September 8, 2021
The summer slump in growth data was largely attributed to delta variant concerns, but the outbreak has recently shown signs of peaking and looks likely to now trace past Covid waves. Heading into the summer, there was anecdotal evidence of easing supply chain constraints, but new anecdotes emerged alongside delta variant infections. Tight supply chains became even tighter after China’s ‘zero-Covid’ policy resulted in the partial shutdown of a major port, and Malaysia’s outbreak resulted in temporary plant closures. Over the next several weeks, we should expect more companies to cut guidance based on supply bottlenecks and higher input costs. Delta variant concerns may soon dissipate, but the supply bottlenecks and associated cost pressures will stick around with the potential to eventually weigh on so-called ‘animal spirits’ in the future. Rising vaccination rates in the US and Asia, still favor an eventual easing in supply-chain constraints, but there should also be an coincident step up in demand. All of this puts inflation concerns back in the mix, which is why the Fed will likely move forward with tapering plans, despite last week’s labor market disappointment.