By James Pethokoukis

The US isn’t a simple machine where government spending is the input and easily predictable economic growth is the output. If Washington policymakers doubted that reality, its truth is becoming all too clear during this pandemic. You can try to boost growth by increasing demand, but there’s also a supply side of the economy. And even if the former is holding up well during this Delta surge, it’s strength can be at least partially offset by troubles with the former. This from Capital Economics:

With authorities having shown no appetite to reimpose restrictions on activity and new virus cases now levelling off . . . [and] assuming new virus cases drop back over the coming weeks, this all suggests that the hit to demand from the Delta variant will be more modest than in previous waves. . . . [P]otentially more important is the disruption being caused by the Delta variant in other parts of the global economy, particularly in key manufacturing hubs in Asia. The worsening semiconductor shortage has already prompted Ford and GM to extend plant closures which will exacerbate the weakness in autos production and sales. At the same time, evidence suggests that renewed virus fears may be preventing some US workers from returning to the labour force, contributing to the “persistent and extensive” labor shortages noted in the Fed’s latest Beige Book. This suggests the hit to supply from the Delta variant could end up being as significant as its effects on demand, keeping upward pressure on prices and holding back the recovery in real activity.

And this from economist Mark Zandi of Moody’s Analytics on the supply side of the economy: 

Delta has further scrambled global supply chains, as factories have shut down in Southeast Asia when workers got sick, and China has intermittently locked down port activity in an effort to contain the virus. The vehicle industry has been especially disrupted as the severe shortage of semiconductors coming from Asia has forced vehicle plants to close. With few vehicles to sell — inventories are at record lows — sales have plunged and vehicle prices have gone parabolic. Homebuilders struggling with shortages and higher prices for everything from lumber and paint to fixtures and appliances, have had no choice but to pull back on construction, despite vacancy rates that are about as low as they have been since World War II and headed lower, and soaring house prices and rents.

Now none of this is suggesting to economists that a recession is on its way, although many Wall Street banks have pared back their growth forecasts. For this part, Zandi is looking for a return to full employment by spring 2023. But the economy’s supply side and supply chain problems are a reminder of how central the pandemic remains to the country’s economic prospects.

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