Surging New Cases Encouraged Vaccinations

The U.S. saw a new wave of delta variant dominant infections starting from the mid-South and spreading quickly to nearby states with lower-than-national-average vaccination rates. Daily new cases per million people (seven-day moving average) surged to 352.6 as of Aug. 10, nearly 10x the end-June level of 37.7, with hospital admission rates rising rapidly at the same time (chart 5). Like other countries experiencing new waves of infections, 96% of cases in the U.S. were caused by the delta variant (chart 4). Most of the new infections took place in the South, where the vaccination rate is lower than the national average: among 14 states with the highest rate of infection over the past seven days (over 278.6 cases/100,000 people) the average share of the population with at least one dose of the vaccine is only 49%, much lower than the national average of 59%. All 14 of these states except Florida (60%) have vaccination rates under the national average.

It appears the quick resurgence of new cases encouraged more folks to get vaccinated. The number of doses administered daily (seven-day moving average) increased to 633,700 as of Aug. 5, from 453,300 a month ago, according to the Centers for Disease Control and Prevention. As a result, the share of the population with at least one dose across the U.S. increased to 59% as of Aug. 10, from 55% a month ago. Unwillingness to get vaccinated has also declined slightly since early July, with fewer unvaccinated folks saying they are not very likely to get their shots (chart 3). However, the U.S. is lagging behind other developed countries like the U.K., France, and Germany in terms of vaccination rates. The virus and vaccines continue to govern economic prospects around the world. Growth normalization is not assured while the globe lacks herd immunity and still fears adverse effects from the virus.

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Americans Chose To Avoid Crowds Amid Delta Variant Worries

Worries about surging new cases may have discouraged outdoor activities, as shown by mobility trackers. Google community trends for retail and recreation have been hovering around 4% below precrisis levels since the end of June. States hit hard by the new wave of infections, such as Florida and Texas, saw a small uptick in mobility, while others with higher vaccination rates and fewer new cases, such as New York and California, enjoyed a faster recovery of outdoor activities (chart 6). Similarly, the number of seated dinners went down across the country, with the national average declining to 9.4% below precrisis levels on Aug. 9, from 5.7% below a month ago (chart 7).

Air traffic lost steam even during the summer traveling season. The number of checkpoints ceased to increase around late July after a strong recovery since February. The current level is 14% below the 2019 average as of Aug. 9 (chart 9). American theaters are also taking the hit from the delta variant, with the number of box office receipts stagnant around 68% below the precrisis level since early July and falling sharply in the first weekend of August to 70.5% below the precrisis level (chart 10). That said, hotel occupancy rates stayed above the 2019 average by 2 percentage points as of the first week in August (chart 8) but appear to have peaked in late July.

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Soaring Home Prices Depressed Housing Demand

Home demand continued to fall in July and early August, with mortgage applications for home purchases declining by a total of 8.9% from the previous month as of Aug. 6 (chart 12). Surging building material costs, lack of lots, historically low inventories, and a labor shortage have pushed home prices to a record high, deterring families from searching for new homes. Lumber future prices, which caught people's attention when they hit $1,600/1,000 board feet in May, went down to only $550/1,000 board feet in early August, a reflection that the supply bottlenecks and frenzied buying that characterized the economy's reopening and sent prices to multiples of previous highs are winding down. (chart 14). This may relieve the lumber shortage pain faced by homebuilders. However, limited supply of other complementary production inputs, such as labor and lots, may still weigh on housing affordability.

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Production Remained Strong But Consumer Sentiment Showed Signs Of Weakness

Goods production remained strong as producers tried to keep up with robust demand despite sustained supply constraints faced by auto makers. Raw steel capacity utilization has stayed above the 2019 average since the end of May, standing at 85% for the week ended July 30, the highest level since the onset of the pandemic (chart 24). The Chemical Activity Barometer also remained higher than the 2019 average in July, increasing to 7.1% higher than precrisis levels (chart 25). That said, auto makers still face a severe semiconductor shortage, as indicated by the well-above-50 Taiwan electronic and optical industry purchasing managers' index: the backlog orders index stood as high as 69.3 in July, nearly unchanged from its average level of 70.7 in the second quarter (chart 16).

That said, consumer spending may weaken from a loss of confidence amid record high home and car prices and worries about job security just as a resurgence in new cases makes consumers more cautious in venturing out freely. A weekly consumer sentiment tracker from Ipsos-Forbes Advisor experienced a sharp decline in the past month, decreasing to 54.8 for the week ended Aug. 5, from 61.9 in the first week of July (chart 20). Consumers surveyed expressed concerns over high car prices and less affordable homes. A preliminary University of Michigan Consumer Sentiment Index also revealed a huge August decline in consumer sentiment, hitting a 10-year low of 70.2. The uptrend in confidence with vaccination, government checks, and the spring reopening has faded amid the resurgence of the virus, and with it, various restrictions (including mask mandates).

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Inflationary Pressures Eased As Vehicle Prices Stopped Increasing

As households become less comfortable purchasing major items, especially cars, the July headline Consumer Price Index (CPI) increased by "only" 0.5% over the previous month, registering growth of 5.4% compared to July 2020. Excluding food and energy, core CPI went up by 0.3% from June, increasing by 4.3% from a year ago. Behind the smaller uptick in CPI after a monthly jump of 0.9% in June was a significantly smaller increase in used car prices, which edged up by only 0.2% in July, much lower than the average of 9.2% in the second quarter.

The Labor Market Continues To Recover

Despite risks from the new wave of infections, we saw further improvement in the labor market in the past month. Initial jobless claims declined for three consecutive weeks, lowering to 375,000 for the week ended Aug. 7, and only 1.72x the average level of 218,000 in 2019 (chart 17). Continuing claims fell as well and may decrease further after many states ended extended unemployment benefits in June and July, while businesses continue to create jobs during the ongoing reopening (chart 18). Indeed job postings remained 35.2% higher than prepandemic levels as of July 30, despite a small decline in the last week of July, showing businesses' increasing need for workers (chart 19).

All in all, the rising headwinds from the delta variant, resumed mask requirements and other potential restrictions, China closing one of its major ports, along with continued inventory shortages/supply chain disruptions, and rising commodity prices are threatening growth momentum around the world.