MANHATTAN (CN) — With the debate on Wall Street over whether the rebound economy has just peaked, investors are falling back into a slightly bearish mood.
By Friday’s closing bell, the Dow Jones Industrial Average lost 148 points for the day and 125 points for the week. The S&P 500, which has eked out wins for several weeks, also fell 16 points for the week, while the Nasdaq was not able to capitalize on Big Tech earnings and declined 164 points.
While Wall Street has been on a winning streak lately, that streak — much like economic data recently suggested about the U.S. economy as a whole — may have hit a wall, as the delta variant of Covid-19 grows and some economic data shows the rebound slowing.
On Thursday, the Bureau of Economic Analysis reported that during the second quarter U.S. gross domestic product regained all of the losses due to the pandemic, increasing 6.5%. While the news should have been welcome, the gains were less than the 8.5% expected by many economists.
“The good news is that the economy has now surpassed its pre-pandemic level,” wrote Paul Ashworth, chief U.S. economist at Capital Economics. “But with the impact from the fiscal stimulus waning, surging prices weakening purchasing power, the delta variant running amok in the South, and the savings rate lower than we thought, we expect GDP growth to slow to 3.5% annualized in the second half of this year.”
Most of the gains in Q2 2021 were driven by the encouraging double-digit increase in personal-consumption expenditures, which rose nearly 12% during the quarter due to the post-lockdown spending spree. Some areas decreased, however, such as nondefense spending on intermediate goods and services, which fell due to the phase-out of the Paycheck Protection Program.
For Ashworth, the data shows the stimulus has provided “surprisingly little bank for its buck” and that supply constraints have hindered the economy more than anything.
Disposable personal income also fell last quarter, to the tune of $1.42 trillion or 26%. In the first quarter of this year, disposable personal income had gained 63% or $2.27 trillion, according to the agency.
Even though most analysts predict the GDP recovery has now peaked, many remain positive for the outlook of the economy.
“The peak may be behind us, but we expect the economy to carry strong momentum into 2022, with growth underpinned by strong consumer and corporate fundamentals and a favorable fiscal impulse,” economist Lydia Boussour at Oxford Economics wrote.
“While the Covid delta variant has emerged as a key downside risk and supply constraints are proving persistent, we still expect the economy to maintain strong momentum in [the second half] and surpass its pre-Covid trend,” Boussour wrote. She predicts real GDP growth will “cool” to a 7% year-over-year increase in the fourth quarter and then 7% in 2021, the economy’s strongest performance since 1984.
Optimists can easily refer to several strong points already in the economy, most notably in corporate earnings.
Most of the good news this week came from Big Tech, which again smashed analyst expectations. In its release, Apple posted a 36% year-over-year increase in revenue, double-digit percentage increases in all of its product categories, and a new high point for its installed base of active devices. Apple’s net income at the end of its third quarter of 2020 was $11.2 billion; at the end of its current third quarter, that number hit $21.7 billion.
Microsoft’s revenue also rocketed up 21%, year over year, and while its net income hit $16.5 billion, a 47% increase over that same period. Google parent company Alphabet did even better, posting a 62% increase in revenue year over year and hitting $18.5 billion in net income last quarter, compared with $6.9 billion in net income at the end of the second quarter of 2020.
Similar gains were seen by Facebook, which posted a 56% year-over-year increase in revenue. Amazon, which has thrived during the pandemic, actually failed to meet its analyst revenue estimates, posting a 27% year-over-year increase in revenue last quarter compared with a 41% year-over-year increase in Q2 2020. The company’s net income increased from $5.2 billion in Q2 2020 to $7.8 billion last quarter.
Despite the mostly constant stream of good news for large corporations, other data points hint at a “sticky” economy, one that wants to burst forth but is constrained by supply bottlenecks and the threat of renewed lockdowns in the face of the delta variant.
Unemployment claims underline this point fairly well. For the week ending July 24, 400,000 initial claims were filed, compared with 424,000 the previous week, according to the Labor Department. Most states saw a weekly decrease in claims, though California’s claims picked up 10,000.
Many experts are waiting for September to see whether unemployment claims are able to remain below the 400,000 mark, as schools reopen and many benefits expire.
New home prices also underscore the supply-bottleneck problem. In May the S&P Case-Shiller home price index showed a 16.6% year-over-year increase, a record annual gain. Experts believe home prices will dip down a bit but that annual price growth is likely to remain in the double digits for the second half of 2021 due to the relative scarcity of homes for sale.
Another burgeoning problem is the rise of the delta variant, which has become the dominant strain of Covid-19 in the United States. It is also more contagious than chickenpox, smallpox, Ebola and the common cold, according to news reports about a Centers for Disease Control and Prevention document.
Despite the doom and gloom about the spread of the variant, some government officials think it will not severely dent the U.S. economy as badly as the original Covid-19 outbreak did.
During a press conference on Thursday, Federal Reserve Chair Jerome Powell said he believes the new variant won’t cause the economy to plunge as previous spikes in the virus. “Many people are vaccinated. They’re going on with their lives,” he told reporters. “Secondly, we’ve kind of learned to live with it. A lot of industries have kind of improvised their way around it.”
Powell noted that the spike last winter wreaked some havoc among the hospitality and leisure sectors, but that this time delta is unlikely to do the same.
“Again, with a reasonably high percentage of the country vaccinated and the vaccine apparently being effective, we’re not experts on this but it seems like a the good going-in estimate would be that the effects will probably be less,” Powell said. “There probably won’t be significant lockdowns and things like that.”
Follow Nick Rummell on Twitter.
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