The COVID-19 delta variant surge, ongoing supply chain challenges and unanticipated labor shortages have combined over the past few months to derail a booming economic recovery and create an economic growth scare. In October, the Federal Reserve Bank of Atlanta GDPNow estimate for third quarter growth plummeted to 0.5% from 6.1% back on July 30. According to the Bureau of Economic Analysis (BEA), GDP grew at annualized pace of 2.0% in the third quarter, slower than economists’ 2.8% estimate and nowhere near the breakneck pace of the first half. With all measures of inflation stubbornly high, Federal Reserve (Fed) Chairman Jay Powell has reluctantly admitted that elevated inflation is “likely to last longer than previously expected and well into next year.”1 A few economists have even started to sound the alarm on stagflation, a situation in which an economy has high inflation, slow or stagnant economic growth and a relatively high unemployment rate. But the stagflation label is a stretch in today’s economic environment.
Stock market investors have barely noticed the challenges produced by the delta variant, supply chain bottlenecks and labor shortages, dismissing them as temporary obstacles on the road to recovery from the pandemic. Extraordinary revenues, earnings and net profit margins have consistently surpassed even the most optimistic analysts’ estimates, bolstering investor confidence and repeatedly sending stocks to all-time highs throughout the year, including multiple records in October.2 Ample liquidity and permanently low interest rates generously provided to investors from the Fed’s still easy monetary policies have also been a tailwind to stock prices.
The contrast between the economic challenges and stock market gains underscores the yawning disconnect between Main Street and Wall Street. Yet, with delta now fading, supply chain bottlenecks peaking and the labor market making progress, a more robust economic recovery could return as early as the fourth quarter — and finally close the gap between economic and stock market performance.
Improving COVID Numbers Deliver a Shot in the Arm
The COVID-19 pandemic has dominated headlines and our lives for the past 20 months. COVID-19 was always a health problem that required health solutions. Today, with better therapeutics, increasing vaccination rates, greater deployment of diagnostic testing and a high level of infection spread among the population, it may finally be time to turn the page on the pandemic.
Figure 1: US Daily New Confirmed COVID-19 Cases
According to the Centers for Disease Control and Prevention (CDC), 78% of the US population 12 years of age and older has received at least one vaccine dose as of October 27. About 90% of those people will complete the vaccination series. To expand the US vaccination campaign to young children, the Food and Drug Administration (FDA) has authorized the Pfizer-BioNTech vaccine for children 5 to 11 years of age. According to US health officials, vaccinations are likely to begin in early November.
Figure 2: A Third of Surveyed Parents of Children Ages 5-11 Now Say Their Child Will Get Vaccinated “Right Away” Once Eligible
Throughout the pandemic, most discussions about ending COVID-19 have focused largely on the availability, effectiveness and safety of vaccines. But in early October, Merck reported on a promising new drug called molnupiravir, an antiviral pill that could be given after COVID-19 symptoms arise to prevent severe disease. The pharmaceutical company claims that the drug performed so well in a clinical trial that it ended the trial early to apply more quickly for emergency use authorization with the FDA. According to a Merck press release, molnupiravir cut the risk of hospitalization and death by half in patients who had mild to moderate disease. And, at the end of October, Merck granted a royalty-free license for molnupiravir to a United Nations-backed nonprofit that would allow the drug to be manufactured and sold cheaply in the poorest nations, where COVID-19 vaccines are in short supply. The availability of a pill to treat COVID-19 would be not only a therapeutic and clinical breakthrough, but it could provide a significant cultural and psychological lift.
Some experts have suggested that the delta variant could be done coursing through the US by Thanksgiving. As of October 20, the CDC reports that the current 7-day moving average of daily new cases decreased by 15.1%. The nation’s most vulnerable population were the first to receive vaccines and are now getting booster shots to strengthen their protection against COVID-19. Advancements in telehealth will remarkably enable people to self-diagnose infectious disease pathogens at home. Vaccinating young children and the possibility of treating COVID-19 with a pill will be major milestones in finally ending the pandemic.
While COVID-19 will be a persistent menace, perhaps like the flu, these advances on the health front mean that the social and economic impacts from the pandemic likely will fade as the new year approaches.
Figure 3: US TSA Traveler Throughput Vs. Open Table Changes from 2019
Time Heals All Bottlenecks
The supply chain crisis is the result of pandemic shutdowns in 2020 immediately followed by a rapid increase in demand as the economy reopened. Supply chains are out of sync because they were forced to go offline when the pandemic started and getting all the industry players back online simultaneously is impossible. Continuing virus-mitigation measures are hampering efforts to return the supply chain to pre-pandemic levels. Shortages of workers, equipment, and space have only made the issue worse. As a result of supply chain bottlenecks, there have been record shortages of everyday products from household goods and electronics to cars, food and raw materials.
At the same time, demand is soaring. Compounding the challenges, all parts of the supply chain are built on “lean” principles (no slack and little redundancy, from truck drivers to warehouse inventories) and therefore were vulnerable to the substantial increase in demand. Consumer preferences can change on a dime, but it takes more time to increase supply chain capacity to meet shifting demand.
Ports, warehouses, and trucking companies are processing more goods than ever while combating ongoing shortages of workers, equipment and space. According to Business Insider, two of the largest US ports recently reported processing a 30% increase in cargo with 28% fewer workers. In July, the US Labor Department reported that the warehouse industry had a record 490,000 job openings. Meanwhile, the trucking industry has a shortage of over 80,000 drivers.3
Clearing bottlenecks is critical to boosting economic growth, but experts predict supply chain disruptions will continue well into next year. However, these supply chain challenges are widely known and priced into markets. With COVID-19 shifting from pandemic to endemic, time resolving product and transportation bottlenecks, and labor markets improving, we may be approaching peak bottleneck. We could soon be nearing an inflection point in supply chain challenges and improvement throughout next year could bolster economic growth.
Figure 4: US Mobility Remains Elevated from its Baseline at the Start of the Pandemic
Labor Market Shows Signs of Life
The Bureau of Labor Statistics (BLS) nonfarm payroll figures for August and September woefully missed economists’ lofty expectations for continued strength in job gains. Thankfully, despite the disappointment in the number of jobs added, the unemployment rate dipped from 5.2% to 4.8% in September. Sadly, there are still five million fewer people employed today compared to the pre-pandemic level in February 2020. That seems a little strange because according to the BLS’ Job Openings and Labor Turnover Survey (JOLTS) there were 10.4 million US job openings at the end of August. Employers of all shapes and sizes continue to report labor shortages.
With fears of contracting COVID-19 at work fading, generous federal unemployment benefits expiring and children returning to school full-time, most economists expected massive job gains this fall. However, the wave of delta cases this summer likely delayed many potential job seekers from returning to work. Perhaps less appreciated is that the pandemic created a global employment shock. JOLTS reported that 4.3 million people quit their jobs in August — that’s 2.9% of the US workforce. And two million more Americans age 55 and older retired during the pandemic than had been forecasted.
Despite the fact that the US economy has added 17.4 million jobs since the April 2020 low, some scarring in the labor market remains that is likely to heal with the passage of time. Workers changing careers will eventually be re-trained and begin to show up more forcefully in the jobs data. Higher wages and sign-on bonuses are also helping to close the gap between the number of job openings and filled positions. And, although some job seekers may have been deterred by the delta surge, more workers are likely to re-enter the labor market as COVID-19 fears subside. In a sign of progress, jobless claims for the week ended October 23, hit another pandemic-era low.
Just because the massive job gains we have been expecting have not materialized yet, doesn’t mean they won’t in the future. The great jobs revival may have been temporarily delayed but the further the pandemic is put in the rearview mirror, the greater the likelihood that the labor market will come roaring back.
Could the Economy and Market Meet in the Middle?
The COVID-19 delta variant surge, supply chain bottlenecks and labor shortages throughout the summer triggered an economic slowdown. The US economy grew at just 2% in the third quarter. That’s the slowest pace in the pandemic-era recovery and down notably from the 6.7% clip in the second quarter. Stock market investors — intoxicated by outstanding corporate earnings results, abundant liquidity and permanently low interest rates — shrugged off the economic deceleration. Having dismissed the risks to the economy as temporary, they are looking forward to a more normal post-pandemic environment.
With rising delta cases likely to have run their course by Thanksgiving, COVID-19 is rapidly evolving from fatal pandemic to endemic nuisance. Peaking supply chain challenges are likely to be worked out over the next year. And, labor market scarring is likely to improve with time. As a result, the US economy could be back on track as early as the fourth quarter when economic data may begin to surpass muted expectations.
Perhaps this scenario is what investors have been pricing in all along. The US economy may finally gain some ground on its stock market. The more interesting question is once the economy catches the market, what happens next? After three years of above average stock market returns (2019 - 2021), it is bold to predict a fourth consecutive year of exceptional gains.
1 Jerome Powell, virtual Bank for International Settlements-South African Reserve Bank conference, October 22, 2021. Quoted in “The Fed chair strikes a wary tone on inflation but says this isn’t the time to raise interest rates,” by Jeanna Smialek and Matthew Phillips, The New York Times, October 22, 2021. 2 Bloomberg Finance, L.P. as of October 28, 2021 3 Grace Kay, “The supply chain didn’t recover form COVID-19,” Business Insider, October
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