It's Likely to be a Long Winter

    It seems like just weeks ago that analysts were exuding confidence regarding the progress to be made this year. The data coming in was nearly universally upbeat and the sense was that a corner had been turned as far as the pandemic was concerned. It seems like just weeks ago as it was just weeks ago. Today the story is far murkier and the progress on the pandemic seems to have ended and perhaps has started to reverse. Thus far most of the economic data has continued to show growth and progress but there are multiple warning signs flashing and there are many forecasts emerging that show a sharp deterioration in various parts of the economy. There are still some fundamental differences between the situation that faced the country last year and the situation now but overall rates of confidence have been falling – for the investor, the business community, small business and the consumer. The question on the minds of analysts is whether this is a temporary setback or the set-up for another significant recession.

  The reason for all the angst is as obvious as it can possibly be. The Delta variant is twice to three times more contagious than the other versions of the pandemic. It doesn’t take much exposure so even the most casual contact has the ability to infect. Fortunately, it is no more deadly than the other strains and vaccines work nearly as well against this strain. The problem is that there are far too many vulnerable people and the spread has not been contained. The vast majority of those that have contracted the virus are unvaccinated and nearly all of the serious cases have been in that population. There have been enough people vulnerable to the virus to once again overwhelm hospitals and create a return to the protocols that had been relaxed only a few months ago. The politization of the issue is adding to the crisis as millions have decided they have a right to shun the vaccine – even as it means they may fall ill and that they may well infect others. Vaccines work against the infection in two ways – by protecting the person who has received the inoculation and by limiting the opportunity for the virus to spread. The resistance by almost half the population means the virus has ab ample supply of new hosts.

    The economic impact has already started to manifest as caution replaces the confidence manifest just a few weeks ago. There are four reactions taking place now that will likely have an impact on economic growth for the remainder of the year and into the next. The first is that companies are hoarding again (polite word is stockpiling). The infection has already had a profound impact on the Chinese and other exporters and this has fouled the supply chain again. Companies do not want a repeat of the supply mess they went through last year and are buying far more than would normally be the case. This accelerates the inflation threat by creating artificial shortages. The second reaction has been to slow the return to the office. Just a few weeks ago the estimate was that many offices would be returning to on-site work – at least for part of the week. The limitations of remote work were obvious and most were looking at some kind of hybrid model if not a full return to the old patterns. Now that has all but halted and companies that had been welcoming people back to the office have been sending them back home. This not only affects the business that has to manage these remote workers but it profoundly affects all the businesses that service an office environment and the construction of office buildings themselves.

    The third impact revolves around the attitude of the consumer. Thus far there has been little discussion of mass lockdowns (although some communities have been considering it). The various protocols have returned however – masking, distancing and the like. The threat this time is not from government demands to close but from reluctance on the part of worried consumers and the polls suggest there is a lot of concern. This will once again hit the service sector hard and most of those businesses were only just starting to pull out of the gloom. The fourth issue is the capacity to blunt any impact of a recession this time. The coffers are empty and there would be extremely intense opposition to borrowing billions to repeat the actions taken last year. A recession now would likely be less dramatic than the 2020 version but there would be little done to shield the people affected by this one.

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