- Inflation is higher than pre-pandemic levels, but manageable
- The labor shortage continues, but is expected to ease
- Commerce less likely to endure wide scale COVID lockdowns
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The U.S. economy continues to recover from the quickest recession on record, reaching its pre-pandemic real output (i.e. inflation adjusted) during the second quarter of 2021. With vaccines available for those who want them, and less restrictions on where and how to spend money, consumers are venturing out of hibernation. We at Lincoln Capital expect the economy to continue to heal throughout the remainder of the year thanks to receding unemployment, recovering supply chains, and the spending of excess savings built during the months of lockdown. We view the future as a probability distribution and we’re watching issues that could result in a negative surprise, especially the labor market, inflationary pressures, and COVID variants.
Labor Shortages Should Ease
Along with productivity, labor is a key ingredient for future economic growth. Yet despite the demand for labor, there has not been enough supply, which is curtailing output and boosting inflation as firms bid up scarce resources. According to the July Job Openings and Labor Turnover survey, there are 10.9 million job openings compared to the 8.4 million considered unemployed. According to the National Federation of Independent Business, 91% of business respondents hiring or trying to hire reported few or no qualified applicants in a recent survey. Health concerns, childcare, and expanded unemployment benefits were all cited as possible sources for this bottleneck. Helping alleviate these issues was the expiration of extended unemployment benefits on September 6th, and the majority of schools offering in-person instruction this year. By the end of the fall, we will have a clear picture if these developments help the labor market, or if there are other structural issues at play.
Inflation is Rising, But Manageable
Inflation is another risk worth watching. Uncomfortable and persistent price increases could create a Federal Reserve response to slow the economy. The current assessment from the market and policymakers is that inflation should return to a more reasonable, albeit higher than pre-pandemic level in the coming months. One-, five-, and 10-year inflation expectations priced in the Treasury Inflation-Protected Securities market point to average inflation of 3.0%, 2.5%, and 2.4%, respectively, for those time periods. The trimmed mean Consumer Price Index, which excludes outlier categories, advanced 3.0% from last year in July. This figure likely reflects a truer gauge of inflation without the distortion of autos, rental cars, airline fares, etc. As the labor market heals and capacity is added to semiconductor manufacturing, we expect inflation to gradually recede.
COVID Lockdowns Less Likely
The spread of the Delta variant has the U.S. again posting many new COVID cases per day. Unlike earlier in the pandemic, there has not been an impulse for hard lockdowns, outside of select cities. While the broader reopening has not been jeopardized yet, there have been rumblings of future disruption on the horizon. Office re-openings have been postponed, trade shows cancelled, and in the travel and leisure category, Norwegian Cruise Line, Airbnb, and Expedia have all noted weakness attributable to the spread of the Delta variant. Seated diners, as measured by OpenTable, were on par with 2019 levels in early June, but spent much of the summer below the levels seen two years ago. While barely noticeable at present, the momentum may be shifting and bears watching.
Despite an alarming amount of newly reported cases, there are reasons to believe that this surge will be less disruptive from an economic point of view. Vaccinated individuals that have contracted the virus have, by and large, avoided serious illness and the hospital. With less severe repercussions, vaccinated individuals likely feel more comfortable returning to previous routines despite the higher case counts. Lastly, between boosters, natural contraction of the virus, and the potential for pediatric approval, we expect cases to once again crest soon, absent a new variant.
In summary, we expect the known risks to the U.S. economy to be resolved favorably and we will continue to monitor future data for negative surprises.
Sean McGuirk is a Chartered Financial Analyst® for Providence-based Lincoln Capital, a financial planning and wealth management firm. He is a graduate of Bentley University and a board member of the CFA Society Providence.