Omicron will hurt the US economy. Why the pain won’t last

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Consumers remain optimistic about the direction the economy is heading, even as Covid cases climb. Here, the window of a clothing store in Glendale, Calif. On December 1, 2021.

ROBYN BECK / AFP via Getty Images

The Omicron variant has driven Covid-19 cases to record highs in recent weeks in cities across the United States, upsetting travel plans for the holidays and driving office workers and buyers out of stores.

But while some aspects of the economy are successful – showing declining consumer demand or shutting down due to a shortage of workers – others ignore Omicron as little more than an echo on the radar. The mixed picture suggests that while the virus will almost certainly put a damper on economic growth in the short term, any larger impact is likely to be short-lived.

“Overall, our medium-term views on the economic outlook have really not changed,” says Robert Rosener, senior US economist at Morgan Stanley. “But it’s probably a bigger, short-term change in the business model.”

Particularly in large cities and densely populated areas where Omicron has spread the fastest, slowdowns in in-person service activity are already evident. Employees working in service-sector companies in New York City, for example, saw an almost 23% drop in average weekly hours worked between November and December, from 28.2 to 21.8 hours, according to data from the Gusto payroll processor. Over the same period last year, average weekly hours increased nearly 18% as the winter break approached, Gusto said.

The number of passengers taking the New York subway has also fallen from pre-pandemic levels since late November, when news of Omicron first surfaced. Ridership was 74% of its 2019 level on Nov. 21, the Sunday before Thanksgiving, just after the Omicron discovery, according to data from the Metropolitan Transportation Authority. It had fallen to 59% of its 2019 level on December 19.

Across the country, the number of people dining in person at restaurants fell 13% last week from the same week in 2019, according to data from booking site OpenTable. During the week ending Thanksgiving Day, those rates were on par with 2019 levels.

“Unfortunately, the economy looked like it was on the verge of normalizing,” wrote Constance Hunter, KPMG chief economist, in an email to Barron. “But Omicron is going to hold us back.”

Since the Covid push is centered in large cities, which generate more economic activity, the ripple effects on the wider economy could be more pronounced in the short term. While the Delta wave of the coronavirus this summer reduced growth by one to 1.5 percentage points, the Omicron wave could impact growth by around two to three percentage points in the first quarter, said Scott Ruesterholz, portfolio manager at Insight Investment. .

But other areas of the economy continue to thrive, and those strong underlying fundamentals could minimize Omicron’s effects, economists say.

Consumers, for example, remain optimistic about the direction the economy is heading, even as cases of Covid climb. The consumer confidence index rose in December, the Conference Board reported on Wednesday, as did the expectations index, which reflects the near-term outlook for income, business and labor market conditions. Concerns about Covid specifically have also diminished.

Air travel trends appear healthy, with more than two million people passing through airport security checkpoints on Monday, the fifth consecutive day of such traffic, according to data from the Transportation Security Administration. And the new movie Spider-Man: No Path Home grossed $ 260 million at the box office last weekend, the second highest grossing debut album of all time, despite rising cases.

The continued strength of some service spending “doesn’t mean we’re out of the woods, and it doesn’t mean we won’t see any impact,” says Rosener. “But it fits with this general picture that while the shape of the impact on activity from each wave of Covid looked roughly the same, the magnitude of the effect tended to diminish with increasing frequency. time. “

Omicron’s future is far from certain, including how long the current push will last. And there are still significant risks of a greater economic impact if it drags on or worsens.

The highly contagious nature of the virus could overwhelm the U.S. healthcare system, for example. Heightened fear of the virus alone could keep workers on the sidelines and delay the labor market’s recovery, even in the absence of mandatory closings. And any impact on labor supply, combined with a potential increase in demand for goods as consumers move away from spending on services, could push inflation up as well.

“The truth is, we don’t know that yet,” says Megan Greene, a senior researcher at Harvard’s Kennedy School and chief economist at the Kroll Institute, a risk-based investigation and consultancy firm.

But a result is clear in the short term, regardless of the direction of the virus. “Even though we just have uncertainty,” says Greene, “it’s a drag on growth.”

Write to Megan Cassella at [email protected]