The Delta variant is raging and the U.S. economy remains in overdrive, leaving us to wonder: What will things look like around the bend? As Q3 takes form, facts in evidence suggest the following trends:
Pent-up consumer demand drives inflation
As it turns out, people have a limit to how much Netflix they can consume. The U.S. consumer has been unleashed with a fury that is unparalleled in history. The U.S. savings rate was trending higher than in nearly four decades.
According to McKinsey, consumers hit a wall in April and started spending their savings at a record pace. Eighty percent of polled Millennials indicated they were ready to "indulge." Brand loyalty has waned significantly during this period, with 40 percent switching brands--double that of prior periods.
Brands will have to earn loyalty by focusing on the new rules of engagement: environmental, social, governance (as a corporate value), and client experiences. Suddenly, prices matter less.
Yet inflation has not dripped into every sector of the economy. Supply chain and raw material shortages have caused runaway markets in sectors such as lumber and silicon chips. The deflationary nature of technology has reversed course.
Shifting corporate priorities
U.S. companies have been hoarding cash. According to Bloomberg Businessweek, corporate capital spending is nearing an all-time low. Companies are reallocating resources away from corporate offices and toward technology architecture, cyber protections, e-commerce platforms, and hiring talent.
With access to cheap capital and rising labor rates, companies have been highly incented to promote robotics and automation. But integrations of such technologies have been poor because of Covid-related shortages in engineers, and equipment arriving late from Europe and Asia. One of our strategy clients, a U.S.-based green beauty brand, can't release a new family of products because its ship has been waiting offshore for a month to find a spot in a West Coast port.
While prices are rising, companies have lost their muscle for passing on price increases. Many find themselves in a trap where incremental supply chain improvements have fallen short. Any enterprise that moves goods has to rebuild its supply chain from the ground up.
Labor constrains growth
The Conference Board projects the U.S. economy will grow by 6.6 percent in 2021, but growth is constrained by severe labor shortages. Companies are taking the extreme step of changing their business models. For example, some full-service restaurants are shifting to self-serve and drive-throughs.
U.S. companies are getting creative, using programs such as H-2B in agriculture to import talent. Others are hiring retirees and other underemployed demographic groups.
As President Biden ponders his decision on the next Federal Reserve chair, most economists expect a shift in U.S. monetary policy. The Fed is signaling a slight pullback on various policies including quantitative easing--the purchase of Treasury securities and mortgage-backed securities. The Fed's actions have kept the 10-year hovering around 1.5 percent, an artificial boon to the U.S. economy. As the Fed pulls back, the housing market is likely to cool.
The size and magnitude of U.S. government stimulus is staggering. The infrastructure bill will tie off some Covid-related priorities, but most of the money will go toward a decadelong effort to rebuild America's ailing roads, bridges, and airports.
Entire sectors and businesses will shift. The construction sector, which swung away from commercial to residential in the past 16 months, will have new civil projects to pursue in growing areas like Phoenix, Boise, Idaho, and Nashville. Cottage industries such as telecommunications and 5G will surge.
China: to be continued
Some business leaders have called on the administration to move away from Trump-era tariffs and saber rattling. Yet recent U.S. posture on cybersecurity and IP (intellectual property) protections offer a tell that Biden is not in the mood to let China off the hook.
Many U.S. companies are seeking to deglobalize their supply chains to maintain steady inventory. Large retailers such as Walmart and Best Buy have told their vendors they will pay more for just-in-time access to local supply.
The hybrid conundrum
Companies that planned on returning to the office in September when kids returned to school find themselves in a pickle. The Delta variant is a curve ball for U.S. employers, who are pulling back on plans to bring people into the office.
While the advent of the hybrid office may be slowed, don't buy into the "death of downtown" debate. Businesses still want downtown presence in New York, Los Angeles, San Francisco, and Boston.
As companies adapt their strategic plans, they will need to keep sight of changes coming around the bend.