The U.S. Expected an Economic Takeoff. It Got a September Slowdown.

Delta variant undoes expectations; hiring and consumer spending slow in the face of fresh uncertainty

Sept. 7, 2021

The U.S. economy is facing a slowdown in September, rather than the takeoff once hoped for.

Earlier this summer, many economists saw the week of Labor Day as the moment when the economic recovery would kick into high gear. Their expectation was that widespread vaccination would ease labor shortages. Schools and offices would reopen, which would mean a comeback for local businesses reliant on office workers. Travel would rebound. Stevie Nicks would be back on tour.

Instead, the rise of Covid’s Delta variant has the nation tapping the brakes.

Businesses and consumers are reworking plans to adjust to renewed mask mandates, travel restrictions, event cancellations and delayed office reopenings.Consumers are pulling back on purchases and employers have slowed hiring. Economists are downgrading their forecasts. Stevie Nicks canceled.

Economists don’t expect the variant to push the U.S. back into recession. But the loss of steam could prolong the recovery of the millions of jobs lost during the pandemic, leave many on the labor market’s sidelines and continue to hobble businesses unable to grow or unwilling to invest amid fresh uncertainty. At the same time, that damping effect could ease inflation pressures if it reduces consumer demand.

The pace of hiring plummeted in August, as restaurants and stores cut staff. Employers overall added 235,000 jobs, down from about one million each in June and July. The University of Michigan’s measure of consumer sentiment fell in late August to the lowest level in a decade, with Americans saying they are worried about the Delta variant and rising inflation.

Swing’s Coffee Roasters reopened one of its two downtown Washington, D.C., cafes in October of last year with just two employees. A second, a block from the White House, was set to reopen Tuesday. Now owner Mark Warmuth said he worries the commuters he was counting on won’t arrive.

“All along we’ve been waiting for September, “ he said. “Now it seems everyone is standing down a little bit to see what will happen with Delta.”

Few federal agencies have opened their downtown Washington offices beyond essential workers, and many private employers are following suit. Mr. Warmuth said he will reopen anyway. He has exhausted most of the federal and state aid he has received and needs to determine whether the downtown cafes can survive.

Economists had thought the economy would be able to push forward on its own steam, without more government stimulus that helped power it to this point.

Companies large and small began in August to drop plans to reopen offices. Among them: Apple Inc., Amazon.com Inc. banking giant Wells Fargo & Co, oil giant Chevron Corp. , insurer Prudential Financial Inc. and ride-share company Lyft Inc. Some have pushed return dates into 2022.

Restaurants and tourism helped drive growth this year as they bounced back, until last month, when some local governments once again mandated masks in public spaces, and some Americans grew more cautious about going out.

Late last month, Hawaii’s governor asked travelers to stay home, warning of the extreme strain on hospitals dealing with Covid spikes on the islands. The move reversed the tourist destination’s summer reopening.

In mid-July, traveler arrivals to Hawaii came the closest to reaching pre-pandemic levels, down about 10% from the same period in 2019, according to state data. The pace of arrivals eased in August, and in the last seven days of the month, average daily arrivals were down 34% from 2019.

Last week, the European Union recommended barring nonessential travel from the U.S. The U.S. has maintained restrictions on travelers from Europe and elsewhere.

For Delta Air Lines Inc., the variant is causing additional “choppiness” as companies have pared back travel spending, CEO Ed Bastian said.

“This summer, we were roaring back with a lot of growth across all of our segments,” Mr. Bastian said. “But about four weeks ago, things started to show some signs of pause, not on the consumer or leisure side of the business, but on the business side, as businesses have pushed back their reopenings.”

He added: “It’s probably put a 90-day delay on some of the growth we were anticipating both for domestic business as well as international openings.”

Last year’s brief downturn was driven by stay-at-home mandates and business restrictions, actions few expect now that more than half of U.S. adults are vaccinated.

U.S. gross domestic product is expected to grow 6.1% this year, IHS Markit forecast. Oxford Economics lowered its full-year growth forecast to 6% in late August from 7.5% in late June.

Annual GDP growth of 6% is still extremely fast for the U.S. While it reflects comparison to an unusual year because of lockdowns in 2020, it would mark a 37-year high, well ahead of the 2.3% average annual growth recorded from 2010 through 2019. But economists and executives worry that additional shocks could further slow the expansion further.

“Nothing is worse than dashed hope,” said Constance Hunter, chief economist at accounting and consulting firm KPMG LLP. “You thought, ‘My kids are back in school, I can go back to work.’ But now that’s very much in question.”

Federal stimulus spending helped the U.S. economy expand at better than a 6% annualized rate in the first half of the year, the Commerce Department said. Earlier this year, some forecasters had expected the economy to accelerate as services spending rose.

Instead, movie theater visits fell by more than half at the end of August from a pandemic peak in mid-July, market research firm TOP data said. Paramount Pictures postponed the release of “Top Gun: Maverick” and “Mission Impossible 7.” Garth Brooks, Nine Inch Nails and Stevie Nicks are among the performers canceling tour plans.

Supply shortages are further limiting production and sales, said Joel Prakken, chief U.S. economist at IHS Markit. Chip shortages have cut vehicle inventories and idled factories. Ford Motor Co and General Motors Co. said last week they would halt some production. Higher rates of Covid-19 infections in Asia and crowded ports have slowed inbound shipments ahead of the holiday shopping season.

“The recovery is still proceeding, it’s just at a slower pace than we’re expecting,” Mr. Prakken said.

Retailer Gap Inc. has told investors it is navigating shutdowns in some places where they source materials and make clothes, as well as wage pressure, port congestion and other transportation challenges.

“We expect these challenges will continue for the remainder of the year,” CEO Sonia Syngal told investors in an Aug. 26 conference call.

Auto-parts chain Advance Auto Parts Inc., said the Delta variant’s spread is causing construction delays for some plans to convert Pep Boys stores it purchased into its own stores, and could drive cleaning costs up.

Medical-device maker Medtronic PLC executives said the company has seen steady improvement in its business through July, but saw some signs of a slowdown late in the month and into August, tied to the spread of the Delta variant.

Karen Parkhill, Medtronic’s chief financial officer, told investors on Aug. 24 that the company expects the variant to most affect demand for procedures that can be deferred, such as cardiovascular diagnostics, and those where patients typically occupy intensive-care beds that are now needed for Covid-19 care.

A Medtronic spokeswoman said the company expects to learn that U.S. infections peaked in late August and believes hospitals are better equipped than during previous infection waves. Medtronic projects the second half of its fiscal year, ending in April, to prove stronger than the first.

The pandemic has caused waves of complications for Collectic Home, an Austin, Texas, furniture seller, said owner Greg Greeson. Code enforcement officers arrived to shut his store in March 2020 after the Austin mayor ordered nonessential businesses to close, then labor costs jumped upon reopening, and shipping prices for furniture from Asia more than tripled.

But by early summer, the business stabilized after Mr. Greeson consolidated the store inside his warehouse. “We thought we saw the light at the end of the tunnel,” he said. “It turns out it was a freight train coming at us.”

Last month, in response to the Delta variant, Austin raised its Covid risk guidance to the highest level and recommended even vaccinated people wear masks while visiting stores. Mr. Greeson—and customers shopping on a Saturday—learned of the warning through messages that blared on their phones. Customer traffic has dropped the past few weeks.

“Times are tough,” he said, adding the company is mostly relying on sales through its website, Eurway.com. “We’ll survive, but we’re going to have to take a haircut” on profits.

School reopening should have been an important moment for the economy, said Columbia Business School economist Stephan Meier. About a quarter of households have school-age children and reliable child care could allow many Americans, especially women, to return to jobs.

But the Delta variant and lack of a vaccine for children under 12 may leave some parents unwilling to work away from home, he said. Already many schools have closed or sent classes back online.

“The uncertainty and anxiety we had last year is kicking back in,” Mr. Meier. “And the uncertainty is enough to suppress the labor supply.”

Last month, 1.5 million Americans reported they didn’t look for work due to the pandemic, according to the Labor Department. In August, there were still 5.3 million fewer jobs on payrolls than in February 2020, according to the Labor Department.

Enrollment at Kiddie Academy, a Maryland-based operator of child-care centers, remains down about 10% from 2019. The company intends to return to pre-pandemic levels of operation this school year, but staffing shortages and social-distancing policies are limiting enrollment, said Kiddie Academy President Joshua Frick.

Many companies remain optimistic. Bowman Consulting Group Ltd. , a Virginia engineering-services firm, expects about 12% sales growth this year, and is busy across nearly all its segments, said Chief Executive Gary Bowman. The one exception: office building projects.

Bowman added about 150 employees in the past 18 months, including through acquisitions, and went public in May. About 80% of the company’s office staff have returned to their desks, he added.

“Delta is a worry, but it’s nowhere near the center of my radar screen,” he said. “I don’t think it’s anything like the initial shock…and we found our way through the initial shock very well.”

Executives at spirits-marketer Brown-Forman Corp. , which sells Jack Daniel’s whiskey and Finlandia vodka, said the Delta variant doesn’t appear to have damped demand. Bar and restaurant sales rose rapidly during the summer and haven’t flagged, CEO Lawson Whiting told investors during a conference call last Wednesday.

“That’s where you would have expected to see weaker results if people were really staying at home a lot more,” Mr. Whiting said, noting that he had yet to review August data. “And you’re not seeing that.”

Prospects are narrowing for other companies. Natasha Miller hired a new account executive for her San Francisco-based events and entertainment firm, Entire Productions, in late June, anticipating a busy holiday season.

It was her first hire since laying off half her 12-person staff during the pandemic, but she now regrets it as some clients postpone new contracts or push events into 2022.

“This Delta variant has really put a kink in everything,” Ms. Miller said.