Dow sinks more than 700 points on Delta variant fears

New York (CNN Business)Goldman Sachs (GS) slashed its forecast for US economic activity in the second half of the year, pointing to sluggish consumer spending on services as well as the threats posed by the Covid-19 Delta variant.

During the pandemic and the start of the recovery, Americans spent big on goods: Used car prices soared, as did prices for furniture and other household items, in response to surging demand and shortages of materials.
But in normal times, consumers spend much more on services like concerts or dining out —and the big spending on goods that has defined the pandemic recovery so far isn’t sustainable to keep the US economy growing.

That’s why rotation is necessary in how people spend their cash, said Goldman Sachs economist Ronnie Walker on Monday in a note to clients. But fears around the Delta variant are keeping services spending down.

“The services categories where spending remains depressed are generally either associated with high virus risk, such as live entertainment events, or connected to office-based work, such as ground transportation or dry cleaners,” Walker wrote.

In response, Goldman slashed its gross domestic product growth forecast, the widest measure of economic activity, by one percentage point in both the third and fourth quarters.
Between July and September, the Wall Street bank expected 8.5% annualized growth, before dropping to 5% in the last three months of the year. For the full year, Goldman predicts 6.6% GDP growth.
From 2022 on, the pace of expansion will slow further, trending back toward the 1.5% to 2% annualized growth what the nation typically saw before the pandemic.
Even though roughly half of Americans are fully vaccinated, cases are rising. In 48 states, the rate of new Covid-19 cases in the past week jumped by at least 10% compared to the previous week, according to data from Johns Hopkins University. In 34 of those states, the rate of new cases increased by more than 50%.
The rise of infections through the variant is coming at an inopportune time: The economy is still not back to normal, and the resurgence of infections could keep people from fully participating in the economy.

“While most consumers appear to be comfortable returning to high-contact services, some are still hesitant,” said Walker. “They are likely to remain cautious for now as the spread of the Delta variant keeps Covid fears alive, delaying a full recovery.”
At the same time, Goldman’s economists believe the Delta variant’s impact on the economy will be somewhat limited: “Appetite for new government-mandated restrictions appears low; early state-level evidence shows little impact on consumer spending so far; and the virus situation already appears to be improving in the United Kingdom and other countries where it spread earliest,” Walker wrote.
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