Delta Variant May Already Be Exerting Max Impact

The rise of the delta variant has started to hit economic data from August, particularly the pace of hiring. However, markets and the economy are absorbing the impact well, much as anticipated in the outlook we’ve articulated through summer.

At this point, one could argue the delta variant resurgence is already exerting its maximum impact on the economy. Cases and hospitalizations in some parts of the country rival or even exceed levels reached in 2020, but the corresponding economic impact has been far less severe. This isn’t to discount the critical public health challenges that persist in areas where cases are rising, but from a purely economic standpoint, the pandemic won’t exert the same pressure as it did in 2020.

Although the delta variant is more virulent than the original coronavirus strain, society is far more prepared to contend with cases than it was a year ago. Our collective knowledge is helping life proceed as normally as possible while also managing cases. Last year, the entire economy was impacted by rising cases. This year, the major impacts are limited to a few sectors of the economy. Monetary and fiscal supports are firmly in place, and policymakers are poised to do whatever it takes to push this recovery forward.

In general, the biggest difference between 2020 and 2021 is the level of uncertainty. Markets are repelled by uncertainty, and in 2020 it reached a fever pitch. Although cases are rising again today, there’s far less uncertainty about how we treat cases, prevent them and conduct business amid the pandemic. Even if there is a market sell-off driven by the coronavirus, we believe it will be rather short lived, as many buyers will be ready to swoop in if prices fall back.

WALL STREET WRAP

Jobs Report: No matter how you slice it, the jobs report was a miss. Yet markets were largely unswayed by the week’s primary data point. U.S. payrolls grew by 235,000 jobs, and the unemployment rate fell to 5.2 percent. A rise in COVID-19 cases is clearly impacting the labor market, as hiring was especially weak in services sectors, where personal interactions are a key facet of the job. Leisure and hospitality were the biggest sector laggards, showing zero new jobs in the reporting period after averaging 377,000 over the prior three months.

The report fell short of expectations, but when we take a closer look, there’s nothing that would alter our outlook. The fall-off in hiring occurred in a narrow slice of the overall economy (leisure and hospitality). We still added jobs during the month and have averaged 750,000 new jobs a month over the last three months. Extended unemployment benefits also expire this week, and kids are back in school: a pair of catalysts that could push more people back into the workforce in September.

Regardless, a little bad news on the labor front is good news for markets, as it likely stretches the Fed’s timeline for rolling back accommodations for the economy. If anything, policymakers are ready to step in quickly to alleviate further downside.

Price Pressures Beginning to Recede? There is generally good news to report from two of our favorite economic indicators, the ISM manufacturing and services indexes, even though we’re seeing the delta variant have an impact here as well.

The manufacturing index came in at 59.9, a hair over July’s reading of 59.5 (a read above 50 indicates expansion) — nothing new to report on this front. However, the index for prices paid fell to 79.4 in August, the third month in a row of a decline and the lowest level since December. Supplier delivery times also fell, while new orders rose. The backlog of orders also rose, while customer inventories remain restrained. Taken together, these are signs that prices are starting to normalize amid solid growth prospects.

The services side stayed hot, coming in at 61.7 in August, just shy of the all-time high of 64.1. These strong services numbers stand in contrast to lighter August data — the jobs report, for example. Altogether, ISMs are looking good. Of 36 industries measured, 32 are still reporting growth, and we’re moving in the right direction.

Consumer Confidence Dips: The delta variant dug into consumer outlooks, as the Conference Board’s Consumer Confidence Index fell to its lowest point since February. This appears to have been driven by rising coronavirus cases and inflation prospects. Still, we think the evidence overwhelmingly points to an economy that has adapted to pandemic conditions, and early indications show inflation may indeed prove transitory.

THE WEEK AHEAD

A Lighter Week Ahead: The shortened holiday week will likely be a quiet one. Earnings season has passed, and there’s not a big slate of data due this week. The Fed’s Beige Book is released Wednesday, which may have some interesting observations from various Fed districts. Otherwise, check back later this week, as we’ll be publishing the investment team’s quarterly Asset Allocation Focus. It’s our chance to dive deeper into our outlook, asset class by class, for 2021 and into 2022.

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