What does the omicron variant mean for the US economy?

With news about the omicron variant, though, a lot remains uncertain. For example, some have said that the symptoms from the new strain are milder than many originally thought, which helped steady markets on Monday.

What’s going on with the US economy?

• So, there’s no denying that the pandemic messed up a lot of things. And, while the United States has seen an economic rebound, we’re still far from a full recovery.

• For example, even though the restaurant industry has seen signs of improvement and international travel is picking up again, neither are at pre-pandemic levels.

• But the thing is, right now, many of the issues we’re seeing aren’t really related to insufficient demand in the economy, but actually, more to do with the supply side of things.

• For example, a lot of people got laid off during the pandemic. But now, many aren’t rejoining the workforce, and so the US has been dealing with a nationwide worker shortage in recent months, making it really hard for companies to recruit talent.

• Another big topic of discussion is inflation, which has also been up. And, a lot of this has to do with supply chain issues.

• But some new data seems to be indicating that there’s an end is in sight.

How so?

• According to Scott Pederson, founder of Harmony Wealth Management LLC, “The economy is recovering from the depth of the economic slowdown from the pandemic.”

• In terms of employment, October saw some of the lowest jobless claims in more than five decades, at 199,000 during the third week of November.

• And, with the holiday season rolling around, people are also spending money, with retail sales in the US up 1.7% in October compared to the previous month.

• Pederson said that “the unprecedented fiscal and monetary policy support of government and central banks around the world provided liquidity into the economic system to keep consumers afloat, especially in the US.”

• He also said that economic growth “has increased this year and should be higher than the trend 2% … growth we saw for the decade after the Great Financial Crisis."

Does that mean everything is OK now?

• Not quite. Though gross domestic product (GDP) is strong this year, Pederson said, ”Looking out past the next year, economic growth should continue to fall back toward the trend 2% GDP growth.”

• Aside from economic growth falling toward the 2% trend, another issue the US is dealing with is inflation, which hit 6.2% in October, the highest rate in more than three decades.

• There are several reasons why inflation is so high at the moment, but a major reason is because of the global supply chain disruption, with the worker shortage being a big contributor to this.

• Companies in the US and manufacturing hubs of the world, such as Vietnam, are struggling to find and keep the workers needed to help produce goods and deliver services, forcing these businesses to either decrease production or increase wages, which lowers supply or pushes up their operating costs, all of which contributes to inflation.

• Another contributor to inflation is high oil prices.

• As a result, countries have now tapped into their own oil reserves (oil that they have stashed within their borders, just in case), while they wait to see whether the Organization of the Petroleum Exporting Countries (OPEC), which controls the global oil supply and prices, decide to increase oil production when they meet this week.

What are other people saying?

• Many expect the supply chain to normalize next year, with the chief executive officer of JPMorgan & Chase Co. Jamie Dimon saying last week that he expected inflation from supply chain issues to normalize with time.

• But Dimon also said that he doesn’t expect the high oil prices and wages to go away.

• The thing is, though, now, with the omicron variant spreading the US economy’s recovery is, once again, very uncertain.

• Now, Federal Reserve Chairman Jerome Powell is set to testify on Tuesday to the Senate Committee on Banking, Housing and Urban Affairs that the “recent rise in Covid-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation.”

• Goldman Sachs & Co. has also emphasized the uncertainty around the variant making it quite hard to predict the economic impacts.

• “The upshot is that omicron could have sizable growth effects, but that the range of medical and therefore economic outcomes remains unusually wide,” the company’s economists led by Jan Hatzius said in a research note.

What’s being done to try and solve some of these economic issues?

• In terms of the omicron, there’s a lot of waiting over the next few weeks while scientists try to learn more about this new virus strain and how effective our current vaccines are against them.

• But, on the other hand, in terms of the supply chain, President Joe Biden has recently signed a Bipartisan Infrastructure Plan into law, which will, in theory, help improve and upgrade the nation’s supply chain.

• “The bipartisan infrastructure bill passed should be a small net positive for economic growth going forward which could help potentially increase productivity in the economy,” Pederson said, “but this would be spread out over several years which would limit its impact.”

• In terms of the worker shortage, wages in the US are going up so companies can attract new talent or at least retain their existing workers. And, there are also some signs that some global supply chain issues are improving.

• In terms of oil prices, the Biden administration has targeted high prices by launching an investigation on oil companies for possible “illegal conduct.”

• Biden has also authorized the selling of 50 million barrels of oil from the US Strategic Petroleum Reserve (SPR), which should help increase oil supply in the US and ease oil prices.

What’s next?

• With the uncertainty around omicron, markets have gone for a wild ride over the past few days.

• Some have said that the symptoms of the new strain are milder than many originally thought, which helped steady markets on Monday. But, this was after news about the variant and fears around our vaccines being ineffective wiped out US$2 trillion off global stock markets on Friday.

• For Tuesday’s hearing, Powell also wrote that the new variant poses “downside risks” to employment and growth and “increased uncertainty” for inflation.

• So, unfortunately, right now, everyone has to just wait and see what happens as more omicron news is released over the next few weeks. With clarity surrounding that, economic forecasts and predictions can be made.

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