Commentary Directory

Recovery Continues, but Delta Looms

Jacob Hess
August 08, 2021

The Week Behind (Aug 2nd - Aug 6th)

Last week was PMI week revealing the state of the global recovery in July. Developed nations in the US and Europe saw manufacturing and service activity growth peaking in Q2 2021. There, robust growth continued in July but was slowed slightly by supply constraints and surging input prices. Growth slowed even more in Asian nations where COVID was making a comeback. The chart below shows how vaccination rates have shielded economies from restrictions that weigh on manufacturing. The same narrative remains: herd immunity through immunization is the only way to get back to economic normality.

From IHS Markit

Countries in the bottom left corner weighed on the JPMorgan Global Composite PMI which fell to 55.7 in July from 56.6 in June. Germany, Spain, and the US were bright spots offset by slow growth in China, Brazil, and Russia and contraction in Japan and Australia. Despite the Delta variant rising in July, output from the Tourism & Recreation sector led all 21 sectors as reopening effects continued to bolster economic growth. Notably, new order growth trumped output growth in the Machinery & Equipment, Automobiles & Auto Parts, and Chemicals sectors. The Metals & Mining sector was pretty much flat. In Q3 2021, global supply chains will be playing necessary catch-up with the reopening economies. Developed economy central banks will be watching with much anticipation, maintaining accommodative policy to allow this to happen while developing economy central banks tighten to cool adverse pricing affects. It is a fragile balancing act that will define what "transitory" means for inflation.

Not only was it PMI week, but the jobs report for July also came out with a very positive 943,000 jobs added. The unemployment dropped to 5.4% (down -0.5%) and total unemployed persons fell -782,000 to 8.7 million. A majority of the drop in the unemployed were temporary layoffs which now sit at just 1.2 million, just 489,000 above pre-pandemic levels, suggesting that most of the easy job gains that were a result of restrictions easing. Could we see some reversal here in Q3 if the Delta variant continues on its current trend? It seems unlikely. Restrictions will likely be directed towards the unvaccinated which would allow vaccinated workers and consumers to continue as normal. Hopefully, the number of unvaccinated individuals drops in the next two months allowing the economy to return to normal for everyone.

Going forward, eyes are fixated on where the labor market will go from here. The Fed has maintained that full employment is its main objective in determining the course of monetary policy as it continues to label the current movement in inflation as "transitory." Where is there slack to get to that level of full employment? Right now, in leisure and hospitality. The sector added 380,000 jobs and is still off February 2020 levels by 1.7 million (even farther off what the sector would be if employment grew at long-term growth rates). These jobs also go towards lower skilled, lower income workers, those that took the hardest hit during the pandemic. Since it was most sensitive to the effects of COVID-19, it would make sense that it be a good general indicator about whether the labor force has shrugged off the pandemic. It would also be the first sector to feel the effects of restrictions from the Delta variant.

Chart of the Week


Supply chain issues persist in metals and machinery. The total level of unfilled orders in these industries vs total shipments is elevated by historical standards. However, it is still below the peaks experienced during the Global Financial Crisis and the beginning of the pandemic.

The Week Ahead

Next week is a big week for inflation. A whole host of nations including the US will report CPI and PPI for the month of July. In addition to that, the JOLTS report will show how job openings are moving off of its record levels. At the moment, the forecast sees openings rising even higher. The equity market remains teetering at elevated levels, but economic news might not be as much of a factor as the Delta variant headlines.