- Sept. 13, 2021
Are markets ignoring the potential slowdown?
- The last couple of weeks have seen a flurry of downgrades by economists to third-quarter and 2021 GDP growth forecasts. A survey of 71 investment firms shows that the economy is now expected to grow about 6% this year, which would still be the fastest pace since 1984 but below the almost 7% rate that was projected at the end of July1. The main culprits for the downbeat narrative over the past month are 1) softening consumer demand impacted by the delta COVID-19 variant, and 2) lingering supply-chain disruptions.
- The spread of the delta variant appears to have dented consumer confidence and disrupted the momentum in job growth. For example, payroll gains decelerated sharply in August, with the leisure and hospitality sector -- which is sensitive to the pandemic trends -- adding no jobs last month after averaging 377,000 monthly gains over the prior three months1.
- Supply-chain disruptions are proving to be more persistent than initially thought, limiting how fast the economy can normalize. Widespread labor and material shortages are restraining production, holding back the recovery, and driving prices higher. July job openings released last week reached a new record high at 10.9 million, and the number of unemployed per opening sank to a record low, indicating a tight labor market1. An example of the snags in supply chains is the semiconductor shortages.
- The silver lining is that growth and economic output are possibly shifting from the third quarter to the fourth (best-case scenario) and next year, instead of being completely lost. As shown in the graph below, GDP growth forecasts for 2022 have risen some as this year's estimates have declined.
- With increased vaccinations and COVID-19 cases appearing to crest, the reopening process is likely delayed, not derailed. The schools reopening and the expiration of the enhanced unemployment benefits could push more workers to rejoin the labor force, alleviating some of the labor shortages. And inventories, which are extremely lean because of the supply-chain disruptions, will need to be rebuilt, adding to growth.
Source: 1. Bloomberg
- Gauging market expectations and what's priced in is no easy feat, but we think that the sector leadership over the past month and cautious market undertone likely reflect, to a certain extent, the ongoing health uncertainties and deceleration in the pace of economic activity.
- Unlike the S&P 500, which has benefited from the outperformance of the mega-cap tech names, small-cap stocks have flatlined since February, and several economically sensitive industries, along with commodities, peaked in May. And since July, the very defensive utilities sector has led the S&P 500 gains1.