RPT: Economic growth slowing even before potential drag from the Delta variant

Andrew Hunter, Capital Economics Senior U.S. Economist, joins Yahoo Finance to discuss the outlook on the U.S. economy amid the pandemic.

Video Transcript

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ALEXIS CHRISTOFOROUS: As the Delta variant spreads throughout the world, investors wonder what will that do to the pace of the economic recovery here in the US. Here to talk about it is Andrew Hunter, Senior US Economist at Capital Economics. Andrew, good to see you.

Now, you believe growth was already slowing a bit, even before the potential Delta drag. Why?

ANDREW HUNTER: Yes, so, I think we have already seen pretty clear signs that economic growth is going to slow pretty sharply in the third quarter. I think, particularly, if you look at the retail sales report we had just last week for July, it showed sales falling by about 1% on the month. So, clearly pretty disappointing.

I think the main driver of that is probably just sort of unsurprisingly the slowdown in income growth that we've seen over the past few months. So, on the one hand, obviously, the boost from the stimulus checks back in March, that's clearly now faded. And more recently, we've also had surging consumer prices and a lot of sectors starting to weigh on incomes as well.

But yet, I think that there certainly are some signs as well in the July data that we could perhaps be seeing some signs of an economic drag from this latest wave of virus cases driven by the Delta variant. And certainly, if you consider what's happened since July, and the sort of first three or four weeks of August, in terms of virus cases, hospitalizations in particular, you know, the situation is really only got worse. So, in that environment, I do think there is a bit of a risk that the economic data for August could be quite a bit weaker than a lot of people are anticipating.

ALEXIS CHRISTOFOROUS: We saw today, we got some housing numbers. Pretty good though for the month of July. Sales of new homes are increasing after three straight monthly declines. What do you make of that report, and also the fact that we had a gangbusters unemployment number for last month?

ANDREW HUNTER: Yes. So, I guess the housing market is perhaps detached from what's going on in other sectors of the economy. Certainly the likes of retail sales perhaps. Certainly now, 18 months into the pandemic, people are more easily able to sort of work and operate in the housing market and complete transactions, regardless of what's going on with the virus.

But I guess more generally, it is worth acknowledging that almost whatever happens over the next few months, it is, you know, it's the economic impact of this current wave of cases is unlikely to be anywhere near as large as what we've seen in the past, certainly not anywhere near as bad as it was in the spring last year. Clearly, the vaccinations have changed the picture there. And more than 60% of adults are now fully vaccinated. And I guess, a key result of that is that it doesn't look like we're going to get any sort of new widespread restrictions on activity, in terms of states or city governments closing retail stores, or restaurants, or anything like that.

I think the one sort of risk instead of that is more what we potentially might see in terms of consumer behavior. So, whether we see these potential rising fears about the virus sort of almost persuading some consumers to voluntarily stay at home, or at least stay away from these crowded spaces, and that could potentially weigh on spending in the services sector again. We have already seen some tentative signs that might be happening.

If you look at some of the survey evidence for August that we've had. So, just over a week ago, we had the University of Michigan consumer confidence index for early August. It fell very sharply and actually suggests that confidence is no lower than it was during the initial height of the pandemic in April last year, which is pretty striking.

We also had the PMI for August just yesterday. Doesn't always get a lot of attention in the US, but again, it fell very sharply driven by the services component. So, again, potentially consistent with that idea that rising fears about the virus are starting to weigh on spending in the services sector again.

ALEXIS CHRISTOFOROUS: In the 30 seconds I have left, what are your expectations for this Jackson Hole Symposium that's going to kick off on Thursday and Fed Powell's speech on Friday, given the fact that the Delta variant adds another layer of uncertainty for all of us?

ANDREW HUNTER: Yes. So, I guess the key point we learned from the minutes from the July meeting last week, the Fed clearly hasn't made the decision on when to start tapering its asset purchases. That's still a live issue, and the Delta variant clearly just adds to the uncertainty. So, in that environment, I think they're going to have to wait for another month or two more of economic data. I don't think Powell's going to be in the position to make any sort of strong statements one way or another this week.

ALEXIS CHRISTOFOROUS: I think a lot of people are in agreement with you. All right, that's going to do it for now. Thanks so much for being with us. Andrew Hunter, Senior US Economist at Capital Economics.