US Daily: The Economic Impact of the Delta Variant: Risks from Global Supply Chain Spillovers (Briggs/Mericle)

Research | Economics | By Jan Hatzius and others
  • We expect the direct impact of the Delta variant on the US economy to consist mainly of a delay in the final steps of reopening, rather than a major reversal. But many Asia Pacific economies have imposed tighter restrictions that in some cases have included factory closures, raising the risk of negative spillovers at a time when supply chain disruptions are already at record levels.

  • Past increases in our Effective Lockdown Index for Asia Pacific countries have been associated with only modest increases in US supplier delivery times. However, larger downside risks are possible if new restrictions constrain semiconductor or auto production in the region, or if China adopts tighter restrictions that affect exports to the US of several currently constrained goods.

  • Any setbacks in the Asia Pacific region could also pose upside inflation risk, especially for autos and other goods that require semiconductors. Port closures or stricter control measures at ports could also put further upward pressure on shipping costs, which are already very high.

The Economic Impact of the Delta Variant: Risks from Global Supply Chain Spillovers

The spread of the Delta variant in the US has heightened some consumers’ virus fears and has led some businesses and local governments to reinstate mask requirements and workers to delay plans to return to offices. But high-frequency data show little hit to consumer activity so far, and we continue to expect the direct impact of the Delta variant to consist mainly of a delay in the final steps of reopening, rather than a reversal of progress to date, mainly because we do not expect severe new restrictions in the US.

In contrast, some other countries—especially in the Asia Pacific region—have reacted with forceful new restrictions. Exhibit 1 shows that US import-weighted aggregates of both our Effective Lockdown Index (ELI)—which combines data on mobility and government restrictions—and the supplier delivery time components of purchasing managers’ indexes have improved over the last couple of months, suggesting that the Delta variant has not been a major setback for US trading partners on average. But in the Asia Pacific region, the ELI has increased meaningfully and supplier delays have worsened.

Exhibit 1: Lockdowns and Supplier Delays Have Worsened in Asia as the Delta Variant Has Spread, but Less So in Other US Trading Partners

Source: Markit, Goldman Sachs Global Investment Research

Several countries in the Asia Pacific region are pursuing zero-Covid policies, and even those with less ambitious goals tend to have lower immunity levels than in other regions. As a result, several countries in the region have tightened restrictions forcefully (Exhibit 2). According to press reports and comments in the purchasing managers’ indexes, restrictions have included temporary factory closures in Malaysia, Thailand, Indonesia, and Vietnam, as well as closures of ports where outbreaks occurred. Unfortunately, in most countries in the region the policy response to date has not been enough to stop virus spread from increasing.

While most countries found ways to operate factories and ports safely in earlier stages of the pandemic, it is not yet clear what measures will be needed to contain the far more infectious Delta variant. The risk is that a zero-Covid goal will require much tighter restrictions until the vaccine is available to the full population, which is still months away in most countries in the region.

Exhibit 2: Lockdowns and Supplier Delays Have Worsened in Asia as the Delta Variant Has Spread, but Less So in Other US Trading Partners

Source: Markit, Goldman Sachs Global Investment Research

Any setbacks in Asia could spill over to the US at a time when supply chain disruptions are already the most severe and widespread in decades, as shown in Exhibit 3. These supply-side problems accounted for much of the disappointment to our initial Q2 GDP growth expectations and have lingered into Q3.

Exhibit 3: Any Setbacks to Production in Asia Could Prolong Record Supplier Delivery Delays in the US

Source: Goldman Sachs Global Investment Research

How large of an impact could new restrictions abroad have on US output? From a purely statistical perspective, we find that past increases in ELIs for Asia Pacific countries have been associated with notable increases in their own supplier delivery times, but only modest spillovers to US delivery times.

Of course, the effect of supply chain disruptions on production is often muted until inventories run out, a nonlinear dynamic currently visible in the impact of the semiconductor shortage on the auto industry. To narrow in on current vulnerabilities where Delta-related supply disruptions pose the greatest risk, Exhibit 4 shows the share of US imports from Asia Pacific economies for several intermediate inputs and consumer goods that have been in short supply recently. We highlight three key risks.

First, Asia Pacific countries account for about half of the semiconductors used in the US. Our sector analysts do not expect shutdowns of semiconductor plants themselves because cleanliness standards are exceptionally high even in normal times, but the plants rely on a long supply chain in the region that could be vulnerable to tighter restrictions. The final packaging and export steps also pose some risk.

Second, the US imports just under 20% of its autos from the Asia Pacific region. Our sector analysts see some risk that auto parts producers in Southeast Asian countries with especially stringent lockdowns could further reduce production in Japan, where Toyota has already announced a brief production halt. Any reduction in auto exports to the US would worsen already tight new auto inventories in the US.

Third, US imports from China account for 7-9% of domestic use of several vulnerable goods, including plastics, semiconductors, furniture, and apparel. If China—which is also experiencing supply chain challenges related to weather and flooding in July—needs to adopt tighter measures that hamper either production or exports, the US could also see moderate negative spillover effects in these areas.

Exhibit 4: The Semiconductor and Auto Industries Pose the Greatest Spillover Risks from Asia to the US

Source: Census Bureau, Goldman Sachs Global Investment Research

We also see several inflation risks from Delta-related restrictions in the Asia Pacific region. First, further delays in the rebuild of auto inventories would push back the timeline for new and used car price normalization. Second, any further hit to semiconductor output could raise prices on a range of consumer electronics that require them. Third, port closures or stricter virus control measures at ports could further increase shipping costs from East Asia to the US, which are already extremely high due to container shortages and remaining restrictions on international transport services.

Joseph Briggs

David Mericle

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We, Jan Hatzius, Alec Phillips, David Mericle, Spencer Hill, CFA, Joseph Briggs and Ronnie Walker, hereby certify that all of the views expressed in this report accurately reflect our personal views, which have not been influenced by considerations of the firm's business or client relationships.

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