WASHINGTON — We have arrived at what was supposed to be a major milepost in the economic recovery from the pandemic. A summer that began with plunging case counts was expected to unofficially end in a return to something like normalcy.
But the virus hasn’t cooperated. Neither have the politicians.
The nation’s economy now is entering a perilous period filled with uncertainties. The most significant is the severity of the Delta variant, with rising COVID-19 infections and deaths triggering a dramatic slowdown in hiring last month, a plunge in consumer confidence, and a downgrade by many analysts to their economic forecasts for the July through September quarter.
There also are major questions about the looming impact of the expiration of extended unemployment benefits for millions of Americans on Monday, the recent end of a national eviction moratorium, as well as threatened Congressional standoffs this fall over federal government funding and the national debt limit. Add to those the likely large economic toll from Louisiana to New England of Hurricane Ida and the possibility of a market-rattling change in the leadership of the Federal Reserve this winter.
“We’re in the middle of a flock of black swans,” said Diane Swonk, chief economist at the accounting and advisory firm Grant Thornton, using the financial term for unpredictable and potentially severe events. She rated the level of economic uncertainty as an 8 on a scale of 10.
The good news is the economy so far is weathering this latest wave of the virus much better than previous ones. While this month’s jobs report fell far short of expectations, average job growth overall over the past few months has been strong. But the rise of the Delta variant is another reminder that the road to recovery from an unprecedented pandemic remains pitted with potholes.
“The recovery is still underway, but the bloom has faded,” Swonk said. ”Delta took the bloom off the boom.”
It all poses another significant challenge for President Biden after a tumultuous August that featured the chaotic and deadly withdrawal of US troops from Afghanistan.
He acknowledged Friday that he had hoped for much more than the disappointing 235,000 jobs created in August, which was less than a quarter of July’s growth and half a million jobs below expectations. Biden blamed the Delta variant and promised to lay out a plan in the coming week to battle it. But he stressed the bigger picture of an economy on the rebound that added 750,000 jobs each of the past three months on average.
“Despite the impact of the Delta variant … what we’re seeing is an economic recovery that is durable and strong,” Biden said.
Many economists agree.
“I think the big story is we have this massive COVID surge … and yet we don’t have the sort of economic carnage we had in 2020,” said Julia Pollak, chief labor economist at online job site ZipRecruiter. The number of active online job postings nationwide across thousands of sites rose 13 percent in August from July, showing that businesses remain optimistic, she said.
And even as he warned that labor market conditions were “turbulent,” Federal Reserve Chairman Jerome Powell said in an Aug. 27 speech that the Delta variant was only a “near-term risk” and the central bank remained on track to start pulling back some of its economic support — although not to raise its key interest rate — by the end of the year if the recovery progresses as anticipated.
But there are signs Americans are becoming nervous and could drag the economy down with their mood.
Retail sales fell significantly last month as the Delta variant took hold. And a leading indicator of consumer confidence from the University of Michigan plummeted in August to its lowest point since 2011 in the face of the increased COVID case counts as well as worries about rising prices, lower wage gains, and pessimism about future job growth.
Those are among the factors that have led economists to downgrade their forecasts for the third quarter from a consensus of a more than 7 percent annual growth rate to about 6.5 percent. The economy grew at a 6.6 percent rate in the April to June quarter, a major improvement from before the pandemic but short of what’s needed for a rapid recovery from the deep recession.
The growth was powered by $1,400 stimulus checks to most Americans this year, part of the nearly $6 trillion the federal government has spent to bolster the pandemic-stricken economy since early 2020 — an unprecedented amount of aid. Much of that aid is ending while the virus is resurgent and it’s unclear how well the economy will grow on its own as the nation remains about 5.3 million jobs short of its pre-pandemic employment.
“The risks are squarely to the downside given a lot of the issues the economy is facing,” said Joe Song, senior US economist at Bank of America Global Research, which lowered its third quarter forecast to 4.5 percent. “Normally these risks come separately ... but right now all of these factors are coming to a head and that’s making it much more complicated to look through the crystal ball.”
He remains “cautiously optimistic” the economy will weather the Delta variant and predicts a return to 6 percent growth in the fourth quarter of the year. But Song noted, “September is going to be a very complicated month, especially in Congress.”
Lawmakers still must pass funding bills to avoid a government shutdown when the fiscal year ends on Sept. 30 and increase the nation’s statutory debt limit of about $28.5 trillion, which was hit on Aug. 1. The Treasury Department has been using temporary accounting maneuvers to allow for continued borrowing to stave off a default on government bonds, but it will run out of those options sometime this fall.
Democrats plan to tie a debt limit increase to a government funding bill. But they’ll need at least 10 Republican senators to support the move and despite joining with Democrats to approve debt limit increases during the Trump administration, all but four of them signed a letter last month vowing they would not do so under Biden. Congressional Democrats could increase the limit on their own through the budget reconciliation process but party leaders have said they want a hike to be bipartisan as in the past.
A 2011 debt limit showdown, resolved at the last minute, led Standard & Poor’s to issue the first-ever downgrade to the nation’s AAA credit rating. The uncertainty also forced the Treasury Department to pay $1.3 billion more in borrowing costs that year.
Song warned that a debt limit crisis would roil financial markets and further harm consumer confidence.
“Negative headlines can make you a little more cautious about maybe some big spending you’re considering,” he said.
A senior White House official who was not authorized to speak on the record, said failure to raise the debt limit would be the equivalent of an own-goal in soccer and said it was particularly dangerous with so many other economic uncertainties.
One of those unknowns is Powell’s future as Fed chairman as his four-year term expires in February. He’s a Republican elevated to the position by Donald Trump. Although Powell has received high marks for his stewardship of the economy, there is pressure on Biden from liberals to nominate someone who will be more aggressive on financial regulation and climate change.
Representative Ayanna Pressley of Boston joined four other House Democrats on Tuesday in publicly urging Biden to replace Powell. Senator Elizabeth Warren also has been critical of Powell on financial regulation.
Swonk said a change in Fed leadership could rattle financial markets and the economy at a time when stability is needed.
“You don’t want to mess with something that’s working,” she said. “Right now, anything that eliminates uncertainty is better than adding to uncertainty.”