- Goldman Sachs and Bank of America both cut their GDP forecasts. The reason: not enough spending.
- Spending by Americans fell more than expected in July, depriving the recovery of its biggest accelerator.
- Yet both banks are seeing growth rebound as the Delta wave weakens and Americans resume buying.
Wall Street is tempering its hopes for an American recovery. A handful of big banks say it was the American people who ruined the party.
With the Delta wave on the rise, causing consumer spending and confidence to fall, Goldman Sachs cut its forecast for third-quarter gross domestic product growth to 5.5% from 9% on Wednesday. Bank of America followed on Friday, reducing its GDP estimate to 4.5% growth from 7% and officially implying that the recovery peaked in the second quarter.
Bank economists aren’t the only ones on Wall Street to become more pessimistic about the recovery. Only 27% of fund managers expect growth to improve over the next 12 months, according to a survey by BofA in early August. It’s the smallest share since April 2020, when lockdowns began to freeze the U.S. economy. That impression also came before retail sales data showed spending slowing more than expected in July.
This slowing in spending is at the center of Wall Street’s darker outlook. The rise in the number of Delta cases has prompted a resumption of mask-wearing rules across the country and rekindled fears of catching the coronavirus. These trends quickly weighed on spending by Americans. Retail sales fell 1.1% in July, with the largest declines at clothing stores, bookstores and car dealerships.
Consumer spending accounts for about 70% of economic activity, making retail sales one of the most relevant measures of the US recovery. Put simply, Americans stopped spending so much in July, and the recovery will likely be worse for that.
The retail sales report shows a “sharp decline in demand” and starts the quarter “on a bad note,” BofA economists led by Michelle Meyer said in a note. Even as spending rebounds in August and September, July’s grim record indicates “relatively moderate” growth in the third quarter, they added.
The data showed a “bigger-than-expected spending slowdown”, especially in service sectors that have yet to experience a full recovery, Goldman economists led by Jan Hatzius said. If the number of cases continues to rise and restrictions intensify, the recovery could stumble again.
Still, both teams hope spending can rebound before 2022. The crisis is not expected to last long, as the duration of Delta’s outbreaks in Europe suggests that the number of cases in the United States could start to decline in September, said Goldman economists. The bank raised its GDP forecast for the fourth quarter to 6.5% from 5.5% on Wednesday as well, noting that the expected drop in the number of cases is expected to fuel a buying spree similar to that seen in the spring.
BofA maintained its fourth quarter estimate of 6%. The Delta wave will cause “some permanent destruction of growth,” but most of the growth will simply be stunted further into the future, the team said.
“Once the Delta threat is reduced and this wave of COVID subsides, we should see pent-up spending on recreation services return,” the economists added. “Some categories will have a bigger rebound than others – maybe travel more than restaurants / bars, for example – but we should see people re-engaging in those activities.”