Business leaders are much less optimistic about the economic recovery than they were in the spring – and they fear vaccination lockdowns will block or even reverse progress.
A new survey by the National Association for Business Economics, or NABE, has found a sharp decline in expectations for economic growth and output, especially in the near term. Survey respondents expect real growth in gross domestic product for this year to average 5.6%, a significant drop from the median growth of 6.7% expected in May, when the latest survey.
“The erosion of forecast and confidence really mirrored what our economists said, as we lowered our GDP forecast for the third quarter from 7.0 to 5.6%,” said Sam Stovall, strategist in chief investment officer at CFRA Research. “We just don’t think things look as rosy as they used to be.”
Almost 2 in 5 respondents to the NABE survey said the downside economic risk outweighed the upside risk for the year, and only 16% said conditions were on the upside. The numbers were reversed in May, when 56% classified upside risk as a higher probability and only 15% said they saw greater downside risk to the outlook.
The main difference, and the factor weighing on hopes of recovery, is the resurgence of Covid-19 fueled by the highly contagious delta variant of the coronavirus. All those who expected the pandemic to decline over the summer have had to change their expectations in the face of a public health crisis that shows no signs of abating.
“We all thought we went through the pandemic five months ago, and I think the variant surprised a lot of people,” said Joseph Heider, president of Cirrus Wealth Management. “As this persists, leaders are increasingly worried and ask, ‘Are we going to control this? “”
NABE Inquiry Chair Holly Wade, Executive Director of the NFIB Research Center, said in the Inquiry Outlook report: “Panelists point to a variant of the coronavirus, against which vaccines may be ineffective as primary downside risk. Almost two-thirds of those polled identified this as the biggest downside risk to the economy, and 9% more cited the slowdown in vaccination as the most worrying obstacle. A plurality of 44% said that faster vaccine deployment was the best chance of achieving greater economic gains than expected.
Heider said: “Vaccine resistance is, I think, more important than what a lot of people anticipated. I think it creates real concern about our ability to achieve herd immunity. And when we don’t no collective immunity, the unvaccinated are human petri dishes for the virus to mutate. “
While the virus poses the biggest threat to the near-term business recovery, analysts said it was far from the only headwind businesses were facing. “There are just a lot more variables and unknowns than six months ago,” said Dick Pfister, CEO of AlphaCore Wealth Advisory.
In addition to the threat of Covid and potential variants, Pfister said, businesses and investors are monitoring other ongoing circumstances. The Federal Reserve is nearing the end of its bond purchases, and more policymakers have expressed their willingness to raise interest rates sooner. The financial peril facing heavily indebted Chinese real estate giant Evergrande is making investors nervous, he said, as they attempt to determine whether the collapse of the company on the verge of collapse was an isolated incident.
“There is probably more than one, and some economists fear that this is no longer systematic inside China,” he said.
A globally connected economy poses other kinds of risks as well: A series of cascading bottlenecks in the global supply chain affecting semiconductors to energy have triggered much of the growing concern about the rapid increase in prices. The NABE survey found that 17% of those polled said supply chain disruptions had a “significant impact” on businesses, while an additional 27% cited mild or moderate impacts.
“Inflation expectations have risen significantly from those in the May 2021 survey,” Wade said. On average, NABE respondents expect inflation to rise 5.1% in the fourth quarter on a year-over-year basis, a jump from an expected increase of 2.8% in the May survey.
David Wagner, portfolio manager at Aptus Capital Advisors, said the duration and scale of the global supply disruption has triggered a reassessment at corner offices in the United States and around the world. In the spring, “it looked like the supply chain problem was transient,” but the assumptions were shattered over the summer, he said, adding: “The supply chain problems persist much longer than initially expected.
“Now that you’re starting to see some sort of tangible supply chain backlog, I think it’s making more people pessimistic. It took people by surprise,” Wagner said.
Rob Haworth, Senior Investment Strategist at US Bank Wealth Management, said: “Supply issues are weighing on the minds of the market and economists as it has limited the amount of output we can get from certain industries.
Along with supply shortages that hamper production and drive up costs, the unbalanced labor market also continues to hold back growth – but there are also glimpses into these distortions of potential normalization. While about a third of survey respondents said they faced an excess of workers, a larger proportion, 44%, said they did not experience a labor shortage. Respondents predict wage growth of 4% for the year, followed by a 3.5% increase next year – rates broadly in line with what many economists see as indicative of a labor market that works well.
“The job market is not fully recovered – we are also seeing this in other surveys, and even the Fed’s beige book indicates that hiring has been difficult,” Haworth said. “There is a lot of room for improvement, but it’s really slow.”