Could this wave of COVID reverse the recovery? Here’s what to watch
The spread of the delta variant has delayed the reopening of offices, disrupted the start of the school year, and generally dashed hopes of a return to normal after Labor Day. But that did not set back the US economic recovery.
Now that the recovery faces a new test: the removal of much of the aid that has kept households and businesses afloat for a year and a half.
The Paycheque Protection Program, which has distributed hundreds of billions of dollars in grants and loans to thousands of small businesses, ended last spring. A federal moratorium on evictions ended last month after the U.S. Supreme Court blocked the Biden administration’s last-minute efforts to extend it. More recently, around 7.5 million people lost unemployment benefits when programs that expanded the system during the pandemic were allowed to expire.
Next step: the Federal Reserve, which indicated on Wednesday that it could start withdrawing its stimulus efforts as early as November.
The double blow of a resurgent pandemic and dwindling aid has led Wall Street forecasters, who were once optimistic about the outlook for the economy this fall and winter, to turn increasingly gloomy. Goldman Sachs said this month that it expected third-quarter data to show lower consumer spending, the mainstay of last year’s recovery. Many economists expect the employment figures for September to show a second straight month of sluggish growth.
Yet economists also see significant sources of strength that could help the recovery weather the latest wave of coronavirus and possibly fuel a strong rebound on the other side. Few believe the global economy is heading into another recession, let alone a repeat of last year’s collapse.
“There was a clear deceleration, but I would focus on deceleration rather than pullback,” said Jay Bryson, chief economist at Wells Fargo. “We certainly believe that the expansion will continue.”
Rather than pose an immediate threat, the withdrawal of aid leaves the recovery with less safety net if economists are wrong or if the public health situation worsens – two scenarios that have reoccurred throughout the crisis. pandemic.
“I think there should be concerns that we may see the recovery weaken further and that appetite for further fiscal stimulus has waned,” said Karen Dynan, Harvard professor and head of the Treasury under President Barack Obama.
And even if the recovery stays the course, it will almost certainly leave out some individuals and businesses, who face an increasingly uncertain fall with little government assistance. Even in the most optimistic scenarios, it will take months for all workers who lost benefits this month to find a job. “The fall will be slower for all of us because we have withdrawn the support,” said William E. Spriggs, professor at Howard University and chief economist for the AFL-CIO. “There will be a downturn in the labor market, and it will be disproportionately black and brown workers who will have to deal with it. “
The pandemic is not slowing down activity as it once was.
The delta variant caused a marked slowdown in certain sectors, notably catering and air transport. But so far, the decline in activity bears little resemblance to the economic downturn the United States has experienced in previous waves of COVID-19.
State and local government officials have failed to reimpose lockdown orders and trade restrictions put in place during previous waves of the pandemic, and they appear reluctant to do so. Consumers seem to have become more cautious, but they haven’t given up on in-person activities, and many businesses have found ways to adapt.
A wild card is how the delta variant might affect the supply of workers. If virus rates remain high, people may be reluctant to take jobs that require face-to-face interaction, especially when vaccination rates are low. And if schools and daycares can’t stay open consistently, parents can have difficulty returning to work.
The government continues to help.
Government assistance has not completely dried up. The Federal Reserve said on Wednesday it may soon start cutting its $ 120 billion monthly bond purchases – which have continued to borrow at low prices and circulate money through the economy – but it will maintain interest rates will almost certainly be near zero next year. Millions of parents will continue to receive monthly checks until the end of the year due to the expanded child tax credit passed in March as part of the $ 1.9 trillion aid package by President Joe Biden.
This bill, known as the American Rescue Plan, also provided $ 350 billion in state and local governments, $ 21.6 billion in rent assistance, and $ 10 billion in mortgage assistance, among other programs. But much has not been spent, said Wendy Edelberg, director of Project Hamilton, an economic policy arm of the Brookings Institution.
“These delays are frustrating,” she said. “At the same time, it also means that the support will continue to have an effect over the next few quarters.”
Household savings could act as a buffer, if it lasts.
Economists, including officials in the Biden administration, say that as the economy recovers, there will be a gradual “shift” from government aid to the private sector. This transition could be facilitated by a record mass of household savings, which could help support consumer spending as government aid declines.
Much of that money is held by wealthier white-collar workers who have kept their jobs and have seen their stock portfolios swell even as the pandemic restricts their spending. But many low-income households have built up at least a small savings cushion during the pandemic due to stimulus checks, improved unemployment benefits and other aids, according to researchers at the JPMorgan Chase Institute.
“The good news is that people are approaching fall with reservations, more reservations than normal,” said Fiona Greig, co-director of the institute. “It can give them a lead to look for a job.”
The risk, for individual households and the economy in general, is that aid will run out before the private sector can take over.
Michael Ernette, 48, lost his factory-built house assembly job in January, and despite applying for four to five jobs a day, he couldn’t find a job. He used his last unemployment check to pay off as many unpaid bills as he could, and now he’s on a countdown until he can’t pay rent anymore.
“I took the last payment we had, and I paid it all off, and I’m pretty much fine until the end of October,” said Ernette, who lives near Pittsburgh. “It gives me 60 more days to find a job.”
Businesses are entering a critical period.
Eighty percent of small businesses are concerned about the impact of the delta variant, according to a recent survey by Alignable, a social network for small business owners. Not all have seen their sales drop, said Eric Groves, chief executive of the company. But uncertainty strikes at a crucial time, as the holiday season approaches.
“This is a time of year when business owners in the consumer sector in particular are trying to get their crystal ball out,” he said. “Now is the time to buy inventory and do all that planning. Rothmans, a century-old menswear retailer in New York City, is in one of the hardest hit areas in one of the hardest hit cities in the country. Still, a co-owner, Ken Giddon, is betting on the future: last week, the company announced the opening of a new site as part of a development project on the West Side of Manhattan.
“We are proud to take hits and pick ourselves up,” he said.
The pandemic has been difficult, Giddon said, but it has also created opportunities by driving down commercial rents and leaving fewer competitors. The Delta variant delayed the back-to-office boom retailers had hoped for, but Giddon expects workers to come back eventually – and need new clothes when they do.
In Minneapolis, on the other hand, Nicole Pomije is still struggling to make payroll.
Pomije opened his bakery business, The Cookie Cups, in 2018 after several years of selling at farmers’ markets and other events in the region. Much of his income came from cooking classes and birthday parties – activities that were next to impossible for much of the past year and a half.
Pomije permanently closed one of its two branches in June. The other hangs on, but hardly; the store restarted cooking classes this year, which made some money, but parents are nervous about enrolling their unvaccinated children for indoor activities.
“I can’t tell you how much salary I have withdrawn from my savings account over the past two years,” Pomije said.
Pomije said she would already be bankrupt if she hadn’t received help from the federal government. Now, with more unlikely help, she’s hoping the holiday sales will help save her business.
“This fourth quarter is going to be really critical to our success,” she said. “If we sell enough products online, if only to pay our payroll, rent, and critical bills to stay afloat, with enough inventory to sell, I think we’ll be fine. “
Supply issues put policy makers in a bind.
At the start of the pandemic, economists had a simple message for policymakers: go big. If any help ended up going to people or businesses that didn’t really need it, it was a reasonable compromise in favor of money for the millions of people who needed it.
Today the calculation is different. The impact of the pandemic is more narrowly concentrated on a few industries and groups. At the same time, many companies are struggling to find workers and materials to meet existing demand. Traditional forms of stimulus that seek to fuel demand will not help them. If automakers can’t get the parts they need, for example, giving money to households won’t lead to increased car sales, but it could lead to higher prices.
This puts policy makers in a difficult position. If they don’t get help for those struggling, it could cause individual hardship and weaken recovery. But reckless spending could exacerbate supply problems and lead to inflation. It requires a more focused approach, focusing on the specific groups and industries that need it most, said Nela Richardson, chief economist at ADP, a payroll company.
“There are still a lot of arrows in the quiver, but you need them to hit the bull’s eye now rather than just going everywhere,” said Richardson.