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Is the economy’s big comeback starting to fade?

Is the economy's big comeback starting to fade?


Is the economy’s big comeback starting to fade?

Biden: US needs to reimagine economy and our futurePresident Joe Biden pitched his proposed investments in families and education at an Illinois community college on Wednesday, telling residents of the swing district that what’s good for families is also good for the economy. (July 7)APAre the economy’s post-pandemic fireworks already petering out?Some top economists have lowered their blockbuster forecasts for this year amid lingering supply-chain bottlenecks, rising inflation and the rapidly spreading of the COVID-19 variant. Toss in a couple of wild cards too: Uncertain prospects for more government stimulus and a Federal Reserve that suddenly seems inclined to raise interest rates sooner than expected.“Risks to the outlook have intensified,” says Barclays economist Jonathan Millar.No need to panic. Economists still expect the U.S. to record its fastest growth since the early 1980s as Americans flush with an extra $2.5 trillion in savings — from government stimulus checks and spending cutbacks during pandemic-induced lockdowns – splurge.For months, experts figured the recovery from the COVID recession would peak midway through the second quarter, or in May, as households spent their latest round of stimulus checks, amounting to $1,400 for individuals. But recent economic reports “reveal a somewhat sharper pullback in U.S. growth and faster inflation rate than expected,” Scott Anderson, chief economist of Bank of the West, wrote in a note to clients.Vehicle sales fell to 15.4 million last month from 17 million in May as a result of low inventories, rising prices and a slowdown following stimulus-fueled purchases, according to TD Economics and Barclays. Housing sales and mortgage applications have slipped because of soaring prices and limited supplies. And indexes of both manufacturing and service sector activity have softened, largely due to the supply chains snags.Anderson has trimmed his economic growth forecast to 8.7% annualized in the second quarter from 9.6% a month ago and to 7.4%, down from 7.7%, in the current quarter. For the entire year, Oxford Economics expects growth of 7% at an annual rate — which would still be the fastest pace since 1984 — down from its prior 7.7% estimate.The disappointing indicators, and the prospect of somewhat slower growth and inflation, have helped push down 10-year Treasury yields to about 1.36% from 1.7% in mid-May and made for a more volatile stock market.More free stuff: Subway closing restaurants early Monday ahead of new menu, 1 million free sub giveaway TuesdayThose factors, along with the delta variant of COVID, have increased risks that the economy could slow even further in 2021, though probably by no more than a couple of percentage points, Millar says.Here’s a look at why the economy could slow more than projected:Supply chain snarls and inflationAlthough consumer demand has surged as the economy reopened, businesses don’t have many of the products and workers they need to keep pace. Many workers at factories, warehouses, ports and restaurants are still caring for children, wary of contracting COVID or reluctant to give up generous unemployment benefits. And trucks and shipping containers are in short supply.Analysts had expected the shortages to ease by this summer but now say they could last through the end of the year, curtailing economic activity.“There’s lots of strong demand but it’s a challenge to bring the goods and services to households,” Millar says. “At the end of the day, that’s what GDP (gross domestic product) is all about.”The crunches are also contributing to a big pickup in inflation, which had been dormant for years. In June, the consumer price index was up 5.4% from a year earlier, the largest increase in 13 years. Average unleaded gasoline prices hit $3.15 a gallon Monday, up from $2.20 a year ago, according to AAA.The effects could be limited if consumers believe the price increases are temporary, as leading Fed officials have argued, but could be more pronounced and dampen spending if they think the higher costs will stick around, Millar says.The COVID delta variantThe fast-spreading strain of the virus is triggering a jump in COVID cases, which averaged 19,455 per day over the past seven days, a 47.5% increase from the previous week, according to Johns Hopkins University. The variant could lead some states to reinstate business restrictions, particularly in the South and West, where vaccination rates are low, says Anderson and Mark Zandi, chief economist of Moody’s Analytics.Already, the variant seems to have affected job growth in states with low vaccination rates, economist Ellen Zentner of Morgan Stanley wrote in a note to clients.Points for paying rent?: Now you can earn credit card rewards just for paying rent through Bilt MastercardUncertainty about more stimulusPresident Biden has announced a $1.2 trillion bipartisan plan to rebuild the nation’s infrastructure and another bill that could cost even more to upgrade a variety of social service programs, such as childcare, home caregiving and free college tuition. The latter could be passed with a simple Democratic majority in the Senate. But both blueprints may be downsized significantly as the White House struggles to satisfy Republicans as well as moderate and progressive Democrats, Millar says. That would temper growth projections in coming years.Fed concerns about inflationThe Fed has promised to keep its key interest rate near zero until the economy returns to full employment and annual inflation tops its 2% target for “some time.” But with both growth and inflation rising, Fed officials’ forecasts at a June meeting showed two rate hikes in 2023, pushing up the timetable for the first increase from 2024.Millar says the central bank’s shift has spooked some investors. Higher inflation could prompt the Fed to raise rates sooner than anticipated, further constraining the recovery.End of housing, student loan aidThe government suspended foreclosures on homes with government-backed mortgages and on rental evictions, and allowed Americans to put off mortgage and student loan payments, Zandi says. After several extensions, the foreclosure and eviction moratoriums are set to expire at the end of the month and the deferral of the payments, and September, he says. Although a declining number of Americans are at risk, Zandi says the deadlines pose a “meaningful threat to my optimistic baseline outlook.”Unlike some other economists, however, Zandi believes the risks to a historic recovery will likely be no match for a massive wave of pent-up household demand.“The economy’s prospects are strong, and it would take a lot to derail it,” he says.              

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