Americans are worried about the rapid spread of the delta strain of the coronavirus, but not enough to stop them from spending money and keeping an economic recovery alive.
A poor jobs report in August two weeks ago sparked new angst about the economy, especially after hiring in the leisure and hospitality sector fell to zero.
Delta appeared to force businesses such as restaurants, hotels and theaters to freeze hiring plans as more Americans stayed on the sidelines for fear of catching the virus. At the same time, a closely watched measure of consumer confidence fell to its lowest level in 10 years.
Yet the threat from the delta appears to have been overstated. Sales by retailers surged in August and were particularly strong if we exclude car dealers.
Read: Retail sales rise despite delta and signal US economy still strong
As it turned out, Americans were going out a little less and spending less on services. Restaurant receipts stabilized in August after five consecutive big monthly gains, to name just one notable example.
Instead, people spent more on groceries, electronics, and other consumer goods sold in online stores such as Amazon Online. Sales jumped more than 5% last month.
As long as Americans continue to spend, the economy will continue to grow. Consumer spending accounts for about 70% of all US economic activity.
The retail sales report “is a reminder that consumers are resilient and willing to spend,” said chief US economist Nancy Van Houten of Oxford Economics.
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However, Americans have become more selective in what they buy.
Sales at auto dealerships have fallen for four consecutive months due to a shortage of vehicles and record prices for the limited selection available. Home sales have also declined due to high prices.
A consumer sentiment survey in September showed that households think it’s a terrible time to buy cars, homes and appliances.
Not surprising. Businesses are grappling with widespread material and supply shortages due to the disruption associated with the pandemic. The result: soaring prices and high inflation.
One thing that is not a problem is the demand.
Businesses have been inundated with orders and they are trying to keep up. And even when they can get enough supplies, they can’t always find enough workers to produce the goods and services.
Read: Half of small businesses can’t find enough workers to fill vacancies
A strong labor market is currently a double-edged sword. Record-breaking job postings mean most employees are secure in their jobs, a heartwarming feeling that keeps them spending money. Wages are also increasing rapidly.
Yet a labor shortage has imposed a sort of speed limit on the rate of growth of the economy. Much of the weakness in hiring in August is likely due to the labor shortage rather than the Delta, economists say.
Read: Delta blamed for poor jobs report, but too few people willing to work could be a bigger problem
Looking at the economy, the Federal Reserve is unlikely to make any major policy changes at its next meeting on Wednesday. The central bank is expected to begin soon to roll out its strategy to support the economy by keeping interest rates at historically low levels over the next two years.
The rise in the delta and the poor jobs report likely pushed the Fed’s announcement towards the end of the year. Yet, as the latest batch of evidence shows, the economy appears poised to take off, especially with the Delta epidemic starting to subside.
Read: With Fed officials divided on outlook, Powell seeks compromise reduction plan
“Given recent delta clouds and the latest payroll data, the Fed may well decide to wait for one more meeting before freezing its plans,” said economist Avery Shenfeld, chief economist of CIBC World Markets.