Thursday, September 9, 2021
According to LPL Research’s analysis of the Federal Reserve’s (Fed) recently released Beige Book, business sentiment on Main Street has declined in recent months as the economy navigates the latest wave of COVID-19, but nevertheless remains elevated as business leaders look past current obstacles. Still, COVID-19 related business challenges persist. While price increases are starting to level off, the global impact of the Delta variant has unwound some progress on supply chain bottlenecks, and a near-term shortage of qualified workers continues to weigh on businesses’ ability to expand.
“Despite on-going challenges, U.S. businesses remain resilient,” said LPL Financial Chief Market Strategist Ryan Detrick. “We have seen economic expectations revised downward recently but the broad sense of optimism on Main Street persist despite slower economic progress due to the Delta variant.”
As shown in the LPL Chart of the Day, Main Street sentiment is still historically elevated, according to LPL Research’s proprietary Beige Book Barometer (BBB). The reading is based on the Fed’s Beige Book, a publication released two weeks before each Fed policy meeting that captures qualitative observations made by community bankers and business owners—what we like to think of as “Main Street” rather than “Wall Street.” The BBB gauges sentiment by looking at how frequently key words and phrases appear in the text.
Labor markets and supply chains do remain a challenge for businesses. Both were seeing some improvement prior to the Delta wave but progress has stalled or even reversed in the past few months. Words related to tight labor market conditions easily reached their highest count since we began tracking them in the beginning of 2015. However, there’s some reason for optimism here as well. With pandemic-related extended employment benefits recently expiring, kids returning to school, and the Delta wave likely near or past its peak, we do think labor markets are primed for further recovery.
The Beige Book reading does contrast strongly with notable recent declines in measures of consumer confidence. The University of Michigan’s most recent reading of consumer sentiment fell to a near-decade low in August. The sharp decline may have been driven, in part, by the emotional roller coaster of dramatically improving COVID-19 conditions following the vaccine rollout followed by the disappointment of a deteriorating outlook as the impact of Delta made itself felt. We have some concerns that declining consumer sentiment may have an impact on spending, but we think the pattern likely to reverse as the current Delta wave continues to come under control.
Overall, we think the Beige Book Barometer provides a more accurate picture of the economic outlook than consumer sentiment right now. Despite the slowing pace of economic improvement and recent notable economic misses, especially the August jobs report, the trajectory of economic growth remains above the average pace seen over the last two decades. As economic expectations come down, we may once again be positioned for some upside surprises as the economy continues to recover. Given what’s priced in to market expectations, we do believe the pace of S&P 500 gains may slow, but we think there’s likely plenty of economic upside left to support further gains into 2022. Nevertheless, uncertainty around the impact of Delta does remain elevated and we continue to monitor market conditions closely.
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