Will the Delta Variant Wreck the Recovery?


The good economic news, when it comes to the ascendant Delta variant of the coronavirus, is that it puts the economy at risk in only two ways. The bad news: They are supply and demand.

So far, the recovery remains robust by most available data. Real-time indicators of business activity show little evidence that Americans are pulling back their economic activity in any meaningful way.

But while there is no reason to expect a repeat of the huge disruption of 2020, the new variant puts at risk the kind of rapid recovery that has been underway for months. Just as major parts of the economy were figuring out how to return to full functioning, this may amount to throwing sand in the gears.

The emergence of the variant has already caused several wobbly days on Wall Street. And the chairman of the Federal Reserve, Jerome Powell, is likely to face questions about the economic implications of Delta in a news conference Wednesday afternoon after a meeting of the Fed’s policy committee.

At the White House, officials are monitoring the variant closely, but see no evidence that it is hurting the recovery — or that policymakers will need to inject another dose of short-term fiscal stimulus anytime soon.

“Overall it looks like the risks are considerably diminished compared to the height of the crisis,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics. “But I do think you have to worry about the macroeconomic risks, and our experience over the last 18 months has shown that.”

As economists and policymakers game out the nature of those risks, what stands out is not the chance of a major shutdown. Instead, the concerns are the constraints on the availability of workers and on the supply and demand for many services.

On the supply side, there are already severe disruptions in many supply chains, especially those that rely on goods imported from Asia. These create ripple effects for the United States, such as a shortage of computer chips that is in turn hindering automobile production and contributing to high inflation.

Many Asian nations — especially those behind the curve on vaccinating their populations — are putting in lockdowns to try to stop the spread of the Delta variant, which threatens to make those shortages and price spikes worse.

“We had already expected that semiconductor shortages would continue into 2022, and that’s virtually assured now,” said Sara Johnson, the executive director of global economics for I.H.S. Markit. She noted that new restrictions were limiting production activity in countries including Vietnam, Indonesia, Thailand and Malaysia.

A more domestically focused supply-side risk comes with the U.S. labor supply.

Employers have been complaining about labor shortages, and if the renewed risk of illness makes even vaccinated adults reluctant to enter or re-enter the work force, those shortages could worsen.

That is particularly true if schools were to return to remote learning — even for brief periods — making it all the harder for parents to work.

“What happens if you have a flare-up?” Ms. Bostjancic said. “Do you shut school for a week? That’s very disruptive to parents who want to return to the labor force.”

On the demand side, there is some comfort in the seemingly robust spending from American consumers, who are flush with accumulated savings from the pandemic, federal stimulus dollars and rising wages.

The consumer confidence index rose slightly in July, the Conference Board said Tuesday, suggesting that the emergence of the variant has so far done no major damage to consumers’ willingness to spend.

There is even a perverse twist that could reduce the variant’s impact on demand for things like restaurant meals and concert tickets. The rate of infection has remained relatively low in places with high vaccination rates. In the places where infections are skyrocketing, public sentiment tends to be overwhelmingly against anything resembling a lockdown.

Still, as noted by two Bank of America economists, Stephen Juneau and Anna Zhou, Michigan saw a pullback in consumer spending on services during its surge of infections earlier this year, even absent formal restrictions on activity.

“So far we have seen little evidence of the Delta variant significantly affecting economic activity or spending on services,” they wrote in a recent research note. “However, survey data point to increased hesitancy of being in physical locations and concerns over the virus.”

That could prove particularly relevant in a few segments of the economy that have been slowest to recover from the pandemic recession.

Many white-collar employers have been on the verge of bringing workers back to offices. If those plans change because of the variant, offices and downtown streets risk staying emptier for longer, implying less demand for office space and downtown restaurant meals.

There is a similar story in the business travel sector, which has lagged leisure travel in returning to health. Will conferences and trade shows return with the kind of robust attendance many hotels, convention centers and event planners have been hoping for?

One particularly tricky thing is that the solution to these potential economic ripples lies in the public health arena. If the recovery stalls, fiscal and monetary policy are unlikely to play much of a constructive role. Already, enough money is flowing through the economy to make overheating and inflation a top-of-mind concern.

There may be a demand shortfall for very specific things, like sandwiches from a downtown restaurant or rooms in a convention center hotel. But it is hard to argue in the summer of 2021 that there is much risk of inadequate aggregate demand.

White House officials say vaccinations over the past several months — and strong support from the federal government for people and businesses — have set the foundation for the economy to maintain momentum even as Delta spreads. And they believe consumers will react differently this time to the spreading virus.

In past waves, people who worried about a higher risk of contracting Covid-19 could either assume that risk and keep up their normal economic activities, or pull back spending in places like retail stores and restaurants. Now, the officials say, spooked consumers have a third choice. They can get vaccinated and largely maintain their typical routines — or, if they’re already vaccinated, just keep spending the way they have been.

All of that means that the policy response to the Delta variant, as for Covid all along, relies more heavily on getting the best possible public health outcomes, with conventional economic policy a secondary concern.

Just when it seemed that the pandemic policy story was finally winding down, in other words, it is starting to repeat itself.

Jim Tankersley contributed reporting.