and consumers have learned to adapt to each wave of the pandemic.

Nevertheless, the rapid spread of the delta variant, initially in many emerging markets abroad, shows that the US economy will remain fragile as long as the pandemic continues.

A shortage of available labor could curb economic growth from the end of this year. A boxing gym in San Rafael, California, was looking for workers in early July.


Photo:

Justin Sullivan / Getty Images

“What you worry is how much disruption we are going to face all the time?” Said Diane Swonk, chief economist at Grant Thornton. “In the US economy there is a certain downside risk that some people won’t go out and eat as much as they used to, they don’t travel as much.”

Gross domestic product, the broadest measure of US goods and services produced, grew at a 6.5% annual rate in the second quarter, a slight increase from 6.3% growth in the first three months of the year, the Department of Commerce said Thursday. It was below economists’ estimates, but it squeezed the size of the economy above pre-pandemic levels, a milestone that underscores the speed of the recovery that will begin in May 2020.

That strong spring growth was fueled by trillions of dollars in fiscal stimulus and consumer spending, which rose 11.8% a year as more people got vaccinations and businesses reopened.

Economists see two main ways in which the spread of the delta variant could undo the robust recovery. First, some state and local governments could re-impose restrictions on businesses. Second, as a result of increased caution, consumers could cut their travel, dining and cinema expenses.

So far, new restrictions have been limited in scope, but the list is growing. This includes reintroducing internal mask rules in some places like Los Angeles County.

Americans don’t seem to be retreating into their homes as the delta variant spreads. Flight volume and hotel occupancy continue to rise, according to an analysis by Jefferies. Public transport use is also increasing, although it is declining compared to pre-pandemic levels, Jefferies said.

The rise in the number of vaccinations in the US has made people more likely to work and spend money despite the increase in cases.

“I’m really not expecting anything like we saw last spring,” said Ben Herzon, executive director of forecasting firm IHS Markit.

“In the future, we’ll just see how high the number of cases gets and how nervous some people get.”

Rising inflation, persistent supply chain disruptions and a lack of available labor are also factors that could slow the economy.

Budweiser brewer Anheuser-Busch InBev TO

said it is grappling with how a number of higher costs could be mitigated to protect profitability, despite second-quarter sales reaching pre-pandemic levels. Barley and freight have become more expensive, and the greater demand for cans in the US has forced them to import them from other countries, further increasing their costs.

Shipping shortages and raw material costs are helping drive inflation in the US WSJ Visit a patio furniture factory in China to see why your backyard renovation could be more expensive this year. Photo: Patrick Fok

Likewise, Nescafe Nestlé coffee machine TO

warned that transportation, raw materials and packaging costs would rise with no indication of when the current surge in inflation would end.

Elsewhere, blockages in seaports around the world have toy companies like Hasbro Inc.

and Mattel Inc.

are already crawling to make sure they have enough supplies for the Christmas shopping season. Toy industry veterans say this year’s disruption is worse than when Covid-19 first emerged last year, which saw many ports, factories and stores temporarily shut down. Sea freight bottlenecks have resulted in long delays in shipping out of China and well above normal rates. Toy manufacturers are also struggling with rising material and wage costs, which leads to price increases.

Nevertheless, many analysts expect these delivery bottlenecks and bottlenecks to subside. Demand – especially for durable goods that consumers snapped up earlier in the pandemic – is starting to weaken. This gives companies more time to process order backlogs and increase production. Many economists say inventory replenishment should increase production in the quarters to come.

A strong comeback in consumer demand this spring has been a double-edged sword for many businesses. Sales are booming so companies can make up for losses, but the growth has been so rapid that some have found it difficult to keep up.

When many people were getting vaccinated earlier this year, they flocked to Factory Hair Seattle to get their hair cut, said Denise Rivera, the salon owner. “It just exploded,” she says. “I went through a recession and saw the economy come back, but never anything like it.”

As the business grew, some stylists got mentally tired and some said they could no longer accept clients. Ms. Rivera added two stylists to her team of six to keep up with the onslaught of customers.

The salon also hiked prices to partially slow growth to more manageable levels, Ms. Rivera said. Haircuts, which include a shampoo and blowout, average $ 60 to $ 70, $ 5 more than a year ago, she said.

Consumer prices rose 5.4% year over year in June, the fastest pace since 2008, the Department of Labor reported. As overall economic growth slows, price increases could also cool off. Economists surveyed by The Wall Street Journal in July see inflation measured by the department’s consumer price index later this year to ease to 4.1% in December year over year and 2.5% by the end of 2022.

Overall, economists expect strong growth, provided no virus cases and associated restrictions and fears reappear. WSJ survey respondents predict the economy will grow 7% in the third quarter before dropping to 3.3% in the second quarter of 2022.

When the pandemic broke out, cutlery maker Sherrill Manufacturing Inc.’s sales began to double.

“The restaurants were all closed so people were cooking for themselves, many of whom had never cooked anything but mac and cheese,” said Greg Owens, CEO of Sherrill. “You wanted something nicer on your table.”

Real-time economy

The latest business news, analysis and data curated by Jeffrey Sparshott of the WSJ.

Sales continued to grow solidly, but have cooled from the blazing pace seen during much of the pandemic. Mr Owens said the spike in spending from government stimulus money has subsided and people are shifting their spending to services like restaurants during reopenings.

“This is certainly less of a demand created for people who sit at home, ‘Our plates are a little old and I don’t really know how them,’ or ‘Our cutlery is out of date,'” he said.

Still, Mr. Owens believes sales will remain strong. His company makes cutlery in the US, and he said many people are increasingly interested in buying US-made products as many imported goods are limited in availability during the pandemic.

At Factory Hair Seattle, business has only recently slowed down, although the salon is still busy. The salon sees an influx of men coming in to clean up their longer pandemic hair – but still grooming, Ms. Rivera said.

“They say, ‘I still won’t be going back to my office until September, October,'” she said. “You don’t want to go back to that short, crisp corporate look.”

Write to Sarah Chaney Cambon at [email protected]

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