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Both business (PMI, ISM) and consumer confidence surveys (University of Michigan, Conference Board) predicted this, employment figures released early in September confirmed it, and inflation data released last week reinforced it: while Europe came through this crisis period relatively unscathed, the resurgence of the pandemic linked to the Delta variant caused a marked slowdown in economic activity in the US.
U.S. Economy Weakens: Temporary Trend or Sustained Turnarouns
Those sectors directly linked to the "reopening", as it is now commonly referred to, have naturally suffered the most. For example, the leisure and tourism sector, which had previously experienced strong demand and a labour shortage, failed to create any jobs in August. In addition, hotel prices, which had surged by 27% since February, contracted by almost 3% in August, in the largest monthly decline since spring 2020. Similarly, airline fares fell by 9% in August, having rebounded by more than 20% in Q2. Another example is rental car prices, which were already on the decline in July and dropped further in August.
This raises the question of whether this is just a blip that will be quickly forgotten as Covid cases begin to decline in the US, or whether it could be the trigger for a trend reversal, following a particularly strong first half recovery. Retail sales, which were also released recently, as well as other key inflation indicators, point to the first of these possibilities. Indeed, although they were expected to fall, retail sales rose by 0.7% over the month, proof that the US consumer's appetite remains strong. Excluding automotive and energy, sales were up by 2.0% in August. The only notable effect of Covid was the sharp upturn in online sales, which had been much less dynamic than average in the first six months of the year.
Scissors effect drives inflation
As for inflation, while the sectors most sensitive to the pandemic slowed down – along with highly transient segments, such as second-hand vehicles, which contributed strongly to the rise in prices in the spring – other less volatile segments saw their prices continue to rise at a high rate. These include new vehicles, and mechanical parts, which recorded their strongest monthly increase ever, and furniture, with its biggest monthly increase since 1985. What do all these sectors have in common? They are all suffering from the scissor effect between continued strong demand (reflected in retail sales, among other things) and a supply side that is struggling to adapt, due to recruitment difficulties and bottlenecks in global production and supply chains.
Q4 Outlook: US growth picks up, inflation remains high
In light of these findings, it seems that the August slowdown was only a temporary setback, mainly affecting those sectors most sensitive to the pandemic, and does not jeopardise the strength of the US recovery overall. And while the end of the emergency employment subsidies at the beginning of September may lead to fears of more moderate consumer spending, the surplus savings that have built up during the crisis remain a substantial source of funds. It is therefore likely that US growth will pick up again in the fourth quarter, supported by continuing robust demand. In turn, inflation is expected to remain elevated as structural components take over from the more transitory ones.
By Olivier de Berranger, CIO and Enguerrand Artaz, Fund Manager, LFDE