Under the shadow of geopolitical tensions with their epicenter in Afghanistan, the siege of the contagious Delta variant, symptoms of fatigue in China or the need to avoid a potential government shutdown in the United States, among other issues, the next few months will have abundant potholes that will not make it easy for the Federal Reserve.

Its intention to begin reducing its stimuli faces a crossroads guided by consumer confidence, which is currently at its lowest in almost a decade.

All of this coincides with two key catalysts: the return to offices and classrooms. Regarding the former, next January is already shaping up to be the new September for many large US companies to allow the return of their employees, as is the case with Apple and Ford. In addition, the number of companies that impose vaccination mandates is increasing, under the threat of retaliation against workers who do not comply with these conditions.

Smooth transition
That said, a key thermometer in determining the economic turnarounds related to the pandemic is in schools. From the middle of the month until next September, the season of return to schools will take on a special role among economists.

At this time, a smooth transition should allow adults with children to return to work, thus reinforcing the good employment figures accumulated in the US between June and July. In fact, Morgan Stanley economists cite this factor along with the expiration of additional unemployment benefits as the catalyst that will drive the unemployment rate to 5% later this year.

It is important to note that up to one-third of the American workforce has children as young as 14 years old. This means that the reopening of schools and nurseries could serve as an engine to make up for the lack of workers. It should also ease growth concerns and boost confidence again. However, the return to the classroom is currently much more complicated than expected.

New admissions in the US for Covid in children reach the highest levels in a year
The reopening of schools, more than 60% of which have already resumed classes, has caused outbreaks in primary and secondary schools across the country.

According to the most recent data from the Centers for Disease Control and Prevention (CDC), new hospital admissions for Covid in children have reached the highest levels since the US began tracking pediatric cases a year ago. year, registering an average of 303 new admissions per day during the week ending August 22. During the past week, 24 children died from Covid-19, double the previous record set in the week ending August 5.

A key indicator
That’s why children’s hospitals across the country are preparing to receive even more cases as schools reopen. Although it is true that children are much less likely than adults to develop a severe case or die from the virus, those under 12 years of age cannot yet be vaccinated and the rates among those between 12 and 15 years old are still relatively low, given that only 34% have received the full vaccination schedule. This facilitates transmission, especially among non-immunized communities.

“This is a key indicator of the impacts of Covid. If we see that schools delay in-person attendance, this is likely to affect risk sentiment, as well as investment strategies related to reopening and aggregate spending,” they say JP Morgan analysts in a note to their clients.

At the end of the day, if the reopening of schools stalls, the domino effect will be felt in the workforce and, ultimately, in the employment data. A misstep in monthly payroll creation would be critical at a time when the Federal Reserve is debating the start of tapering, as the process of reducing debt purchases is known. As of today, it is expected that in the month that we are about to end, the US will have created at least 725,000 new jobs and the unemployment rate will fall to 5.1%.

Retail sales in the coming months face supply chain problems
Overall, infections in the United States have skyrocketed in the last six weeks as the highly contagious Delta variant spreads primarily among unvaccinated people at a time when the immunization rate is 62.5% among the adults of the country.

That said, the data compiled by the CDC also records a total of 9,716 people who have had to be hospitalized or have died despite being fully immunized. Now the Biden Administration will begin offering a booster dose starting September 20 for adults who received the Pfizer or Moderna vaccines.

From BCA Research they observe how this increase in infections and the need for a new dose could trigger a change in consumer behavior that would translate into a potential delay in the normalization of economic activity.

This dovetails with the 1.1% decline in retail sales last July, which suggests that the impact of stimulus checks and additional subsidies is dissipating. At the same time, inflationary pressures are causing 45% of US consumers to say that “it is a bad time to buy” cars, houses and durable goods due to the rise in prices, the highest since the 1970s.

Key season
As we head into peak transportation, distribution and supply season for the all-important holiday season, retailers are already in full swing of back-to-school shopping. According to the annual survey conducted for the National Retail Federation (NRF), consumers plan to spend a record $ 108.1 billion on school and college supplies. However, supply chain disruptions threaten to decimate forecasts.

Consumer confidence plummets as fiscal stimulus dissipates
“Unfortunately, the problems in the supply chain and port congestion that we have seen this year are affecting the availability of inventory,” acknowledges Jonathan Gold, vice president of the NRF. Gold anticipates that many retailers expect these problems to continue well into 2022, which could fully affect the holiday shopping and sale season.

For their part, Bank of America strategists outline multiple reasons why investors should start worrying about growth. Among them they identify the collateral effects of the stimuli, which have caused immense inflation of assets both on Wall Street and in the economy at street level.

Sudden recession
To date, the Fed has bought $ 4 trillion worth of bonds in the last 18 months (double what the US has spent on the Afghanistan war in the last 20 years), central banks around the world have spent 834 million dollars every hour buying bonds since the financial crisis while the US government heats up the economy with 875 million dollars an hour so far this year.

Consequently, the annualized US CPI in the last six months to July is 7.8% and the underlying reading is 6.8%, as indicated by the entity. At the same time, house prices (May) have risen 19.7%, Canada’s CPI is the highest in the last 20 years while the real estate sector of the United Kingdom, Canada, New Zealand and Australia begins to overheat . In parallel, the prices of raw materials have fallen: oil and copper have fallen by 16% and 13%, respectively, from their highs in 2021.

For their part, small-cap companies, whose profits are more sensitive to changes in economic demand, they begin to notice the consequences. The Russell 2000 Index is down nearly 8% from its all-time high, reached in mid-March.

“China’s growth falters, US consumption has peaked, fiscal optimism is fading, and a potential ‘mistake’ from the Federal Reserve increases the risk of a sudden recession in the fall (probably telegraphed through the sharp fall in global PMIs), “Hartnett notes.

Any decline in manufacturing activity would be negative for the stock market. There is a close correlation between year-on-year movements in the PMI and those of the S&P 500. If manufacturing activity contracts, the Fed could find further resistance from the market to its potential withdrawal plans.

By Rak Esh

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