MainStreet Macro: Pivotal Moments

One of the things I missed most over the past year was the steady stream of summer blockbusters. My family and I would squeeze into packed theaters to watch the endearing sidekicks and goofy costumes. And we’d wait for the inevitable, pivotal moment when our hero is forced to make a decision that could alter the fate of the city, the world or even the universe. 

Main Street businesses, the real-world heroes in the economy’s battle against the viral menace of COVID-19, are at just such a pivotal moment.  

This week, official GDP data is likely to confirm what we already know — the U.S. grew like gangbusters in the second quarter of the year. Yet as good as the economic numbers look from a distance, up close there’s growing unease that Main Street isn’t out of the woods yet when it comes to the pandemic. 

Here are three pivotal moments Main Street is facing. 

Delta variant  

The highly infectious Delta variant of the coronavirus has accelerated the number of cases over the past few weeks, threatening to reverse months of progress in containing the disease. The U.S. is now at a “another pivotal moment” in its battle against the pandemic, Center for Disease Control Director Rochelle Walensky said last week. 

The seven-day average of new cases has increased 20% in the last two weeks from the previous four.  That uptick, particularly in areas where vaccination rates are low, is more than a health concern. The pandemic can cause even healthy, vaccinated people to withdraw from normal economic activities like travel, eating out, and attending games or concerts due to nervousness about the disease.   

As a society, we’re better equipped to deal with the virus today thanks to the widespread availability of vaccines and a better understanding of safety protocols such as mask-wearing and physical distancing.  

That means the likelihood of another national lockdown is remote. But regions hit hard by new cases could bring back restrictions to contain the outbreak, which could affect Main Street right when growth is kicking into high gear.  

ource:  Center for Diseases Control  

Jobless claims 

Over the past three months, employers have been hiring at an accelerating clip. (Three is the magic number at which most economists are ready to declare that the decline or increase in an economic indicator is a trend rather than a one-off event).   

Layoffs declined over the same time period, with new jobless claims from displaced workers falling from an average 621,000 in April to 394,000 in June.   

But last week, jobless claims, a proxy for layoffs, rose unexpectedly by 50,000 from the week before. It’s possible the increase was a one-off seasonal aberration, a hiccup in the downward trend. However, layoffs can persist and even grow in areas of the economy disrupted by the coronavirus, even as hiring continues to increase overall.  

The increase in layoffs comes less than a month after half of U.S. states ended enhanced unemployment benefits in June, ahead of the federal expiration in September. This is a pivotal moment in the labor market — generous benefits have been blamed for labor shortages reported by some businesses and industries.   

The end of additional unemployment benefits could lead to even stronger hiring in future months. But the uptick in claims last week also suggests that the labor market bottleneck will take time to clear. 

Inflation  

I wrote about inflation last week and, like a typical economist, I omitted noisy and volatile gasoline and food prices to focus on “core inflation”.   

Yet gas and food are a big part of Main Street budgets, and higher gas and food costs could feed into higher inflation expectations by consumers and employers. 

As of last week, national gas prices are up over 35% from the beginning of the year. After moderating earlier in the year, the pace of food prices is also edging up again. 

For now, it looks like these price increases are a temporary nuisance that will lessen in time. But they come at a pivotal moment. Demand for services is up as consumers become more mobile, even taking vacations. At the same time, American households and businesses no longer can rely on pandemic-related federal aid to help with expenses. 

My Take 

For our Main Street hero it feels, in many ways, like the pandemic battle is mostly won. Health conditions have improved greatly since winter’s third wave, hiring is up and monthly job gains are building. As a group, consumers are in great shape financially, with low debt and high savings relative to historical averages.   
 
But there are risks lurking that can slow, delay or muffle the economic trajectory. The highly contagious Delta variant could lead to backward steps in the economy’s reopening. New dynamics in the labor market could mean that hiring bottlenecks continue for longer than expected. Inflation could seep out of contained pockets of the economy and become more widespread. 

So even as we expect economic growth to continue, take it from an economist who’s seen a lot of plot twists: One of the biggest mistakes a superhero can make is being overconfident that the villain has been defeated.