Consumer sentiment plummets as renewed COVID fears come to the surface
Last week, the University of Michigan’s Consumer Sentiment Index came in at 70.2, falling 11 points due to fresh concerns over an uptick in COVID-19 cases and inflationary pressures. Reflected in the sentiment, the index collects data on consumer attitudes and expectations to quantify changes in the discretionary expenditures for the broad consumer market. Given the recent flare-up in COVID cases driven by the highly contagious Delta variant, it appears U.S. consumers are feeling a renewed anxiety that getting back to pre-pandemic life may still be farther down the horizon. The August print was the lowest reading since the start of the pandemic (71.8 in April 2020) and the lowest level since December of 2011 when it reported at 69.6.
Worries regarding inflationary pressures and jobs returning have added to the elevated nervousness about whether the U.S. economy will see a sustained and even recovery. The recent fall in confidence highlights the risk that economic growth may have challenges should consumers dial back spending in the near term. Frustration and anxiety dealing with renewed concerns given the delta variant should continue to impact consumer sentiment over the near term as Americans face the possibility of dealing with COVID-19 for longer than anticipated.
Companies hoard cash amid Delta surge
According to data from S&P Global after the most recent second-quarter earnings report, U.S. companies are holding a record amount of cash and short-term investments on their balance sheets. Companies currently hold $6.84 trillion of cash, 45% higher than the 5-year average and a 2.6% increase over the second quarter. Finance officers consistently cite uncertainties from the Delta variant as the main reason for increased liquidity as it continues to spread rapidly and some governments are once again considering restrictions. One item that is keeping cash balances higher is an expected slowdown in capital expenditures in the third quarter. As companies weigh the risks presented, many have opted to slow Capex spending and retain more on the balance sheet. On its face, this could lead to a slower pick up in growth as companies delay investments, but higher cash balances protect liquidity and lower leverage ratios which we believe will be positive for IG credit ratings this year.
China’s economic recovery is losing steam as the U.S. buys itself a couple of quarters of faster growth
China’s economic growth in the second quarter came in below expectations as the country deals with the spread of the Delta variant. On top of port closures across Shenzhen in May and June keeping shipping at about only 30% of capacity, a large shipping port in Zhoushan closed last week as several employees became ill with COVID-19. China is struggling with continued outbreaks of the Delta variant that are depressing tourism and consumer spending in the country as well as a government crackdown on foreign investment that has sent equity markets into turmoil. In response, most of the large investment banks globally have cut their expectations for economic growth in China by 50 bps from 8.8% to 8.3% this year. China’s slower growth rate is contrasted by that of the U.S. which has outpaced growth in China over the last two quarters primarily due to the U.S.’s larger fiscal and monetary stimulus response. While China will have no trouble reaching its 6% government growth target in 2021, cracks are showing in the system that could cause growth to remain lower than expected with port closures from COVID-19 continuing to pressure global supply chains and costs.