Bank of America economists on Friday cut their forecast for third quarter growth in the U.S. to 4.5 percent, a big drop from the 7 percent previously expected.
This downward revision follows the Census Bureau’s weaker than expected report on July retail sales, a move which had been anticipated by the bank’s credit and debit card data showing weakening consumer spending.
Economists Michelle Meyer and Alexander Lin wrote in a note to the bank’s clients that consumers had likely cut back on spending because of fear of the Delta variant, supply-side constraints that had made some products unavailable or pricey, and a rise in “precautionary savings” by households wary of what the future holds.
“We think the Delta variant is a large reason for the soft patch as can be seen by the pullback in spending on leisure services,” they write. “But we also have to consider the possibility of more permanent supply-side constraints and greater precautionary savings.”
In a separate note, Bank of America global economist Ethan Harris writes that “the US has in effect hit a big supply-side speedbump, traveling at 80 mph.”
Harris sites several data points indicating a U.S. slowdown:
- Supply shortages remain at severe levels, although a number of surveys suggest they are starting to level off.
- Job openings continue to set new records.
- Inventories have plunged.
- An increasing share of nominal GDP growth is being absorbed in higher prices rather than higher real GDP.
- Excess savings continue to pile up in household bank accounts.
RICHMOND, CALIFORNIA – MAY 14: In an aerial view, brand new Subaru cars sit in half empty storage lot at Auto Warehouse Co. on May 14, 2021 in Richmond, California. New cars are becoming hard to find and the prices have surged as dealerships are having trouble with inventory due to the global chip shortage and global supply chain issues brought on by COVID-19-related complications. (Photo by Justin Sullivan/Getty Images)
In Meyer and Lin’s view, the pullback in consumer spending due to the Delta variant will likely be only temporary, pushing growth off into the fall when the resurgence has run its course. But the supply constraints could have a more lasting impact.
“If supply is permanently constrained, it means higher inflation and a shorter economic cycle,” they writes. “If supply just takes longer to come back but ultimately returns to full capacity, it flattens the path for growth but could mean a longer cycle provided the Fed facilitates the cycle.”