The stock market finished mixed for the third quarter with the stocks of large US companies rising 1.2% while smaller US company stocks declined -3.5%. Foreign stocks were also lower by 1.4%, and US bonds were higher by 0.4%. Covid cases linked to the Delta variant increased over the summer, causing more consumers to stay closer to home. With less consumer spending, the pace of economic recovery in the US slowed over the quarter.
Unemployment in the US is still high by historical standards, measuring at 5.9% in June, well above the pre-pandemic rate of 3.5%. Economists have noted an anomaly in matching laid-off workers with available job opportunities as the economy continues its uneven reopening process. US companies are reporting record numbers of unfilled jobs. However, in May 2021, more than nine million people in the US reported that even though they desired work, they could not find suitable employment. There are a variety of possible explanations. Many workers relocated during the pandemic and are now in geographic areas with fewer job openings. Others have changed their industry preferences, have returned to school, or may now desire remote work.
Ordinarily, an elevated unemployment rate would subdue wage increases as more workers compete for fewer jobs; however, through the first half of 2021, US wages grew at the fastest pace in decades. Additionally, rising demand for goods and services amongst labor challenges has contributed to shortages and bottlenecks, which have in turn stoked inflation. Overall, consumer prices rose by 5.3% in August compared to the previous year. The unique condition of rising wages alongside growing inflation as produced a complex environment for low-wage workers. According to federal data, even though wages have increased for those in the lowest income tier, their “real” (after inflation) wages fell by 0.5% in August from a year earlier due to the effects of inflation. While real wages for all workers have declined over the last year, low-income households have been the most impacted by the decline. They spend a larger share of household income on basic needs such as food, housing, transportation, health care, and clothing, which have increased overall at higher rates than discretionary goods and services.
Thus far in the second half of the year, the rate of rising wages has cooled as the effects of the Delta variant have slowed the pace of economic growth. Economists at the Federal Reserve believe that inflation will abate because they see the causes as temporary, though others anticipate persistence in inflation.
In climate news, in September, the US Energy Department announced that the US could generate 37% of its electricity from solar power by 2035 and 44% by 2050 if the nation pursues an aggressive agenda of cutting fossil fuel power generation. As the US only generates 3% of its power from solar at present, this is a meaningful advance. In addition, the current Democratic 2022 budget proposal includes a variety of climate provisions including tax credits for electric vehicles, a program to encourage utilities to shift toward renewable energy, supporting the development of carbon capture technology, introducing a national carbon tax, and creating fees on methane emissions. The Department’s estimate, achieving the 44% level will require an increase in spending by the public and private sector of at least $562 billion over the next 30 years. According to Energy Secretary Jennifer Granholm, ensuring there will be funding for adequate solar capacity to allow an energy transition will be supported by a tax credit program.
Added to this, private investors—such as committed socially responsible investors—have shown willingness to make substantial investments in renewable energy. However, more than anything else, political will and public support will be the critical elements to reaching the 44% goal.
Looking forward, as has been the case, the economy will be on improved footing when we see meaningful reductions in new Covid cases. There have been reports that the Delta variant surge is peaking, although the trajectory of the pandemic remains a question as many remain unvaccinated and new problematic variants may emerge.